Archives August 2020

July Income And Consumption | Seeking Alpha

Almost to the Bottom

I find it helpful to compare everything we’re seeing to the Great Financial Crisis. Most everyone reading this remembers it well, and it stands as the worst economic calamity of most people’s lives until now. As you see, 5 months in, we are almost to the nadir of the GFC, which did not come until the 8th month in that crisis.

Personal consumption expenditures (PCE) is the largest, and most important part of GDP, accounting for 68% of 2019 real GDP and 75% of growth. It also drives the second most important part of GDP, investment.

So the key to recovery is getting that green line back to 100, and the rest will follow.

But in the meanwhile, firms piled up very large revenue losses in Q2, now extending into Q3 for some. In general, there is a huge dichotomy between goods, which are recovering well, and services, which are not. Unfortunately, services PCE is about twice the size of goods.

In the income data, we see the same patterns as before. Income loss is substantial, but that has been more than made up for by government benefits. Combine that with reduced consumption, lower taxes and interest payments, and we see over a trillion dollars in excess household savings. The personal savings rate remains at record levels:

But this is only one of several cash bubbles out there. Commercial banks:


We don’t know exactly how much cash nonfinancial corporations are holding on to right now, but they did raise $954 billion in new debt and equity from March to July. For comparison, nonfinancial corporations raised $969 billion in all of 2019. And that does not include all the private placements.

So, the money supply has ballooned.

But the M2 velocity hit the lowest level ever in Q2 (quarterly only).

Velocity of M2 measures how many times the average dollar was used to make a purchase in a quarter. That is by far the lowest reading ever, though it only takes us through the Q2 average, and April and May were pretty much the worst months ever.

So, what happens to all this cash just sitting around remains the key issue going forward.

Data Note

We see it all over: the data quality is extremely poor right now, and large revisions are becoming common. So, in the first place, remember that all this will undergo multiple rounds of revisions, and even in normal times, these can be large, especially in prices and deflated real numbers.

But these are not normal times, and agencies are struggling just to get the nominal numbers right, on top of trying to figure what is happening with fast-moving prices. So, we will look at nominal consumption and prices separately, and I encourage you to look at the prices especially as close approximations of reality.

Income and Savings

To me, this is the most remarkable thing that has happened. Cumulatively since March versus the February TTM average, households:

  • Earned $248 billion less…
  • … but received additional $794 billion in benefits, a difference of $546 billion.
  • They consumed $504 billion less…
  • … and paid $75 billion less in taxes and interest…
  • consequently saving $1.1 trillion.

Here’s what that all looks like on a chart

Through June, households had also paid off over $100 billion in credit card debt from that giant green savings block. Just looking at commercial banks, their cardholders shaved another $9 billion off their card balances from the end of June through August 19. So, at least in that subset of consumer cards, the repayments have slowed down considerably but are still going.

So, minus the debt repayments, households have held on to about a trillion dollars – about half from stuff not purchased, and half from excess government benefits. Pretty staggering numbers all around.

The corporate income numbers are behind the personal income numbers by a couple of months and are only quarterly. We don’t get the detailed splits until next month, but Q2 corporate income, roughly equivalent to revenue, was down 13% QoQ and 12% YoY.

Before tax profits, roughly equivalent to EBT, got hit even harder:

And the nonfinancials were down almost 30%.

Yet, the stock market went up every month in Q2.


Remember, these are nominal dollars, just like public companies report in.

This is undoubtedly the fastest and largest shift in consumer preferences ever, and the general trend is against the sweep of the last 74 years. In that period, we went from an economy very much fixed around producing and consuming goods to one dominated by services.

Services were 47% of GDP in 2019 and 69% of all consumption. But the pandemic trend we are seeing goes against that. Many of the services people purchase are closed or unsafe, so they have taken the brunt of the storm.

But people are also stuck in their homes and bored, and seeing every flaw their home has every waking moment. So, they have taken the large savings from all those services not purchased and put it into their homes – new furniture, appliances, electronics, building materials and garden supplies. And, of course, more food and household supplies to substitute for all the meals not eaten out in the past 5 months.

So, this is what that looks like month by month:

Services are still down over 9% in July from February levels, but the goods economy has made more than a full recovery and is up 6%. The net effect is that goods, 31% of consumption in 2019, made for 34% of consumption in July. It took 11 years to go from 34% to 31% and 5 months to go back.

But services are still much bigger, so the accumulated revenue losses for firms keep piling up.

We are looking at this via cumulative losses versus the February TTM average. Goods losses were much smaller to begin with and peaked in May, now down to less than half May’s level. If goods consumption stayed flat in August, these businesses will have collectively wiped out all the large losses of April and May, which is pretty extraordinary.

Digging down a bit, we start to see the household goods come into play. Starting with durables, vehicles are the biggest part of this, and have recovered somewhat, but the household categories – furniture, appliances, electronics, building and garden – have now almost made up for all accumulated losses.

That’s pretty remarkable. Vehicles are always a very important category, and we see a continuation of incoming trend: people are preferring used to new:

Used vehicle dealers have made up almost all of pandemic losses. When we look at public transportation, we will see why. The nondurables home categories have been strong all along:

The biggest home category is, of course, food – one of the three large nondurable categories along with gas and clothing. Those other two are the only sour notes for goods:

So, overall, the goods economy is in pretty decent shape if you’re not selling gas or clothes. One last thing from the goods table:

But services are much larger, and that’s where the problems are. We start with the Big Dogs – housing and health care. These categories are so large, they can move the whole report by themselves. Health care is doing much worse than I would have expected at this point, and, at least through July, housing is acting as if nothing is happening.

That’s a pretty normal-looking curve on housing. I really expected health care to be cutting into those large losses by now, but instead, it put on another $10 billion in July. The whole category is still down 7% since February, with dental and nursing homes doing particularly poorly. The only up category is labs.

But there are group of services with high fixed costs that make up for it with density and volume and peak demand times – transportation, recreation, food, accommodations, and smaller services grouped under “Other”. Together, these were 23% of consumption in 2019. They were only 18% of consumption in July.

The accumulated losses in these businesses were at $407 billion through July.

These are by far the worst large categories in the report.

Starting with food and accommodations, we see that the split between fast food and full service is real. Fast food restaurants have turned it around and have started eating into their March through May losses. Q2 looks like a pretty good quarter for them.

Full service restaurants and bars are still losing about $10 billion a month in revenue, while fast food is moving the other way. Comparing groceries to food service, we see losses in the latter are outstripping grocery gains substantially.

Households have saved a cumulative $38 billion from not eating out as much since March. That’s about $23 a month for every man, woman, and child.

Also note the food hoarding in March.

Looking at the two student categories, they are really in the dumps. Remember, these are seasonally adjusted in these highly seasonal categories, so this is compared to what a “normal” spring and summer might look like.

This is one of the reasons universities are opening against all logic. The large recent increases in tuition and fees have not been to pay for education (faculty salaries are stable), but rather for amenities like food and housing. If students are only paying for education via remote learning and not the amenities, universities operate at a loss.

Anyway, it will be interesting to watch these categories as they play out in August and the Fall as schools open up.

Finally, in this category, we have hotels, which added another $5 billion in losses in July.

Moving on to transportation, these were some of the hardest-hit categories in March through May, and recovery has been slow compared to their plunge.

I consider these categories bellwethers. The recession doesn’t begin to end until people are willing to get on a crowded plane, bus, or subway again. Air carriers added another $4 billion in losses in July, for $32 billion total. They also missed out on their summer surge.

Recreation services is where the worst-hit categories are:

Audio and video services includes streaming services like Netflix (NFLX) and Spotify (SPOT), so that is buoying that category, even though the rest of it, especially photo studios, are still doing poorly. Cable and satellite TV are continuing their slow slide as if nothing is happening.

Let’s check in on some of the subcategories here, because it’s pretty striking.

Look at casino gambling in June and July. Vice is nice in pandemic life. Weirdly, though, lottery purchases remain down. I would have thought gamblers would substitute large lottery ticket purchases for casino and sports gambling not available. I guess they have the stock market, which, at this point, should be switched from financial services to recreation services.

Looking at the losses in the broader subcategories:

Most of the really bad services from the previous chart sit in that far right-hand side group, and you can see they added another $12 billion in losses in July, for a total of $62 billion now.

“Other Services” is pretty dense, with 52 sub-categories and sub-sub-categories.

Communications is the largest of the sub-groups, but only 15% of Other, and mobile and home internet are most of that. This has been a flat line across this whole time, though that hides some large variation

The two digital services for mobile and home are very flat, but we see a huge divergence between first class mail and other delivery services, now up 28% since February. First class mail is a whole article unto itself, so you will have to forgive me if I skip it.

But the rest of the Others are doing poorly, with most of the accumulated revenue losses coming in the clothing and personal care category.

That is almost entirely personal care, $45 billion out of the $47 billion total accumulated losses. $25 billion of that was for salons, which is only a $7 billion per month business in the first place. In July, salons were still down 81% since February.

Professional and business services is one of the categories that worries me the most, here and also in the jobs numbers. Legal and accounting are starting to get back up. But the rest are down then flat, and funeral services are, if you will forgive the expression, dying.

The rest of Other:

  • Education services losses are spread out amongst the subcategories. But again, these are pretty seasonal right now, so we’ll see where that goes in the August and September numbers.
  • 67% of the cumulative losses in social and religious services is child care.
  • 62% of the cumulative losses in household maintenance is domestic services.

There are two sort of accounting anomalies that are also having an unusual effect on the top line PCE number. The first is foreign travel. PCE is calculated by who spends the money for the good or service, so counterintuitively, spending by US residents abroad is added to PCE, but spending by foreigners in the US is subtracted. The result, “net foreign travel”, is added to PCE. Since both foreign travel categories are way down, they cancel each other out in the top line of PCE. But that is masking these declines:

The only thing keeping that red line higher is foreign students. And the losses continue to pile up:

The other accounting anomaly is nonprofits. Here, and in many other government data, households and nonprofits are reported together. But nonprofits are both consumers and also sellers of goods and services to households. In order to not double-count the latter, nonprofit sales to households are subtracted from their gross output, and that net consumption, aka “Final consumption expenditures of nonprofit institutions serving households”, is added to PCE.

What happened was that in March through June, nonprofit sales fell much more than their gross output, which also fell. The net result was a cumulative boost to PCE of $49 billion over those months because of this accounting. As you see, that has evened out in July, and all three are down 6-7% from February.

Summary bullets:

  • This is the fastest shift in consumer preferences ever.
  • Consumers are substituting household goods for services they cannot enjoy.
  • Even if it remains flat in August, the goods economy will make up all the accumulated losses of April and May.
  • But services are still twice as large, and are doing much more poorly.
  • Health care remains terrible.
  • The other very large service category, housing, is acting like nothing is happening.
  • The group of high-density services in transportation, recreation, food, accommodations, and personal care were the worst hit and remain the worst off.
  • There has been over $100 billion not spent on foreign travel to and from the US.

