Rackspace Technology Inc (RXT) 2020 Q2 法說會逐字稿

Greetings. Welcome to the Rackspace Technology 2Q 2020 Earnings Call. (Operator Instructions)

Please note this conference is being recorded. I would now turn the conference over to your host, (inaudible), of Investor Relations. You may begin.

Good afternoon, everyone. Welcome to Rackspace Technology's 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 statement 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 in constant currency when available as a framework for assessing how our underlying business performed. 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.

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 have achieved thus far, and we're looking forward to an incredible future.

Speaking of our future, I will 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 continued 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, and overall IT modernization efforts.

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 multibillion-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 3 regions and all service offerings. The Texas Department of Information Resources deal was only 13% of our Q2 signings, and no other single deal representing 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 4 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 was 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 4 acquisitions that have revolutionized our offerings.

Today, we're 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 it 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 4 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 begin 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 recorded 4 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 and 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 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 1 or 2 technology trends that transformed the way we live and work. Going all the way back to the '70s, we had mainframes and 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 a 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 taking 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 challenge is 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 4 offerings, Multi-cloud, which includes public and private cloud, applications, data and security. We are deep in these 4 solutions, much different than other companies that try to deliver 30 to 100 offerings. Cloud is all we do. We have these 4 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 4 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 focus 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 organization's 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 deployment model.

On Slide 17, let me speak to how we've built our service's 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 land slide, and our competitors have no shot at 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 8 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 and error prone processes provided by our competitors, our customers demand standardization and Rackspace delivers.

We lead 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 is why they buy from us.

It is evidenced in our Net Promoter Scores and our renewal rates. We serve our customers across the entire multi-cloud life cycle, providing end-to-end solutions.

Customers crave a single provider for their entire cloud life cycle. 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 a multi-cloud environment to save money, scale up and scale down and pivot to new business models.

And while our 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 beating 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 0 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, to take you through our second quarter results in more detail.

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 a 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 amongst 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 4 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 1- to 3-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 that our 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 noncore 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 as 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 3 main segments are Multicloud Services, Applications & Cross Platform and Openstack Public Cloud.

The combination of Multicloud Services and Applications & Cross Platform represents 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've currently have no meaningful debt maturities before 2023 after raising $658 million in proceeds from the IPO, our leverage stands at 4.3x against our trailing adjusted EBITDA.

Our intention longer-term is to reduce our leverage to a target range of 3 to 3.5x, that would 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 $161 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 announce progress further on this front.

With that, let me conclude on Slide 30 by reviewing 3 concepts I just spoke to and 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 are the best-positioned company to capitalize on the multi-cloud movement.

As we look out to 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 due to 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 '20 over the first half.

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

(Operator Instructions) And our first question is from Heather Bellini with Goldman Sachs.

Congratulations on the IPO. I just wanted to follow-up on one housekeeping question, and then I had another question.

First, there didn't seem to be a cash flow statement that came out with today's results. So just wondering when 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 are very well positioned in the market and COVID is 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 3 months, and how you're feeling about it exiting the quarter?

Sure. Heather, this is Dustin Semach speaking, and I'll answer the first question just 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 that's 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 kick off of the call.

And there is 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 related to the cash flows.

Yes. And Heather, thanks for your question related to the pandemic and how we see business and pipeline progressing.

First of all, I'll 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 continued 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. So we're super optimistic, Heather.

Our next question is from Tien-Tsin Huang with JPMorgan.

I really appreciate the presentation. That'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 in the pipeline, maybe larger deal sizes, new logos? Just trying to get a little bit more on bookings, sustainability and visibility, of course.

Again. I'll kick off and then Dustin, you can jump in and add as well. First of all, thanks for the question, Tien-Tsin. It's good to hear your voice.

Look, we see really strength being very broad-based. So we see it across all 3 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 Multicloud 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, if 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 capitalizing on. Dustin, anything else to add?

Yes. Just as a follow-up on the 2 points. One is from that mix that you're talking about from an installed 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 1 point from quarter-to-quarter is another example about the strength of how it's affecting our installed base, which we expect that trend to continue as we go throughout the rest of FY '20.

Got it. That's great. So just my quick follow-up with Texas, I know, it's a little bit larger than usual, and you 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 me, I've actually a quick follow-up. I'm getting this question from e-mails, just can you give us -- that's in the organic bookings growth in the second quarter? If -- sorry, if I missed it.

Yes, sure. I'll say it's 2 things. One is 0 concern about contract execution, right? 0 issues delivering in a remote environment, right? So just get those 2 right off the bat. I mean, if anything, what we've seen is actually our customer satisfaction score has actually increased throughout fiscal year '20 really to kind of and as a way is a proof point for that. And then the last -- you've to comeback and what was the last question on...

Just the organic booking. Yeah.

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

Yes. And just 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 5 months, and we don't see any problems at all. The other thing to just to kind of think about is that our services are very standardized.

So this is not one of those organizations that 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.

Our next question is from Dan Perlin with RBC.