Prices and Inflation

Again, this is where we are likely to see the largest revisions over time, so treat these as approximations.

PCE-chained price indexes attempt to measure the prices of what people are actually buying, unlike the fixed basket of goods of CPI. So, importantly, we are going to see the results of large substitution effects. Normally, this is when the price of something goes up, so people substitute something else. In this case, it is more that many services people used to buy are not available or unsafe, and they are substituting goods in the home.

But especially in services where the shifts have been the largest, we also see large formula effects. The most extreme example is spectator sports. This is a category that is still down 99.9% in July, but with prices inflating at 6.2% YoY. What that means is, whatever is left out there (and I have no idea what that 0.1% of sports is), is relatively expensive. But unlike CPI, almost none of that winds up in the top line numbers.

So, given all those well-deserved caveats, let’s get to it. In the first place, despite all that cash flooding the system I told you about, inflation remain muted at 1%.

This is not to say it has done nothing; we would probably be deflating right now otherwise.

But like with consumption, we are seeing a small reversal of the historical trends of goods and services:

Services inflation runs a little hot, above the 2% Fed target, whereas goods price inflation is much lower and often negative. Zooming in on 2020:

We see that services inflation dipped down below 2% and has stayed very flat since. But goods prices, which had bounced in January and February, collapsed sharply in March-May, but have also recovered pretty sharply. That curve is hiding two things, in particular, underneath.

In the first place, food and energy goods have had a huge effect on that curve, but they are more or less cancelling each other out.

In July, the inflation rate for the combined line was -0.9%, but that’s come back from -3%, boosting the goods top line somewhat. But if we pull out food and energy, the chart looks pretty similar to the one with them still in there, just with slightly higher levels in goods.

So, what’s happening? Outside of recovering energy prices, it’s almost entirely due to vehicles, and really, used vehicles.

I’m accustomed to used vehicles having an inordinate influence on the report, but this is amazing. This is another one of those goods-for-services substitutions:

So, demand has spiked, and even though inventories are very high right now, dealers are taking advantage and raising the stickers. Their margins are skyrocketing as a result:

The used truck margin has doubled since April. So, to sum up:

  • Services, two-thirds of consumption, are seeing reduced inflation that has been flat for 4 months now.
  • But goods are on a bit of a wild ride, driven almost entirely by energy prices and used vehicles.
  • The net effect is 1% inflation, well below the Fed’s target.

The Fed’s Inflation Targeting Announcement Ultimately Means Nothing

The Fed’s announcement that they would begin to use average inflation targeting and allow inflation to get hot for a while to make up for lower periods sent equities rallying again and the long end of the Treasury curve up. I took the opportunity to buy some 20- and 30-year bonds.

But the Fed saying that they will tolerate brief periods of high inflation does not mean there will be inflation. They are bankers, not gods.

In the first place, they had already told us they were not raising rates for years, so this has zero effect on the short and medium term. It is merely recognition that our problem no longer is keeping a lid on inflation, but rather, stopping deflation. That chart in the Twitter screenshot above is core PCE inflation, what the Fed targets, over the longest expansion in history. That period includes near-zero rates for 6 years, 3 rounds of QE totaling about $2 trillion dollars, TARP, and a giant tax cut in 2018 that finally pushed inflation over 2% for 2 quarters in that year.

Note that what finally pushed it over was fiscal policy, not monetary policy. They are bankers, not gods. So, what is happening? For that, we need to back up 50 years.

For anyone who live through the 1970s, it was a formative experience. We all have “Inflation Bad” tattooed on our frontal lobes. A thriving middle class, a rising Boomer generation, and women entering the workforce pushed demand high. Add in a couple of oil shocks, and you get this:

Prices and rates were high because there was a high demand for capital to meet consumer demand, but not enough savings to fund that capital. The neutral rate, the magic rate at which savings equals investment and 2% inflation meets full employment, was very high.

The Fed controls only overnight rates, and the further out you go on the curve, the less control they have. Right now, the 1-3 month bills are all inverted with the overnight rates. They can’t even control that.

The narrowing spreads and inversions we saw through 2018-2019 was the bond market telling the Fed that short-term rates were too high. Powell’s pivot in December 2018 was a reaction to this and credit conditions tightening, not the President.

But back to the 1980s. In response to the neutral rate skyrocketing, the GOP devised a variety of supply-side policies to create more savings at lower interest rates – to raise the marginal propensity to save:

  • Lower marginal tax rates on high earners, who save more of their income
  • Tax-advantaged retirement and other savings
  • Capital gains tax rates

So, this sets the stage for our current problems, which are the opposite of the problems of 1980, when there was too much consumption and not enough savings. Now, there is not enough consumption:

  • Red line – Annualized real PCE growth 1970-2000, 3.5%
  • Green – 2000-2019, 2.3%

The reasons given by economists, generally:

  • Demographics – Workers work the same number of years but are retired for much longer, so they must self-insure against running out of money in their 80s. There is a good chance you are here at Seeking Alpha for this exact reason.
  • Inequality 0 High earners have a lower propensity to consume, and they are getting a larger share of income.

But the supply-side policies are still in effect. They were created to solve problems from 1980, and both helped create that inequality and continue to reinforce it. Those policies are now working against us.

I would add a third, psychological, reason – which is that the experience of the last recession was indelible, and it highlighted to everyone the tenuous nature of our incomes in a globalized world.

Rates are a price for money. Like all prices, they are controlled by supply and demand. When the price for money was high in 1980, it was telling us there was not enough capital to meet demand. We needed more supply. Now rates are telling us that there is not enough demand for capital to meet supply.

We see that reduced demand for capital in fixed investment.

  • Red line – Annualized real fixed investment growth 1970-2000, 4.7%
  • Green – 2000-2019, 2.1%

Inflation similarly sits at the nexus of supply and demand. It’s no big mystery why inflation is low. Scroll back up and look at the real PCE chart. Consumption growth has slowed; demand is low, and the system is awash with capital with no place to go. They are literally giving it to blank-check SPACs now, because there is no other place for it to go. So, the Fed can say whatever they want, and the inflation bugs can come crawling out of the woodwork. They can’t make people want to consume more.

Unless we deal with those root problems of inequality and income insecurity for seniors, demand will remain low, and so will inflation, no matter how many digital dollars the Fed prints.

The Numbers That Really Matter

I’ve been quoting this extensively since he said it, because it frames our situation particularly well. During the Q2 earnings call, Citigroup (C) CEO Mike Corbat finished up his scripted remarks with this:

We are in a completely unpredictable environment which no models, no cycles to point to. The pandemic has a grip on the economy and it doesn’t seem likely to loosen until vaccines are widely available.

When asked to elaborate later in the call, he said:

I think of this going through four stages, containment, stabilization, normalization and ultimately a return to growth… I would describe right now that broadly in the world we are somewhere between containment and stabilization, right? Containment is that we can bend the curve in terms of the transmission of cases. Stabilization is that as we remove or start to take down some of the barriers or actions that were put in place… And when you get to the third phase around normalization – and simply put, normalization to me is: Am I willing to get on the airliner? Am I willing to get in a subway? Am I willing to go into a crowded venue to watch a sporting event or a concert or what it may be? And I think realistically when we get to that third bucket, I just don’t see that coming and I would say many don’t see that coming until we feel like there’s an anti-virus vaccine that’s available for the mass population around that. And so I think one of the things that people struggle with today is the disconnect in some ways between where the market is in some ways and actually where we are in terms of this health pandemic… So I don’t want to be pessimistic in there. I want to be a realist and I just think that in order to truly normalize, that’s what’s necessary to do that. [emphasis added]

Let’s break down the key points:

  • The pandemic caused the recession, not the shutdowns. This is at root a public health problem, not a political or economic one.
  • We cannot get out of containment.
  • We will not get to normalization until there is a safe, effective vaccine. The recession only begins to end then.
  • There is a huge disconnect between the market and the economy right now.

So, how’s that going? In the first place, we are no longer the worst in the world, as Spain has snatched that title from us.

But as you can see, the case rate has stopped coming down in the last week. This is different from that pause earlier in August, which was just California clearing backlog. So, this is where we stand today:

As you can see, the Dakotas are the worst states in the country right now, but we are seeing flare-ups throughout the Midwest. Even Maine is seeing their case rate go up from a single wedding, which now infected 65 people, several whom did not even attend. One of the non-attendees has died.

But the biggest spikes have been in Iowa and Alabama:

Why? They reopened the universities, and those counties now have sky-high case rates:

And it’s not just there:

So, it looks like we are maybe at another inflection, which would be the sixth by my count. Stay tuned, COVID-19 is not going anywhere.

Adding It Up

There’s a lot here, but the big issue remains over $3 trillion in cash that is just sitting around waiting. Households have about $1 trillion, banks another trillion, and Treasury another trillion. In addition to that, there is another $4 trillion in T-bills that have been auctioned since April 1. They have a weighted average term of 135 days and a weighted average rate of 0.14%. The demand for this $4 trillion in bills earning a negative real return was 192% higher than the issues, with $14 trillion tendered.

Just last week, Treasury sold another $300 billion in bills with a weighted average term of 102 days and a weighted average rate of 0.10%, the same as the overnight rate, for 102 days. There was $888 billion tendered, 196% more than the offerings. That’s almost $900 billion chasing 10 basis points for 102 days.

That’s about $7 trillion earning little or no return. The system is awash with capital, and there is no place for it to go. Real rates will remain negative because the real neutral rate is negative. Right now, the 10-year TIPS is -1.09%. Does that sound like an inflationary environment to you?

So, the big question remains: will this cash just sit on the sidelines like it has been, or will banks, corporations, and households put it to work?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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More resignations at Singapore firm linked to Newcastle United bidders By Reuters

© Reuters. FILE PHOTO: Premier League – Newcastle United v Aston Villa

SINGAPORE (Reuters) – Several directors resigned from a Singaporean firm linked to bidders for soccer club Newcastle United on Tuesday, the latest hiatus for the bidding group since Reuters reported doctored photos of Barack Obama were among various suspect claims it had made.

The resignations from consultancy Axington (SI:), owned by Singaporean cousins Terence and Nelson Loh, included its chairman, Chinese jeweller Evangeline Shen, according to filings with the exchange.

The Lohs and Shen are the co-founders of newly formed Bellagraph Nova Group (BN Group), which said last month it was in advanced talks to buy Newcastle. It has described itself as a “conglomerate” with turnover last year of $12 billion.

The board exits follow the former U.S. ambassador to Singapore’s decision to quit the firm as its stock price sank last week and came as the company said it plans to make “strategic changes” in its “business direction”.

Reuters reported on Aug 22 that BN Group had admitted to doctoring photos of former U.S. President Obama in marketing materials and had released other information about the group prematurely or in error.