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 rate. You didn't talk 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 from smaller SMBs to enterprise? Is it the type of client work that you're doing? So anything there would be helpful.

Very good. 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 1 quarter, and we're excited about momentum in the future as well. And really, how we plan on continuing to drive that or 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. I 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 1,000 of our Rackers, which are in customer-facing sales and customer success roles or 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 up-sell, how to cross-sell. And that's in its very, very early innings.

So we're excited about that. All the work that we've done around our rewards and recognition, the incentives and the metrics we've put in place 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.

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

Great. And then as a follow-up, getting back to bookings and translation into revenues. I know you talked about 1 to 3 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 more nonrecurring professional services that are embedded in the business?

And just how that might be playing out? I know 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 have thought originally?

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 it 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 and internal characteristics are different across the board. So it's difficult in a very consistent way to measure that across the board.

On the other side of it, we have installed base bookings which is kind of 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 another piece of, as you mentioned, is the nonrecurring revenue piece associated with 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 we're at 95% revenue recurring model, the other 5 points is the nonrecurring piece.

And while there can be some lumpiness, in general, that business is more broadly is growing and will continue to grow in over the next year and the years to come.

I think that's really good. I would just add here, Dan. We're -- when we think about our growth drivers, there are many and they're 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 that we 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.

Our next question is from Matt Cabral with Crédit Suisse.

I wanted to dig a little bit into the big wins you guys had in the quarter. You mentioned Texas a couple of times. Just wondering if you could talk a little bit about what the ramp of those deals into revenue looks like from here? And then maybe just more broadly, I wonder if you could touch 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?

Kevin, I want to jump in here, and you want to jump in...

You jump into that one, and then I'll add, yes?

Yes. Yes, absolutely. So a couple of things, Matt, good to hear your voice again. So the first thing I'll tell you is we talked about that 1- to 3-quarter lag, when you think about the state of Texas, that deal was a larger deal. 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 3 quarters and then we implement day 1 and then it starts. It actually takes that time the contract ramps over you recognize revenue as you go.

So if you think about the full year contract, what it means is it takes 1 to 3 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 is dependent on larger deals.

It's actually not dependent on larger deals. And that's one of the -- we're trying to express when you see overall bookings performance, as we mentioned before, 107% growth, 66% organic. While state of Texas is a portion of the organic piece, it's not an overwhelming large portion.

Most of the growth came from broad-based impact on overall bookings from all different types of offerings and different types of deal sizes. So we'd like to think of as larger deals as an accelerant that really amplifies our growth, but is not necessary for growth in itself.

Yes, I would agree. I'm sorry, go ahead, Dustin.

Yes. Then the last point that I'll make is just heading to 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, it's 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, does a lot to protect the overall margin profile of the deals, and they're pretty consistent across segmentation as well as size.

I think that's well said. I'd also add, Matt, as we -- as I kind of talked about in my opening remarks, we have 7,000 deals that we signed in the quarter. So it was a pretty broad-based sales effort for sure.

Texas DIR, 13%, 1 3, so not significant. This customer concentration and say, now that we're getting into enterprise market is 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 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 a fantastic opportunity for us going forward.

Got it. And then for a follow-up. Kevin, you mentioned in your prepared remarks that COVID's accelerated a few years' worth of cloud adoption.

I guess, it sounds like momentum is 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?

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 that complexity is going to decrease over time, right? It's just going to continue to increase. So when I kind of think about, all right, where is innovation heading? Where is the puck going to head in the future, multi-cloud, 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, now that's really where we see a lot of the future growth.

And we're very well prepared to capitalize on that.

Our next question is from Bryan Keane with Deutsche Bank.

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 are going to be pressured there? Just trying to reconcile those two.

Bryan, you got Dustin here. Again, thank you for the question and a couple of things I'll tell you. First off, what you pointed out is that if you look at our guidance, which reflects it as well, is they pointed to EBITDA, but what you'll see moving from here is a continued 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 mix shift, and it does have some structural pressure on the overall margin mix, but just to keep in mind one thing is that the free cash flow dynamics between those offerings within, where there'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 to capital-light offerings, right?

The second piece, and Kevin alluded to it a little bit earlier, particularly on the go-to-market side, is that we've set up a number of transformation programs that really designed to extract value out of the business as we go through this mix shift.

We've been able to do it very successfully over the past year. And similar to our adoption and the demand we're seeing in multi-cloud, we're also in the very early innings, and our transformation program is the way you see there's significant opportunity to continue to take value out of the business as we work through that mix shifting into a structural or 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'll continue to offset it with these programs across FY '20 and into FY '21.

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, as Dustin mentioned, we've got 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 a high degree of confidence there, and we'll continue to deliver.

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

Yes. Let me kick off on that, and Dustin, you can jump in. 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 3 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 4 companies.

They've 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 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've, obviously, been very thoughtful and judicious about the deals, given the work that we're, Dustin and 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 hypergrowth. So that's kind of how we think about M&A.

Our next question is from Ashwin Shirvaikar with Citi.