Local Singapore media subsequently reported other inconsistencies in claims made on the group’s website, press releases and social media posts, which the firm said “appears to be the result of the actions of certain errant individuals”.

Many of those press releases have since been deleted, its social media accounts have been deactivated and a password is now required to view BN Group’s website.

In other recent developments, luxury jewellery brand Bulgari (PA:) has refuted the group’s claims of a business association, and Singapore’s Business Times newspaper reported some regional investors were trying to withdraw investments from other BN group entities.

BN Group did not immediately respond to a request seeking comment. It was quoted by the Straits Times newspaper saying it will appoint independent legal counsel to investigate the posting of the marketing material and will not address any further media queries until investigations are completed.

The Singapore Exchange (OTC:)’s regulatory arm last week called for a probe of Axington’s directors “in light of recent developments”, shortly before the company postponed a shareholder meeting saying it needed time to review its plans.

At that meeting, shareholders had been due to vote on switching Axington’s business to medical services and robotics, and change its name to NETX, a firm that BN Group had heavily marketed as one of its entities.

Also among Tuesday’s four resignations was executive director Marjory Loh, Terence Loh’s sister, who cited “recent intense public scrutiny on the company” for stepping down, according to filings with the Singapore Exchange.

A spokeswoman for Singapore’s corporate regulator ACRA has also said it is taking enforcement action on two other companies linked to the Lohs for not filing annual returns.

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You might use Zoom for free, but companies are paying for it — pushing the stock to new heights

Zoom Video Communications Inc. has become a household name during the coronavirus pandemic, with millions of people using its online-video service for free — but it still needs companies to pay for it in order to survive.

On Monday, it proved that is happening — and then some. Zoom

reported another amazing quarter as consumers, schools and all types of businesses continue to use the service while sheltering in place, sending shares up 22% in after-hours trading. While most individuals are using Zoom for free, more companies are signing on for big-money deals.

Zoom Chief Executive Eric Yuan touted some major new customers — Exxon Mobil Corp.

and Activision Blizzard Inc.

— during a conference call Monday afternoon. Exxon is using Zoom as its communication platform for its teams, customers and partners around the world, while Activision plans to replace its legacy videoconference products with Zoom. 

Zoom said that it added 219 customers in the second quarter that spent more than $100,000 each in the trailing 12-month period, its best quarter ever for attracting big-revenue customers. Zoom is approaching 1,000 customers of that size, reaching 988 as of the quarter’s end on July 31.

Zoom also said that it expanded on its deal with ServiceNow Inc.

, signing the cloud-software company to a deal for Zoom Phone, the company’s system to replace legacy PBX systems; with more employees working at home, those PBX systems are often sitting idle while employees use their own phones for work. Zoom expanded that service internationally in the second quarter and launched a hardware-as-a-service offering, which will allow it to sell large corporate clients on more services, and thus drive more sales.

“We continue to see growth in the period from both new customers as well as existing customers, and tremendous opportunity with webinar, especially, as well as Zoom Phone,” Zoom Chief Financial Officer Kelly Steckelberg told analysts. “We actually signed our largest Zoom Phone deal to date in Q2. So exciting to see that continued momentum.”

Smaller customers are growing fast at Zoom too, but they could have a more volatile effect on Zoom’s financials. Zoom ended the quarter with about 370,000 customers that have 10 employees or more, adding 105,000 of those in the second quarter, and pushing the smaller companies to 36% of Zoom’s revenue, up from 30%.

But executives admitted that those customers are showing a greater propensity to “churn” to other services, and they could more prone to price fluctuations by paying monthly instead of annually. They are also the most obvious targets for Zoom rivals — like Alphabet’s Google Meets


, Microsoft Corp.’s

Teams and WebEx from Cisco Systems Inc.

— to poach.

By locking down more big-money deals, expanding offerings beyond videoconferencing and increasing the base of smaller corporate clients, Zoom continues to prove it is built to be a force even after the pandemic has run its course. Yuan predicted that even though everyone will be working from home for the foreseeable future, the nature of work when people return to the office is going to change dramatically in ways that will still make Zoom an important part of the daily routine.

“If you look at a lot of companies they have a very big [open] space, I think that may not work anymore in the future,” he said. He also said that employees may shift to two or three days a week in the office, working at home the other days, and there won’t be much need for a lot of small offices with few workers. “It’s very, very likely it’s hybrid,” he said.

Indeed, as the future of work is likely to be more of the same that many are experiencing now, Zoom is poised to continue to reap the benefits.

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Rackspace Technology’s (RXT) CEO Kevin Jones on Q2 2020 Results – Earnings Call Transcript

Rackspace Technology, Inc. (NASDAQ:RXT) Q2 2020 Earnings Conference Call August 31, 2020 5:00 PM ET

Company Participants

Sloan Bohlen – Investor Relations

Kevin Jones – Chief Executive Officer

Dustin Semach – Chief Financial Officer

Conference Call Participants

Heather Bellini – Goldman Sachs

Tien-tsin Huang – J.P. Morgan

Dan Perlin – RBC

Matt Cabral – Credit Suisse

Bryan Keane – Deutsche Bank

Ashwin Shirvaikar – Citi

Ramsey El-Assal – Barclays Investment Bank

Keith Bachman – BMO

Amit Daryanani – Evercore ISI


Greetings. Welcome to the Rackspace Technology 2Q 2020 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Sloan Bohlen of Investor Relations. You may begin.

Sloan Bohlen

Good afternoon, everyone. Welcome to Rackspace Technologies second quarter 2020 earnings conference call. We will refer to a slide deck during today’s prepared remarks, which can be found on the Investor Relations section of our website. On the call today are Kevin Jones, our Chief Executive Officer; and Dustin Semach, our Chief Financial Officer.

Before I turn the call to them, on Slide 2, you will see that certain comments we make on this call will be forward-looking. These statements are subject to known and unknown risks and uncertainties, which would cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our S1 registration and other SEC filings.

I would like to remind our listeners that Rackspace Technology assumes no obligation to update the information presented on the call except as required by law. Slide 2 also informs our participants, that our presentation includes certain non-GAAP financial measures and certain further adjustments to these 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 respective and most directly comparable GAAP measures. These reconciliations can be found in tables included in today’s earnings release and our slide presentation, both of which are available on our website. We will also provide revenue metrics and constant currency when available as a framework for assessing how our underlying business performs, excluding the effect of foreign currency rate fluctuations. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. After our remarks this afternoon, we will be happy to take your questions.

I will now turn the call over to Kevin.

Kevin Jones

Well, thank you Sloan and good afternoon everyone. Welcome to our initial earnings call following our recent IPO. Now, before we discuss our business and the second quarter, I’d like to take a minute to acknowledge how proud I am to be part of such a talented and innovative organization. I want to say thank you to all of our customers and our nearly 7,000 Rackers around the world for all that we’ve achieved thus far and we’re looking forward to an incredible future. Speaking of our future, I’ll also talk today about how Rackspace Technology is attacking the incredible market opportunity in front of us.

Now on Slide 4, you can see our agenda for today. I will summarize our second quarter results and key takeaways, and Dustin will cover our financial results. Starting on Slide 5. We were very pleased with our results in the second quarter of 2020. Bookings continue to accelerate and increased 107% year-over-year driven by both our core multi-cloud services as well as our apps and cross platform offerings.

We also had an outstanding quarter with our existing customers as our core net revenue retention for the quarter was 99%, which is up from 98% last quarter. This was driven by excellent execution in our land and expand transformation program. Our bookings were strong across the board, both geographically across the Americas, EMEA and APJ regions, and especially with larger enterprise customers where we achieved 121% year-over-year bookings growth. In fact, I’d like to highlight two of these customer wins.

Rackspace Technology was awarded the largest contract in our history to support the Texas department of Information Resources’ overall IT modernization effort. Under this contract, Rackspace Technology will provide operational, technical and security solutions across the customers’ multi-cloud environment. Rackspace Technology also won a large opportunity with ResMed, a multi-billion dollar digital health company to be their preferred multi-cloud partner. Under this agreement, Rackspace Technology will provide migration assistance to our highly automated private cloud technology stack and operational support of a broader multi-cloud footprint, including Microsoft Azure and other technology stacks.

I should mention that our second quarter sales wins were very broad based. We had over 7,000 new signings across all three regions and all service offerings. The Texas Department of Information Resources deal was only 13% of our Q2 signings and no other single deal represented more than 4%. And not only did we beat our overall sales target in the quarter driving growth of 107%, but we’ve also exceeded our sales targets every month for the last 12 months in a row. We’ll talk more later in the presentation about why our sales performance has strengthened so dramatically over the last four quarters and why we have so much confidence and momentum for the future.

Moving now to our financial results. Our Q2 core revenue growth was also quite strong, up 14% over last year on a constant currency basis. Pro forma for acquisition of Onica Holdings late last year, our core growth of 7% was also strong. Consolidated revenue for the quarter grew 10% on a constant currency basis and totaled $657 million. Lastly, on the top line, it’s important to point out that over 95% of these revenues are recurring.

Turning to profitability, our adjusted EBITDA for the second quarter totaled $188 million, which represents a strong margin of approximately 29%, which is up year-over-year and year-to-date. This increased profitability was driven by revenue growth and the continued benefit of our transformation programs. We also continued to decrease our capital intensity, which was down 80 basis points to 9% for the last 12 months. The continued shift to our capital-light offerings brought capital expenditures as a percentage of revenues down, which positions us well to drive significant free cash flow growth.

Rackspace Technology, as you know, also completed its IPO earlier this month. As a result, the company and our balance sheet are well positioned to drive long-term growth. Since it is our first public earnings conference call, I’d like to take a minute to reintroduce Rackspace Technology on Slide 6. As you can see, Rackspace Technology is a transformed company since going private in 2016, both in terms of our compelling market position in multi-cloud services, as well as how we’ve strategically shifted the company to capitalize on that opportunity.

Prior to the take private, Rackspace Technology is viewed as a competitor to the public cloud. Today, we partner with AWS, Google and Microsoft. You might wonder why the change? Well, we are right in the middle of a tectonic shift in the industry to multi-cloud, with over 81% of customers considering a multi-cloud strategy today. Multi-cloud is extremely powerful, but incredibly complex, and approximately 75% of businesses need help with their multi-cloud environment. As the leading pure-play multi-cloud solutions company, we enable cloud adoption and the cloud ecosystem as a whole in partnership with public cloud hyperscalers like AWS, Google, Microsoft and other partners such as VMware.

In the past, Rackspace Technology sold managed hosting and OpenStack products. Since the LBO, we have done four acquisitions that have revolutionized our offerings. Today, we are a leader in end-to-end multi-cloud solutions. And this shows up in the numbers. Revenue from businesses with attractive growth has increased from less than 10% to approximately 90%. Our bookings growth has exploded, which I’ll detail in a second. Core pro forma revenue growth has increased significantly, and capital intensity has halved to 9% and is expected to decrease over time.

Slide 7 gives a little bit more detail on our growth trajectory. Since the new management team joined Rackspace Technology in mid-second quarter last year, there has been a remarkable shift in performance driven by our transformation initiatives. We’ve taken bookings growth from flat to 107% year-over-year growth in just four quarters. We’ve also improved core revenue growth to 7% year-over-year on a pro forma basis. And the best part of this is we are just getting started.

Slide 8 gives you some insight into just how we did it. Now first of all, I have to say that we are in a huge and growing market with secular tailwinds. That’s obviously a big help, but we’ve also implemented over 120 transformation initiatives at the company, the vast majority of which are targeted at building sustainable revenue growth. Just to mention a few of the transformation initiatives, we doubled down on our professional services and consulting capabilities. This is our tip of the spear for customer engagements and how we began advising customers on their cloud journey. This was huge in terms of moving us up the stack and influencing customers’ technical direction and customer spend.

Also, we put a much stronger focus on the enterprise part of our market with great success. We are winning big enterprise customers all over the world. We put in place a management system with detailed key performance indicators, and intense cadence, culture of accountability and reinforce relentless execution. We have increased the number of salespeople. We are doing bigger deals and have massively improved our sales force productivity. Finally, we have a land and expand strategy that emphasizes installed base customer growth.

Remember, we have 120,000 customers, and we have a huge opportunity to grow rapidly within our existing installed customer base. So we implemented detailed account planning, a new sales education program called race to win, an executive sponsor program that gets all executives into our sales motions, and we have improved our sales incentives. Together, these and other initiatives have helped us dramatically improve our sales performance. By the way, we have now reported four consecutive record-breaking quarters for our sales bookings, and we expect our momentum to continue.

Now let’s talk about how we’re setting the company up for the future. It starts with our mission statement, which you can see on Slide 9, embrace technology, empower customers deliver the future. Embrace technology means we are always going to be developing and exploring new technologies and mastering the most important ones for our customers. Empower our customers, means we help our customers achieve their business outcomes, working with them every step of the way. Deliver the future is really self-explanatory, that’s exactly what we do for so many customers. And we do it faster than they can do it themselves. It’s a short mission, but it’s something that people can remember and get behind.

As you can see on Slide 10, we are an investment in a pure-play end-to-end multi-cloud solutions company. We unite the cloud ecosystem across all technology stacks and deployment models in a way that’s seamless and practical for our customers. By the way, we don’t expect multi-cloud to remain static as more clouds and cloud use cases emerge in years and decades to come, we’ve built the ideal software platform to expand our solutions and be our customers’ sole cloud services partner for the long haul.

Now, if we look at Slide 11, you’ll see that each decade had one or two technology trends that transformed the way we live and work. Going all the way back to the 70s, we had mainframes then PCs and the Internet, and more recently the public cloud and mobile. Fast forward to today, the start of the multi-cloud era, now in a lot of ways, the multi-cloud is the culmination of the revolutions that came before it. We see it as the driving force for technology innovation for the next decade.

And this isn’t just a prediction. We’re seeing it every day with our customers. For this reason, we have architected our strategy and our solutions around multi-cloud and where the next wave of technology is headed. Now there’s the question of how do we get here today? On Slide 12, if you look back to the start of the 2010s, the public cloud was a new opportunity for a group of early tech leaders and cloud native businesses that were focused on building entire operations and revenue streams in the cloud.

Fast forward to the middle of the decade, public cloud adoption increased. Although a lot of bigger businesses use the cloud largely for development and test environments, not fully taken advantage of all the cloud had to offer. But things have changed dramatically, even in the last few years. Today, businesses are under pressure to use cloud technologies to solve strategic problems, build new revenue streams and decrease costs, and customers need multi-cloud solutions to help unlock this value.

Turning to Slide 13, so what does this mean for us? Multi-cloud adoption presents us with a huge and growing opportunity. Customers are well on their way to embracing multi-cloud technology with over 80% of enterprises using some sort of multi-cloud strategy today. Customers love multi-cloud, but it is complex and very difficult to navigate. And customers are being pushed to multi-cloud and not just to save money. It’s also to grow revenue.

As a result, 75% of enterprises will want a services partner to help them get to multi-cloud by the end of 2021. And that’s up from 30% in 2018. This is one of the big reasons we are seeing such an explosion in demand for our services. Putting it all together, we’re addressing a huge market worth over $400 billion. And the trends are in our favor to also take share over time.

Now the value proposition we’re offering customers is clear, as you can see on Slide 14, businesses are navigating a maze of cloud technologies. Multi-cloud is very powerful, but incredibly complex. In order to be world-class at multi-cloud customers, need to be adept at all these different technologies. And even if customers could understand all these technologies, which is doubtful, that’s only half the battle, customers also need to understand how all these technologies integrate and work together.

That is absolutely impossible for customers to do at scale in a world-class way. That’s why customers need us, now more than ever, customers are under extreme pressure to get to the cloud, but the complexity and challenges overwhelming and customers need our help.

So on Slide 15, let’s talk about how we actually help customers and our differentiated approach to customer engagement, which you can see here on the border of the wheel. We start with an initial advisory and assessment then we design and build the technical environments. Once the customer is in a multi-cloud environment, we continue to manage and optimize the workloads over the long-term. This end-to-end comprehensive nature of our customer engagement is a big differentiator for Rackspace Technology.

Now let’s talk about our solution model, what you see in the middle. I love it. I absolutely adore it. It is elegant in its simplicity. We have only four offerings, multi-cloud which includes public and private cloud, applications, data and security. We are deep in these four solutions, much different than other companies that try to deliver 30 to 100 offerings. Cloud is all we do. We have these four offerings and we are the specialist. And when customers want the best, they choose the specialist.

Now let me provide some additional color on these four offerings on Slide 16. Our multi-cloud capabilities bring a unified approach to the cloud, with hundreds of products provided by each hyperscaler, there are many ways to build and operate in the cloud and the paths that customers take are the difference between success and failure. This is where the expertise we bring makes a real difference. Our application solutions lead customers through the design deployment and management of off-the-shelf applications, such as SAP and Oracle and SaaS products such as Salesforce, all optimized for cloud environments.

We also help customers build new cloud native products, including end-to-end solutions for the Internet of Things. Our data solutions focused on bringing data closer to business decision makers. We deliver these services using both traditional and next generation approaches, including machine learning.

Lastly, in cloud security, we offer fully integrated security solutions that provide customers with threat detection analysis and remediation capabilities. And of course we have integrated security into our software platform, Rackspace Fabric, to give our customers a centralized view of their organizations’ vulnerability and threats.

Now in today’s environment, every conversation starts with the workload, the application, the data, and matching that with the best technology stack and deploying the model. On Slide 17, let me speak how we built our services ecosystem around this exact thought process. We’re actually giving customers the ability to make those fluid decisions and choose the right technologies for their workloads, whether that’s Azure Stack, AWS, Google Cloud, or anything in between. And through our software platform, Rackspace Fabric, which I’ll speak about in a minute, we are uniting the cloud ecosystem across all technology stacks and deployment models in a way that’s seamless and practical for our customers.

Now let’s talk about the proprietary software that enables all of this on Slide 18. We have spent more than $1 billion and 12 million hours of highly skilled professionals’ time on our proprietary software, Rackspace Fabric, over nearly a decade. Our IP includes over 200 unique tools and components to deliver our services and automation runs deeply here. We have the best automation in the industry by a landslide and our competitors have no shot of replicating it. Just the time and investment alone is no small feat, and we plan on staying ahead through leveraging the next wave of technology.

And now let’s talk more deeply about why we are winning on Slide 19. We are significantly differentiated. So let me be very clear about how Rackspace Technology is different from our competitors, by talking about these eight advantages that we have. We have the highest automation in the industry as we discussed earlier, and customers love that because it provides them with speed, agility and high quality. And we are focused on widening the gap between Rackspace’s automation and the rest of the field. We have standardized operational processes. We have by far and away the most standardization of any company in our industry.

After decades of cumbersome customization in error-prone processes provided by our competitors, our customers demand standardization in Rackspace delivers. We leave with our software, Rackspace Fabric, which is supported by nearly a decade of investment. We are famous for our fanatical customer experience. This is built into the DNA of the company 20 years ago, and customers continue to cite our outstanding service as why they buy from us. It is evidence in our net promoter scores and our renewal rates.

We serve our customers across the entire multi-cloud lifecycle, providing end-to-end solutions. Customers crave a single provider for their entire cloud lifecycle. That is Rackspace Technology. We continuously improve our solutions with our customers, always proposing ways for our customers to save more money and innovate faster. This is much different than our legacy competitors, whose protectionist mindset has driven customers away from them. We are actually helpful. We transform customers to the cloud. That is how we engage. We deliver at scale serving more than 120,000 customers in over 120 countries and growing fast.

And finally, we maintain strong and long-standing relationships with our technology partners, AWS, Google, Microsoft, VMware and others. This is a huge strategic shift for Rackspace Technology and is much different from our competitors. Our partners are deeply integrated into our sales, operations and solution organizations. This is differentiated from our competitors whose partners are typically relegated to organizations, more like an appendage to the company and not core to its operations. I personally spend 15% of my time with partners and we are lined up with our partner sales leaders and our partners’ go-to-market teams all over the world. So to summarize here, it’s great to have such a materially differentiated company, and it is showing up in our sales and revenue numbers.

Slide 20 is my last slide, before I turn it over to Dustin. Just taking a step back and looking at where we are sitting today, COVID-19 has had a massive impact on our lives. As it relates to our business, the pandemic has actually accelerated years of digital transformation and made it clear to our target customers that having the right multi-cloud strategy is no longer a nice-to-have. We are slammed with demand from customers motivated to move to multi-cloud environment, to save money, scale up and scale down and pivot to new business models. And while Q2 was clearly strong, we’re already off to a great start in Q3. We again smashed our monthly sales target in July, making it 13 months in a row feeding our sales bookings plan. We are excited about the sales momentum thus far in Q3.

Related to our business performance during the pandemic, I should note that we have a diverse customer base with zero customer concentration risk, and importantly, we’re able to deliver our services remotely. 99.5% of our Rackers have been working from home since March 9. We have a robust financial profile with strong profitability and liquidity available. Now more than ever, we are confident of the resiliency and sustainability of our business.

With that, I will turn it over to our Chief Financial Officer, Dustin Semach, take you through our second quarter results in more detail.

Dustin Semach

Thanks, Kevin. Good afternoon, everyone. As Kevin just mentioned, we are very pleased with our Q2 results, and I’d like to echo our appreciation to all the investors and analysts for your support during our IPO. We look forward to working with you all in the quarters and years to come.

If we turn to Slide 22, let’s start with a snapshot of Rackspace Technology today. We generate revenue of over $2.5 billion annually, over 95% of which is recurring. As Kevin mentioned before, the recurring nature of our revenue is a metric that we find to be highly differentiated among services companies.