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 that rapid -- it looked like a 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 in a [maybe] percent of quota realization. Could you talk to that? The quick add on to that is you guys had just literally 1 line on July strength. Can you build on that, please?

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

Yes, sure. And so the first one, Ashwin, on the sales headcount. So when we think about this particular -- 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 of 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.

And some of it is the strategic decisions that Kevin alluded to earlier around things like targeting enterprise area, which naturally wins us some of the bigger deal sizes.

It's not necessarily working people more, but putting our dollars to better work through some of these other different nonstrategic decisions that we made.

And so 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 [we talk] about transformation programs and we've been using that to fund our ability to put investment in targeted areas, and that's exactly what it would do. What I mean by investment is in terms of fee on the street, but second to that, we still expect a 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.

I think, that's well said. And I'll add, we're, 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-launched 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 catching on in 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. We're right in the process of closing in 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.

Got it. And then the second question was with regards to -- you guys, obviously, talked a lot about capital intensity coming down in the business. Can you speak with a 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 missed the implication there or the timing that you might have mentioned for that? Could you talk a little bit about this?

Yes, absolutely. So we're always trying to figure out ways to continue to drive free cash flow up. And then to your point, working capital is another one of those examples. There's a couple of different things. 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 the 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 strengthened 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, and they were never -- we never struggled again with, but they actually went to other direction where we really strengthened it, reduced our DSOs as a result of that.

And so 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, and then you can see elongations into the 80, 90 days, where for over 2/3 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 as for the remainder of 2020, and we've been 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 and make sure that we have the most optimum structure in place seen 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.

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

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 would value?

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.

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 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?

Yes. I'd love to talk about that. That's a great question, Ramsey. It's one of my most favorite topics. So look, I -- yes. 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's 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 a very sticky business as well that sticks around long term. So that business for us grows significantly, and it will be a good growth engine for us going forward.

Our next question is from Keith Bachman with BMO.

Yes, sorry about that. I wanted to ask about Multicloud 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 to 18 months?

And then I have a follow-up.

Sure. Kevin, you may jump in here?

Yes, you want to take that one?

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 and our data centers and the business and hyperscale data centers. And keep in mind now that across our partners, we have offerings that really sit in both.

And so if you focus on one of the charts that Kevin went through, we talked about the 4 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 since our data centers, even though they like as example, AWS Outpost or Microsoft Azure stack and vice versa and hyperscalers. And so but what's important for us is that what you see is hyper growth across capital light. And so we're not focused so much on are we actually selling into our data centers or leveraging hyperscalers, but we really come from a customer-centric perspective, and where when we -- and part of the reason we organized around this Multicloud solution is that when we talk to our customers, we let the customers' need to really dictate the outcome. And so it's that particular environment, those particular applications, with 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 hyperscaler's data centers.

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 really what this has allowed us to do is it's allowed us to leverage the billions and billions of dollars that our partners spend 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.

Okay. Great. 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 as balancing your targets, where you're a little over 4 now on your debt coverage ratios.

And I want to take that down to, call it, $3 million to $3.5 million. How does that change your behavior at all, at least in the near to medium-term as you're work on those ratios down in terms of your strategy or your 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?

Sure. Kevin, do you mind if I jump in here and...

Yes, go for it.

Yes. So Keith, a couple of things. So first off, we are trying to deleverage to 3 to 3.5x. That is our target. But one of the things I'll say about the business more broadly, that it 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 delever, if there's opportunities, as Kevin mentioned earlier, when he was answering the question about different types of capabilities and different types of asset, 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 prevented from getting to that target leverage profile in quick order.

Our next question is from Amit Daryanani with Evercore ISI.

I guess, (inaudible) as well. I guess, I just want 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 you think about the back half of this year and even longer term, how do you see the sustainable growth number as you go forward?

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 to 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.

Longer term, there is massive opportunity here. Given this tectonic shift in the industry to multi-cloud, we are -- Rackspace Technology is a leading pure play, multi-cloud provider.

So Amit, 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.

And just to be clear there, I know 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-based in terms of the opportunity that's ahead of us. So again, we don't see anything stopping us any time soon.

And then I guess, Dustin, when I look at the core gross margin ex OpenShift business, it looks like core gross margin was down about 320 basis points year-over-year.

Hopefully, my math is right, but could you just touch on what wer=e the gross margin headwinds that you had? And how do you think about gross margins as we go forward from here? Do you think the June quarter numbers were gross margin basis are a trough?

Sure. And so it's a good question. And so when we think about the progression of the business, Amit, I think, even from a booking standpoint, oftentimes, we see it sequentially. And as if you think about multi-cloud overall, that particular segment, the margins are 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 also had a 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 of the 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 the quarter-to-quarter as well as year-over-year as we go from here.

Yes. I'll just -- I think, that's right. And I'll just add, we continue to be optimistic about continued bookings and 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 on 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.

My congrats on IPO as well.

Okay. I think that's our last question. So I'll go ahead and wrap up. Hopefully, you can see the 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 with 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.