Since Kevin and I joined Rackspace Technology in mid-2019, we have seen our top line growth accelerate to 7% versus 0% or flat at the time of the take-private in 2016. And finally, we had a robust margin and cash flow profile with annual adjusted EBITDA of close to $750 million and a profitability profile that’s seen capital intensity has been cut in half to 9% from nearly 20% just a few years ago. Our continued shift to capital-light offerings where we leverage our partners for new product innovation is driving this trend, and ultimately, we’ll continue to expand our free cash flow generation as well.

On Slide 23, let me summarize our Q2 results across our four key metrics: first, on the upper left, you can see 107% growth in our year-over-year bookings. Additionally, we would note for your models that we typically see a one to three-quarter lag from bookings to revenue recognition. Second, on the upper right, we again show our revenue growth, which will trend similarly to our bookings growth over time.

As we move to adjusted EBITDA, I’d like to point out the EBITDA growth will be somewhat slower than revenue growth in the near-term, given the mix shift in our revenues. That said, that impact would be more than offset by the rationalization of non-core expenses, leveraging of partner R&D and lower capital intensity. In sum, we expect EBITDA margins for our business to be in the 28% to 29% range in the near-term.

Lastly, on the bottom right, you can see the year-over-year progression of our capital intensity, which is our capital expenditures versus a percentage of our revenues. As you can see, our capital intensity declined 9.4% in the second quarter for the same mix reason that compressed our EBITDA margins. This is a good problem, and we’d like to emphasize that the end result of shifting to a more capital-light revenue mix in multi-cloud services will drive and compound our cash flow in the years to come.

On Slide 24, I’d like to take a second to detail Kevin’s point about the strength of our bookings momentum in the past year. In addition to 107% year-over-year growth, we are also showing the dollar volume we are generating by quarter, and you can see how meaningful the ramp is really in creating value for Rackspace Technology. As Kevin noted, the groundwork we have laid with some of the items mentioned on the left-hand side of the chart will pay increasingly large dividends over time as we continue to capitalize on the multi-cloud opportunity and drive significant top line growth.

If we turn to Slide 25, let me detail our segment revenues. Our three main segments are Multicloud Services, Applications & Cross Platform and OpenStack Public Cloud. The combination of Multicloud Services and Applications & Cross Platform references our core segment. And due to the strong growth in our core segment, core now represents over 90% of our business, making OpenStack a smaller and smaller piece of our overall portfolio.

I will detail each segment and start on Slide 26 with our Multicloud Services, which accounts for the lion’s share of our revenues at 79% of Q2 revenue. In Q2, we grew these revenues by 16.2% on a constant currency basis. As Kevin noted, the growth was driven by strong performance and broad-based impact of our overall bookings growth. Lastly, Kevin has also noted our net revenue retention continues to be very strong at 99% for the quarter. Also for our fourth year in the row, Rackspace Technology was named a leader in the Gartner Magic Quadrant for public cloud infrastructure, professional and managed services worldwide.

Let’s now turn to Slide 27 and speak to our Apps & Cross Platform revenues, which account for 12% of our overall Q2 revenue. In general, these complementary services tend to grow in tandem with our multi-cloud services, but for the Q2 segment grew just 1.5 points on a constant currency basis due to the completion of larger projects in the prior quarter. With the Texas Department of Information Resources deal coming online in Q3, we expect this growth to reaccelerate throughout the rest of the year.

Lastly, on Slide 28, you can see that our legacy OpenStack revenues, which now represent just 9% of the base will continue to shrink over time as we grow multi-cloud. In fact, revenues in the segment declined 21% on a constant currency basis compared to Q2 of last year.

Now if we turn to Slide 29. You can see that Rackspace Technology is very well positioned to augment our growth and add value-based on our balance sheet post IPO. As you can see on here, we currently have no meaningful debt maturities before 2023 after raising $658 million in proceeds from IPO, our leverage stands at 4.3 times against our trailing adjusted EBITDA. Our intention longer-term is to reduce our leverage to a target range of 3 to 3.5 times, but I also offer that the highly recurring nature of our revenues allows for leverage to be applied in this model.

Additionally, we have available liquidity of over $601 million as of quarter end. Last point I’ll make here is we believe there is ample opportunity to lower our funding cost over time given the highly recurring nature of our cash flows and our improved leverage profile. As you can see here, through our deleveraging with the recent bond tender, we have already saved nearly $44 million in annual interest expense. We’ll be sure to update you as we announced progress further on this front.

With that, let me conclude on Slide 30 by reviewing three concepts, I just spoke to them putting them in the context of our near-term outlook. First, as Kevin and I both mentioned, there is a long runway for top line growth in this business as we’re the best positioned company to capitalize in the Multicloud movement. As we look out over the near-term, we currently expect full year 2020 consolidated revenue growth in the 9 to 10 point range, which implies ramping growth over the second half to the strong performance of our bookings in the first half.

Additionally, as you can see on the second row, the growth is predominantly driven from our core segment, which includes our Multicloud and Apps & Cross Platform segments, where we expect 30% growth at the midpoint for full year 2020. This implies that the core revenue growth will grow 10% or double digits on a pro forma organic basis in the second half of 2020. As we noted, this mix shift should drive slightly lower EBITDA growth as our Multicloud services business has lower EBITDA margin, but is more capital efficient and will drive improving cash flow.

To that point, in the middle of the page, our expected adjusted EBITDA for the full year 2020 is in the range of $756 million to $760 million, which represents a growth of 2% at the midpoint compared to 2019. And lastly, at the bottom of the page, we expect our results will generate adjusted EPS in the range of $0.75 to $0.81, implying 11% growth in the second half of fiscal year 2020 over the first half.

With that, let’s turn to questions. Operator, over to you.

Question-and-Answer Session


At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question is from Heather Bellini with Goldman Sachs. Please proceed with your question.

Heather Bellini

Great. Thank you guys for taking the question and congratulations on the IPO. Just wanted to follow-up on one housekeeping question and then I had another question. First, did you seem to be a cash flow statement that came out with today’s results? So just wondering, one we’re going to get that. And then the other question just has to do with, if you could give us a sense of, obviously, you guys were very well positioned in the market and COVID accelerating the movement to the cloud. But can you talk to us a little bit about the deal closing environment and just pipeline generation environment in light of COVID and kind of how you’ve seen that evolve over the course of the last three months and how you’re feeling about it exiting the quarter. Thank you so much.

Dustin Semach

Sure. Heather, this is Dustin Semach speaking. And I’ll answer the first question is around the housekeeping item and then Kevin, if you want to turn over and talk a little bit about how you see the sales performance in light of all this going on in the marketplace. So the first question is, our 10-Q was also filed just about – I want to say about 30 minutes ago, kind of right at the kickoff of the call. And there’s a cash flow statement within the 10-Q, this should be there to address your questions. And then whatever else you have left over from that I can also handle with you in a follow-up.

Heather Bellini

Perfect. Thank you.

Kevin Jones

Yes. And Heather, thanks for your question related to the pandemic and how we see business and pipeline progressing. First of all, say, as we’ve discussed, the pandemic really had no negative impact on our business to the contrary. We saw fantastic performance, we saw after we pivoted to work from home environment, which we did flawlessly. In March, we saw productivity increase, we saw customer satisfaction continue to improve and we saw sales momentum accelerate quite a bit.

And even in the last month or a month or two, we’ve seen continued acceleration in our sales results and pipeline, we’ve seen pipeline continue to be very, very strong. And the reason is because now more than ever customers want to save money, they want to be able to scale up and scale down and pivot to new business models and Multicloud is perfect for that. So we’re excited. We’re pretty slammed with demand right now. We don’t see that stopping anytime soon. We’re super optimistic, Heather.

Heather Bellini

Great. Thank you so much.


Our next question is from Tien-tsin Huang with J.P. Morgan. Please proceed with your question.

Tien-tsin Huang

Thanks. Really appreciate the presentation, it’s helpful. And of course, congrats on the IPO as well. Just a follow-up on Heather’s question. I just wanted to ask a little bit more on the quality of the pipeline I get that you’re slammed and it continued into July. But anything to add in terms of the trends and the pipeline, maybe larger deal sizes, new logos, just trying to get a little bit more on booking sustainability and visibility, of course.

Kevin Jones

I’ll kick off. And then Dustin, you can jump in and add as well. First of all, thanks the question, Tien-tsin, good to hear your voice. Look, we see really strength being very broad-based. So we see it across all three regions, Americas, EMEA and our Asia Pacific and Japan region, whereas you may know, we’ve expanded geographically quite a bit in the last few months. And that’s really because Multicloud is now catching fire all over the world and we’re there to make sure we can capture that demand. So we’re seeing it broad-based from a geographical perspective. We’re seeing it broad-based also from a service offering perspective across multi-cloud and application, security and data. And then finally we’re seeing it pretty broad-based across our customer segmentation. So across small business, medium sized business and enterprises.

I will say, we have to differentiate at all. I would say we’re seeing more growth in the enterprise customer market where we’re winning big deals all over the world, which is great news for Rackspace Technology, because that can drive even more incremental growth. So, very broad-based, really, really excited about it and looking forward to capitalize on it. Dustin, anything else to add?

Dustin Semach

Yes. Just as a follow-up on the two points, one is, from that mix that you’re talking about from an install-base, as well as new logo, very healthy mix there. And I think state of Texas is a demonstration of an example of that. And then if you look at our actual core net revenue retention, how that stepped up a point from a quarter-to-quarter is another example about the strength of how it’s affecting our install base, which we expect that trend to continue as we go throughout the rest of fiscal year 2020.

Tien-tsin Huang

Got it. No, that’s great. So just my quick follow-up, with Texas, I know it’s a little bit larger than usual, and you don’t have a lot of other sort of concentration beyond that. But anything to comment on in terms of contract execution risk, given the larger size on that one or just in general, your ability to implement deals virtually here? Are you in a good rhythm with that? And if you don’t mind, actually a quick follow-up, I’m getting this question from emails. Just can you give us – Dustin, the organic bookings growth in the second quarter, if – sorry if I missed it. Thanks.

Dustin Semach

Yes, sure. I’ll say, it’s two things, one is, zero concern about contract execution, right? Zero issues delivering in a remote environment, right? So just get those two right off the bat. I mean, if anything, what we’ve seen is actually our customer satisfaction score has actually increased throughout fiscal year 2020 really to kind of – as a way as a proof point for that. And then the last one – you have to come back to what was the last question on the…

Tien-tsin Huang

Just the organic bookings, yes.

Dustin Semach

Yes. So on the organics booking piece of it, think of it as roughly 107% for the quarter and then 66% on a pro forma organic basis.

Kevin Jones

Yes. And just some more color – some more color Tien-tsin on Texas. I just met with the state of Texas last week. They are very happy with our performance. We’re off to a great start. Really, really excited about that relationship and continuing to execute extremely well. And like Dustin said, we’re in a groove – a complete groove with how we deliver remotely. We’ve been doing it now for five months and we don’t see any problems at all. The other thing just to kind of think about is that our services are very standardized. So this is not one of those organizations delivers a lot of custom type services. They’re just standardized, they’re pretty straightforward and we’ve got the best – I think the best operational and delivery teams in the world.

Tien-tsin Huang

Good stuff. Thanks.

Kevin Jones

Thank you.


Our next question is from Dan Perlin with RBC. Please proceed with your question.

Dan Perlin

Thanks guys and again, congratulations on jumping off with a good quarter, right out of the gate. The question I had was around the quarterly revenue retention ratio. You talked about it stepping up about 100 basis points here. So that’s good to see. But we get the question a lot about how you guys are thinking about driving that above 100% and kind of what’s the target range that you’re shooting for there. And then maybe just making sure we understand the key components that are going to drive that? Is it mix, smaller SMBs to enterprise? Is it the type of client work that you’re doing? So anything there would be helpful? Thanks.

Kevin Jones

Okay. So Dustin, I’ll kick off and then you can jump in as well. Look, first of all, thanks, Dan. We’re really excited about this opportunity to continue to improve our customer retention. It was great to see it move up a full point in one quarter. And we’re excited about momentum in the future as well and really how we plan on continuing to drive that through our systematic transformation program. So we’ve got many transformation programs really dedicated to continuing to retain, renew and actually add additional sales to our existing customers. Just think Dan, we’ve got 120,000 customers today. So we’ve put major, major focus on kind of growing our business with those existing customers. New initiatives that we kicked off over the last few quarters include account growth planning, so doing account growth plans for our customers.

We kicked off a sales education program called race to win. So a 1,000 of our Rackers, which are in customer facing sales and customer success roles are taking that training. We just finished the first phase. We’re planning actually to finish it today. Actually teaching, our Rackers in detail about how to upsell, how to cross-sell, and that’s a very, very early innings. So we’re excited about that. All the work that we’ve done around a rewards and recognition, the incentives and the metrics we’ve put in place and with a roughly 1,000 kind of customer facing Rackers is going to help it all within customer segmentation work. There’s a whole list of things that the team and I are managing personally to make sure we continue to drive that customer retention rate in the right direction.

Dustin Semach

And then, and just to fall into that point, I get specifically about, kind of where we see it heading in the short term. We think we’re going to get it above 100% in very quick fashion. But we’re in – particularly in the core and when I’m talking 100% above and talking about in the core segment and then a longer term, we’re still trying to figure out what the right mix is. And in terms of how that’s going to flow through from between new logos and install base, but we see there’s significant momentum and opportunity for this to continue to move up into the right.

Dan Perlin

Great. And then as a follow-up, getting back to bookings and translation into revenues, and you talk about one to three quarters, but embedded in that, can you maybe give us an update on what you’re seeing in terms of kind of customer churn and then the roll-off that’s expected on some of the – maybe a more non-recurring professional services that are in embedded in the business and just how that might be playing out. And you’ve got this kind of rate of change with OpenStack, and I’m just wondering, are you able to – are you finding that you’re able to maybe retain some of those clients better than you might’ve thought originally? Thank you.

Dustin Semach

Dan, yes, great question. Kevin, I’ll take this one first and jump in, if when you want. And so a couple of things I’ll tell you, first off, when we think about a more broadly, the metric that we’re really focused on is, net revenue retention. The metric we just talked about, right, which is that combination, as you mentioned of different variations of churn. But keep in mind, we offer a number of different offerings in churn characteristics or different across the boards, it’s difficult in a very consistent way to manage measure that across the board. On other side of it, we have install base bookings, which has gotten the net effect of that is what’s leading to that overall, 99% retention number that we talked about on a core basis.

And again, we’re continuously focused on managing that. And the other piece of it, as you mentioned, is the non-recurring revenue piece associated professional services. Now, while there could be some lumpiness when projects come off and on more broadly, that’s an area. And we talk about it’s about 5% of our business. So when a 95%, revenue recurring model, the other five points is the non-recurring piece, and while there can be some lumpiness. In general, that business is more broadly is growing and we will continue to grow in over the next – over the next year and the years to come.

Kevin Jones

I think that’s really good. I would just add here, Dan, we’re – when we think about our growth drivers, there are many in their material, right? You think about multi-cloud adoption. So as our existing customers continue to rotate more and more workloads into the cloud, right, which is happening and then we upsell data and performance analytics, as well as some of our application services. There’s just massive opportunity within our existing footprint to expand our technology footprint and just grow workloads in general. The other ways to think about growth drivers just leveraging and expanding our partners, the hyperscalers as well as 3,000 other partners, so we’d have continued sales execution, very early innings here around sales execution. And then geographic expansion is kind of the other way to think about it, particularly for enterprise and global customers, which we’re seeing a very rapid acceleration.

Dan Perlin

Excellent. Thank you.

Kevin Jones

Thanks, Dan.


Our next question is from Matt Cabral with Credit Suisse. Please proceed with your question.

Matt Cabral

Thank you. I wanted to dig a little bit into the big wins you guys have in the quarter. You mentioned Texas a couple of times. Just wondering if you’d talk a little bit about what the ramp of those deals into revenue looks like from here. And then maybe just more broadly, one of you’ve touched on how important larger deals are to your growth trajectory going forward, and just how we should think about the margin performance there versus more the run rate business in the other part of your mix?

Dustin Semach

Kevin, I’m going to jump in here and…

Kevin Jones

You jump into that one and then I’ll add.

Dustin Semach

Yes, absolutely. So a couple things, good to hear your voice again. So the first thing, I’ll tell you, as we talked about that one to three quarter lag, when you think about the State of Texas, that deal was a larger deal, it’s going – so it’s going to be on the far right of that spectrum, where it takes a couple of quarters for that deal overall, to blend into revenues. but keep in mind, it ramps. So, it’s not that it takes three quarters and then we implement day one and then it starts. It actually takes, that time that contract ramps over time you recognize revenue as you go. So, if you think about the full year contract, what it means is it takes one, three quarters for you to be billing on a monthly basis that full – effectively that the full annualized version of that contract divided by 12.

So, the next point around is our growth depending on larger deals, is actually not dependent on larger deals and that’s one of the ways we’re trying to express when you see overall bookings performance. As we mentioned before, 107% growth, 66% organic, our state of Texas is a portion of the organic thesis, not an overwhelmingly large portion. Most of the growth came from broad-based impact on overall bookings from all different types of offerings in different types of deals sizes. So, we’d like to think of as larger deals, as an accelerant that really amplifies our growth, but it’s not necessary for growth in itself.

Kevin Jones

Yes. I would agree – I’m sorry, go ahead Dustin.

Dustin Semach

Yes. Then, the last point that I’ll make is just hit into the third piece of your question around the margin profile, is that – in these larger deals, we actually don’t see the compression from a margin perspective. We get this question oftentimes, and across the board, I think is due to the standardized way we sell and the standardization of our offerings and the expectation from the customer and even buying in a very standard way, it does a lot to protect the overall margin profile of deals, and they’re pretty consistent across segmentation as well size.

Kevin Jones

I think that’s well said, I’d also add Matt, as we – as I kind of talked about in my opening remarks, we had 7,000 deals that we signed in the quarter. So, it was a pretty – a pretty broad-based sales effort for sure. Texas DIR, 13% – 13%, so not significant, this customer concentration and say, now that we’re getting into enterprise market is it’s definitely not something that we’re concerned about, because we do just have such incredible diversification and that’s much, much different than other companies in our industry, because we are so diversified. It really allows us to play offense and go after some of the –some of these bigger deals.

So, we’re not at all concerned about customer concentration, getting into the enterprise market is incredibly exciting for the team and one of the reasons is because of the operational leverage we have by getting into this market, right. That’s one of the key things about our financial thesis that we’ve talked about quite a bit. As we get into these larger deals, we’re finding they are profitable, and they’re – because we deliver them not with a labor-based model, but with a software-enabled multi-cloud model. So basically, the same standardization, the same automation that we’ve got in the broader book of business that we manage is what we are now applying to the enterprise market. So, just fantastic opportunity for us going forward.

Matt Cabral

Got it. And then for a follow-up Kevin, you mentioned in your prepared remarks that COVID accelerated a few years worth of cloud adoption. I guess it sounds like momentum has carried well into Q3 so far. but I guess running that forward a little bit as we get into 2021, 2022, just curious for your perspective on how that dynamic plays out. And if you think we stepped up to a new base in terms of the adoption curve, or if there’s risk that we’ve brought forward, some of that adoption, which means, there’s kind of a coming digestion period that we need to be thinking about at some point in the future?

Kevin Jones

Yes. Yes. Thanks. Great question. Look, here’s how I kind of think about this. We’ve definitely seen an acceleration in the move to multi-cloud. But when you just think about multi-cloud, multi-cloud is still in its very, very early innings. And here, at Rackspace Technology, we’re very focused on kind of staying ahead of that part of the market.

Now, my prediction kind of long-term is that the ecosystem will continue to get more complex and that just benefits us even more. The specialization that’s occurring. the preferences that customers are developing are becoming kind of more and more detailed, more and more specialized, which just breeds more and more complexity. And that’s another reason that we are so busy right now. So, slammed with demand is because that complexity is already increasing, and there’s no way that complexity is going to decrease overtime, right. It’s just going to continue to increase.

So, when I kind of think about, all right, where’s innovation heading? Where’s the pop going ahead in future? Multicloud many years to run, but then also as the ecosystem gets more complex, we see opportunities with some of our fastest growing offerings, such as artificial intelligence, machine learning, cloud native application development, internet of things, edge computing, that’s really where we see a lot of the future growth and we’re very well prepared to capitalize on that. Okay, Matt.


All right. Next question is from Bryan Keane with Deutsche Bank. please proceed with your question.

Bryan Keane

Hi guys. Congrats on the solid start here. I wanted to ask about the margins. The question I get the most is thinking about the mix shift. How are you guys able to keep EBITDA margins pretty stable yet? The gross margins moving more towards multi-cloud and more towards public cloud, or we’re going to be pressured there. just trying to reconcile those two.

Dustin Semach

Hey, Brian. you got Dustin here again, thank you for the question. A couple of things I’ll tell you. first off, what you pointed out is that, and if you look at our guidance, which reflected as well is to point you to EBITDA that what you’ll see in moving from here is a key thing you step up sequentially as well as year-over-year, similar to what the result we had in Q2. That’s number one. number two, you’re correct. We are going through a mixed shift and it does have some structural pressure on other raw margin mix. But just to keep in mind, one thing is that the free cash flow dynamics between those offerings, within whether it’s multi-cloud applications, et cetera, are comparable, right. And this is really that structural mix you’re talking about is really reflective of just this mix shift from capital intensive, the capital wide offerings, right.

The second pace, and Kevin alluded to it a little bit earlier, particularly on the go-to-market side is, is that we set up a number of transformation programs. They’re really designed to extract value out of the business as we go through this mixture. We’ve been able to do it very successfully for the past year and similar to our adoption and the demand we’re seeing in the multi-cloud. We’re also in the very early innings. And our transformation program is where you see their significant opportunity, they continue to take value out of the business as we work through that makeshift and get into a structural long-term margin profile of going from here. And so we’re – we expect that through the – kind of this pressure to exist, but we’re going to need to offset it with these programs across FY 2020 and into Fy 2021.

Kevin Jones

Yes, I would agree, Bryan and I would add; look, we recognize that there’s some pressure in that gross profit line. We’re delighted that adjusted EBITDA was up quarter-on-quarter and year-over-year, right? In this quarter, it’s best to mention we’ve got lots of lots of transformation programs in place, and we’re confident we’ll be able to grow profit and grow free cash flow over the long-term. So, very – high degree of confidence there and we’ll continue to deliver.

Bryan Keane

Got it. Just as a follow-up. I know Onica has been really successful deal for you guys, just thinking about the M&A pipeline and thinking about, are there other deals out there potentially you guys could add to supplement the portfolio as well? Thanks so much.

Kevin Jones

Yes. Let me kick off on that and Dustin, you can jump in.

Dustin Semach


Kevin Jones

Well, thanks for that. We’ve been delighted with the Onica deal. Look, Bryan, when I kind of think about growth at the company, I really think about it in three different buckets. First of all, the industry, we’re in a $400 billion industry with a tectonic shift to multi-cloud in our industry. So, we just benefit from tremendous secular tailwinds. That’s part one. part two is organic growth. We’re obviously crushing it from an organic growth perspective, excited to continue the momentum with our sales execution, our 120,000 customers and all the new logos that we’re winning.

And then you’re absolutely right. The third part is M&A, and if you look at the M&A component to the overall strategy of the company, it’s been pretty profound, right. You think about over the last few years, we’ve acquired four companies. They completely revolutionized the solutions and the offerings to our customers. The latest being, Onica and Onica has been spectacularly successful. It helped us move up the stack with our customers, helped us provide more professional services, more cloud native application development, more application modernization capabilities, internet of things, and those types of capabilities.

So going forward, M&A will continue to be an important part of our strategy. And the great news is, and we have an integration playbook. We have an integration center of excellence, really optimistic. We have a pipeline of deals. And we’ll be – we’ll obviously be very thoughtful and judicious about the deals given the work that we’re and Dustin team are doing on the capital structure. But there are great companies out there that can expand our capabilities and also, we’ll look at areas of hyper-growth. So that’s kind of how we think about M&A.

Bryan Keane

great. thanks for taking the questions.

Kevin Jones

Thank you.

Dustin Semach

Yes. Thanks, Bryan.


Our next question is from Ashwin Shirvaikar with citi. Please proceed with your question.

Ashwin Shirvaikar

Thank you. Hi Kevin. Hi, Dustin. Congratulations on this first call. I want to kick-off with asking you about sales headcount and productivity. Obviously, when you got there a little over a year ago that was followed by the rapid look like 13% year-over-year increase in sales headcount. Are you still hiring rapidly or have you shifted more to a focus on sales productivity and what are the metrics we can externally track, maybe percent of quota realization, could you talk to that? The quick add-on to that is, you guys have just literally one-line on July strength, can you build on that please?

Kevin Jones

Dustin, do you want to start with some of the sales and productivity metrics?

Dustin Semach

Yes, sure. And so the first one Ashwin on the sales headcount, so when we think about this particular year, we have made an investment in sales headcount particularly towards the end of 2019 as we head into 2020. Keep in mind that was like to your point is roughly 10 points the overall increase in bookings. The rest of it actually came from the portion that we talked about in terms of we used to use the word productivity, but I would think about it more broadly as sales performance and sales execution, as some of is the strategic decision that Kevin alluded to earlier around things like targeting the enterprise area, which naturally went to some of the bigger deal sizes. Not necessarily working people more, but putting our dollars to better work through some of these other different strategic decisions that we made.

And as we think about going into next year, we’re absolutely going to continue to invest in growth. And that’s part of the reason I talked about these transformation programs have been using that to fund our ability to put an investment in targeted areas and that’s exactly what we’ll do. What I mean by investment is in terms of fee on the street. But second to that, we still expect continued performance as we go into next year and that the bulk of the performance will come from the strategic decisions that we made in our overall go to market strategy rather than just having to deploy additional SG&A dollars to get incremental bookings.

Kevin Jones

I guess, its well said and I’ll add Ashwin, we’re really excited that we’re – although we have made a lot of progress and we’ve got momentum, the best is really yet to come in terms of the sales transformation and the sales execution items that Dustin alluded to.

I went over several of those programs earlier, there’s many more programs all over the world related to geographic expansion, all the work that we’re doing with AWS, Microsoft, Google, VMware and others on co-developing new products and new solutions that we kind of co-launch together. We’ve got new go-to-market partnerships with our partners as well. We’ve got a whole load of demand creation activities that are just kind of catching on over the very early days. And by the way, all the salespeople that we’ve recently hired, they are going to get more and more productive and more and more energized every month that goes on. So kind of all those things together, make me very, very, very excited and optimistic.

And in terms of July, really not a ton more to add about what we’re seeing on the sales side. We smashed our monthly sales target again in July, that’s 13 months now of beating our sales bookings plan month-over-month-over month, right in the process of closing August as well. So we’re excited about that, we haven’t seen any slowdown at all to the contrary, we just continue to see acceleration due to this tectonic shift in multi-cloud and the transformation of our company.

Ashwin Shirvaikar

Got it. And then the second question was with regards to, you guys obviously talk a lot about capital intensity coming down in the business. Can you speak with the couple of the other factors that help free cash flow, say for example, working capital efficiency and changes that you’re making with regards to collections and as well as you mentioned briefly, the potential for debt refi, I might missed the implication there or the timing that you might’ve mentioned for that. Could you talk a little bit about this?

Dustin Semach

Yes, absolutely. So we’re all – we’re always trying to figure out ways to continue to drive free cash flow up. And to your point, working capital is another one of those examples. You know there’s a couple of a different thing. First off, even if you go back to 2019, we do have an AR securitization facility that we put in place that was step number one.

Step number two is as part of COVID-19, while Kevin really focused on the sales aspect and the delivery aspect and aspects that affected overall workforce one of the other areas that as many companies were concerned about was liquidity at the time and ensuring that we’re in the best shape possible. We really strengthen our working capital management across the entire company. Our collections are the highest they’ve ever been and they’ve continued to be for quite some time. Even beyond, they were never – we never struggled again, but they actually went the other direction where we really strengthen it, reduced our DSOs as a result of that. And as we’ve seen a significant uptick there.

I would also just say, just take a moment to say that in general, the way we structure our invoicing, Ashwin, et cetera, is that it already has structurally very low DSOs relative to a lot of other – many of our other peers that we’ve had, you can see elongations into the 80, 90 days, where for over two thirds of our business is roughly in the 30-day range.

And then on the debt refi side, as well as taxes, we’re always looking for ways to optimize around cash taxes. That’s number one. So we’re still – we’re looking for ways to do that for the remainder of 2020, and even getting ahead of 2021. And then for debt refi that is an area we’re going to constantly look at our balance sheet, constantly look at our capital structure, make sure that we have the most optimum structure in place and from an overall cost of debt. And we’ll continue to do that as soon as we get past this tender offer that is in process right now as we speak.

Ashwin Shirvaikar

Understood. Thank you, guys.

Dustin Semach

Thanks, Ashwin.

Kevin Jones

Thank you.


Our next question is from Ramsey El-Assal with Barclays Investment Bank. Please proceed with your question.

Ramsey El-Assal

Hi guys, and thanks for taking my question tonight. I was wondering if you could comment on some of the media reports about a potential Amazon investment and I guess even just sort of hypothetically, in terms of gaining an investment from one of your hyperscaler partners, how do you sort of balance that with sort of the neutrality and objectivity that I guess your customers probably value?

Kevin Jones

Hi Ramsey, Kevin here. Thanks for the question. So look, in terms of the media reports from a couple of weeks ago look as a policy. We do not comment on media speculation, but what I will say is AWS is a fantastic partner of ours along with Google, Microsoft, VMware, and over 3,000 other technology providers. And our sales teams, our R&D teams are lined up all over the world. We grow together, we go to market together, we sell together with our partners and that’s integrated deeply into our sales teams and our research and development teams.

And look a cornerstone of our strategy is collaborating with our partners. It’s been a really, really big factor in driving our success. So we’re going to – and we plan on continuing that strategy in the future and offering our customers the best technology solutions for their particular needs.

Ramsey El-Assal

Got it. Okay. And I wanted to follow up. I think it was on Tien-tsin’s early question about the Texas IT modernization win. Can you talk about your broader exposure to government – the government sort of channel and whether – to what degree you’re already there and to what degree a win like this sort of opens the aperture a little bit to maybe winning other government deals?

Kevin Jones

Yes. I’d love to talk about, that’s a great question, Ramsey. It’s one of my most favorite topics. So look…

Ramsey El-Assal

Yes. Right.

Kevin Jones

Yes, I look; I’ve got almost 30 years of public sector customer experience. So I really do like the public sector market quite a bit. It’s an area of the market that for Rackspace Technology, we are very new, so there’s massive opportunity. And what this win did for us is it absolutely put us on the map for the biggest solution – biggest cloud and solutions deals in the industry.

And so, we are – we got a fantastic leader for our government business, Rick Rosenberg, he is extremely experienced and seasoned. And he and his sales leaders are all over the country with a really nice pipeline of future deals. So more to come there, it’s a huge area of upside for us. By the way, we’ve also got the same situation in EMEA and in Asia Pacific and Japan. We’ve got extraordinarily kind of experienced executives in both of those regions as well that are, have got decades of experience landing really, really significant size public sector deals.

And as you know in the public sector, once you win a deal, it can be extraordinarily, not just great for capability and profitability in the company, but it can be very sticky business as well, that sticks around long term. So that business for us grow significantly and it’ll be a good growth engine for us going forward.

Ramsey El-Assal

Got it. All right. Thanks a lot.

Kevin Jones

Thank you.


Our next question is from Keith Bachman with BMO. Please proceed with your question. And Keith, your line is open.

Keith Bachman

Yes. Sorry about that. I wanted to ask about multi-cloud and the capital light strategy. And I wanted to ask about the means and what I mean by that is when you think about the amount of business currently being processed or generated by your data centers versus partners, where does that stand today in terms of how much you’re leaning on partners and how do you think that changes over the next, say 12 months to 18 months? And then I a follow-up. Thank you.

Sloan Bohlen

Sure, Kevin, you may jump in here.

Kevin Jones

Yes, you want to take that one?

Dustin Semach

Yes. A couple of things, Keith, when we think about it. One is when we think about the business overall first-off, we’re – we don’t break it out in a sense between what we think about the business in our data centers and the business in hyperscale data centers. And keep in mind now that across our partners, we have offerings that really sit in both. And so if you – if you focus on one of the charts that Kevin went through, we talked about the four key tech stacks, what you’ll see is whether it’s AWS, VMware, GCP or even Azure, you have products really now that are being sold.

And that sits at our data centers, even though they like example, AWS Outpost or Microsoft Azure stack and vice versa and hyperscalers is what’s important for us is that what you see is hyper growth across capital light, and so we’re not – we’re not focused so much on are we actually selling into our data centers or leveraging hyperscalers.

We really come from a customer centric perspective and where, and when we – and part of the reason we organized around this multi-cloud solution is that when we talk to our customers, we let the customer’s need really dictate the outcome. And so that particular environment, those particular applications, those particular workloads that will ultimately dictate the solution that we sell. And then ultimately dictate the deployment model, whether it’s in our data centers or our hyperscalers data centers.

Kevin Jones

That’s well said. I would just add to that Keith, I mean, this is one of the beautiful things about the strategic shift that we made to partner with our hyperscalers and to more deeply integrate our development of solutions with our other 3,000 partners, right? So it’s really, what this has allowed us to do is, it’s allowed us to leverage the billions and billions of dollars that our partners spent on R&D as well as our own R&D and that allows us not just to be more efficient, which we are, but it also allows us to innovate much, much faster. So it’s a great combination.

Keith Bachman

Okay. Great. Thank you. And then my follow-up deals with, I want to come back to M&A for a second. And just, how do you think about it is balancing your targets, where you’re a little over 4 now on your debt coverage ratios, and want to take that down to call it 3 to 3.5. How does that change your behavior at all, at least in the near-to-medium term, as you’re working those ratios down in terms of your strategy or willingness to do M&A. Does it prioritize debt payment at least in the near-term over M&A or just maybe a little bit of feedback on the intended aspirations there?

Dustin Semach

Sure. Kevin, do you have a jump in here.

Kevin Jones


Dustin Semach

Yes. So, Keith, a couple of things; so first off, we are trying to be leveraged at 3 and 3.5 times that is our target. But, one thing I’ll say about the business or broadly there has a very strong cash flow generation profile, which gives us the ability to deleverage pretty quickly and to get into that range. And ideally for us, that would be towards the end of 2021 in terms of getting into the target ratio.

With that said, as we continue to deliver, if there’s opportunities as Kevin mentioned earlier, when he’s answering question about different types of capabilities and different types of assets, if we see things along the way, we will still be opportunistic in identifying those particular targets to bring them in. But what it means more likely or not is that there will be relatively smaller acquisitions relatively than do a larger acquisition. That would keep us – prevent us from getting to that target leverage profile and quick order.

Keith Bachman

Okay. Understood. Fair enough, many thanks.

Dustin Semach

Thanks, Keith.


The next question is from Amit Daryanani with Evercore ISI. Please proceed with your question.

Amit Daryanani

Yes. Thanks for taking my question guys, as it’s asked as well. I guess, first, I just going to go back to the bookings discussion and the mid-60% organic booking growth, obviously it’s a very impressive number. But just wondering how do we think about the sustainability of this growth, especially if we think about the back half of this year and even longer-term. How do you think about the sustainable this growth number as you go forward?

Kevin Jones

Great. I’ll start, and then Dustin, you can jump in. Look, I mean, I think we’re very excited, certainly about the Q2 performance that you mentioned 107% sales growth, you’ve seen now accelerating revenue growth. We expect that acceleration continue. And we also issued full year guidance, which is ahead of our own expectations from just a month ago. And that guidance highlighted by achieving double-digit pro forma core revenue growth at around 10% for the second half of 2020.

Longer-term, there is massive opportunity here, given this tectonic shift in the industry to multi-cloud where Rackspace Technology is a leading pure play multi-cloud provider. So on it, we’re very kind of excited and optimistic about future growth. As Dustin said, we’ve got a long runway of growth ahead of us.

Dustin Semach

And just to be clear there, I think we get a lot of questions here around sustainability durability. As you think about other lean indicators, whether it’s pipeline, et cetera, they continue to be very, very healthy and broad base in terms of the opportunity that’s ahead of us. So again, we don’t see anything stopping us anytime soon.

Amit Daryanani

And then I guess, Dustin, when I look at the core gross margin x OpenShift business, it looks like core gross was down about 320 basis points year-over-year, hopefully my math is right. But could you just touch on what where the gross margin headwinds that you had and how do you think about gross margins as you go forward from here? Do you think the June quarter numbers from a gross margin basis were at trough?

Dustin Semach

Sure. And so – it’s a good question. So when you think about the progression of the business Amit, I think even a booking standpoint, oftentimes we’d see it sequentially and that’s if you think about multi-cloud overall, that particular segment, the margin is relatively stable. And during my prepared remarks, I talked about applications and there were a couple of projects that completed during the prior quarter, which helped – which muted also some of the year-over-year growth that we saw in the second quarter, but that’ll also add an impact to gross margins.

And so that piece of it, we do expect that to bounce back kind of going into Q3, but again, as some other questions came in, there is some structural pressure in that area, but just keep in mind that no matter that structural pressure, we’re going to continue to maintain adjusted EBITDA and you’ll see that sequentially step up in a quarter-to-quarter, as well as year-over-year as we go from here.

Kevin Jones

Yes. I’ll just – I think that’s right. I’ll just add, we continue to be optimistic about continued bookings in revenue growth. We’re very confident and optimistic about our ability to continue to drive profitability and profitability growth, adjusted EBITDA being up quarter-on-quarter and year-on-year. Dustin, I think addressed the gross profit line. Our ability to continue to generate sustainable free cash flow growth is also very, very strong. And all those transformation programs and cost reduction initiatives in order to do that are underway.

The other thing to think about is as we sell and we continue to get operating leverage through having this fantastic automation, having really a software enabled business, not, a heavy labor based business, all those things that really play into our favor, which is why, we are so optimistic about growing profitability and cash flow of our company.

Amit Daryanani

Perfect. That’s really helpful. My congrats on IPO as well. Thank you guys.

Dustin Semach

Thank you.

Kevin Jones

Thanks, Amit.

Kevin Jones

Okay. I think that’s our last question, so I’ll go ahead and wrap up. Hopefully you can see this Slide 31 here, or if you can turn to Slide 31, I’ll just go through a few closing remarks.

So first of all, thank you very much for joining our call today and for your interest in Rackspace Technology. We are sitting in a very unique position in the cloud ecosystem and we’re offering customers a special combination of software enabled multi-cloud solutions, in a way that the market has not seen before. Our ecosystem is built on our proprietary software, IP and automation powered by the deep technology expertise of our highly skilled Rackers that allows us to win time and time again.

And all of those qualities are driving a double-digit revenue growth profile and improving profitability, but the opportunity to generate strong free cash flow per share growth on a sustainable basis. We’ve done the work, we’ve demonstrated the results, the opportunities are massive, and we are ready to take the hill. We greatly appreciate your continued support as Rackspace Technology accelerates our momentum during this incredibly exciting time. Thank you, and we look forward to speaking with you again in a few months. Thank you.


This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.

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Asian stocks edge lower after Wall Street dips in month-end trade By Reuters

© Reuters. FILE PHOTO: Passersby wearing protective face masks are reflected on a screen displaying stock prices outside a brokerage in Tokyo

By Alwyn Scott

NEW YORK (Reuters) – Asian stocks were set to weaken on Tuesday following a softer Wall Street close while the dollar slipped as markets digested new Federal Reserve comments that suggested rates will stay low for an extended period.

Australia’s S&P/ASX 200 lost 0.89% in early trading, while 225 fell 0.22%, Hong Kong’s futures lost 0.38%.

Wall Street declines overnight were caused by month-end portfolio rebalancing “rather than a new trend in equities,” said Rodrigo Catril, senior FX strategist at NAB Market Research in Sydney.

The and the S&P 500 ended in the red, while the Nasdaq rose solidly. The S&P gained more than 7% for the month to notch its best August since 1986 in what is traditionally a softer month for stock performance.

“After such a strong summer run we’re reverting back to the old pandemic playbook, so we see tech outperforming,” said Mona Mahajan, senior U.S. investment strategist at Allianz (DE:) Global Investors in New York. “Really, that’s a defensive move as people think about stay-at-home more as we’re heading toward that fall season.”

Investors in Asia await the release of China manufacturing data and an interest rate decision from the Australian central bank. While the Reserve Bank of Australia is not expected to change policy, its commentary on the economic outlook will be closely watched.

Most stocks slid overnight, but chalked up another month of gains for August. U.S. tech shares rose again Monday, powered by stock splits that lifted Apple Inc (NASDAQ:) and Tesla (NASDAQ:) Inc.

Providing some support to sentiment was AstraZeneca (NYSE:)’s plan to enroll 30,000 participants in a late-stage study to evaluate its COVID-19 vaccine candidate, AZD1222. Vaccine news often lifts markets.

Taiwan stocks could see a boost after the U.S. said on Monday it was establishing a new bilateral economic dialogue with the country, an initiative it said was designed to support Taipei.

Fed Vice Chair Richard Clarida on Monday expanded on Governor Jerome Powell’s comments from last week, saying that under the U.S. central bank’s new policy view, a low rate of unemployment does not on its own trigger higher interest rates.

Last week, the Fed said its new strategy plan is to use higher inflation when the economy is robust to offset the impact of periods of weaker prices.

The Nasdaq fared even better than the S&P for the month, up nearly 10% as it rallied for a fifth straight month.

Monday marked the first trading day for the revamped Dow, with (NYSE:), Amgen Inc (NASDAQ:) and Honeywell International Inc (NYSE:) joining the 30-component index, replacing Exxon Mobil Corp (NYSE:), Pfizer Inc (NYSE:) and Raytheon Technologies (NYSE:) Corp. Honeywell ended the session lower while a move higher late in the day pushed Salesforce and Amgen into positive territory.

In Asia, China’s Caixin manufacturing purchasing managers’ index

For a graphic on MSCI’s World Stock Index:

The Dow Jones Industrial Average fell 0.79%, the S&P 500 lost 0.23%, and the added 0.68%.

The dollar edged lower against a basket of major currencies early on Tuesday. The fell 0.08%, with the euro up 0.02% to $1.1938.

The Japanese yen strengthened 0.04% versus the greenback at 105.86 per dollar, while Sterling was last trading at $1.3364, down 0.04% on the day.

Expectations that the Fed will keep interest rates low for an extended period kept the dollar soft, marking a fourth straight month of declines, its longest losing streak since 2017.

For a graphic on Global markets, asset performance:

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