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Rackspace Technology, Inc. (NASDAQ:RXT)
Q1 2021 Earnings Call
May 10, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, everyone, and welcome to the Rackspace Technology's first-quarter earnings conference call. [Operator instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Joe Crivelli, vice president of investor relations. Sir, you may begin.

Joe Crivelli -- Vice President of Investor Relations

Good afternoon and welcome to Rackspace Technology's first-quarter 2021 earnings conference call. Kevin Jones, our chief executive officer, and Amar Maletira, our president and chief financial officer, join us today. The slide deck we will refer to today can be found on our investor relations website. On Slide 2, certain comments we make on this call will be forward-looking.

These statements are subject to risks and uncertainties, which would cause actual results to differ. A discussion of these risks and certainties is included in our SEC filings. Rackspace Technology assumes no obligation to update the information presented on the call except as required by law. Our presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors.

In accordance with SEC rules, we've provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations are in the tables included in our earnings release and slide presentation, both of which are available on our website. After our prepared remarks, we will take your questions. I'll now turn the call over to Kevin.

Kevin Jones -- Chief Executive Officer

Good afternoon and thanks for joining us to discuss our first-quarter financial results. 2021 is off to a great start, and we are excited to share the results with you. Today, I'll discuss quarterly highlights and provide additional perspective on some recent product launches that we believe position Rackspace Technology exactly where the market is moving. As I've done in past quarters, I'll also touch on some case studies of customers who are doing truly innovative things with cloud technology, and our president and chief financial officer, Amar Maletira, will go into detail on the financial results before I make some concluding remarks.

Slide 5 shows the main messages we would like to deliver today. First quarter was very strong for Rackspace Technology, and we exceeded the guidance targets we set in late February, with record revenue and very strong earnings growth. The tectonic shift to multi-cloud, as well as the success we had onboarding new logos in 2019 and 2020 are expected to fuel double-digit revenue growth throughout 2021 and beyond. You've heard me say that 2021 is going to be the most exciting year for new product launches in the history of the company.

And in the first quarter, we launched Rackspace elastic engineering and Rackspace services for VMware Cloud, which have been extremely well received by industry analysts and customers. I'll talk more about these in a moment. The work that our finance team has done to improve cash flow drove a significant turnaround in the first quarter, with strong growth in operating cash flow. Amar will discuss this in his section.

It also bears repeating that our first-quarter debt refinancing put us in a position of strength from a balance sheet perspective for years to come. As we've noted previously, we now have no significant debt maturities for the next seven years. And in addition, our debt was booked at historically low interest rates. In fact, the $550 million financing that we completed in February was the best pricing ever for a non-investment grade senior secured notes offering.

Turning to Slide 6. We posted another record quarter with revenue up 11% compared to the first quarter of 2020 to $726 million. Core revenue growth was even stronger, up 15% year over year to $677 million. This strong growth was driven by continued momentum in our multi-cloud business.

We are winning new customer engagements and expanding share of wallet with the customers we onboarded in late 2019 and throughout 2020. As a result, we believe we are expanding market share in cloud IT services. Earnings leverage continues to be excellent. Non-GAAP operating profit was $119 million and non-GAAP earnings per share was $0.23, up 10% and 44%, respectively, compared to last year's first quarter, and we see opportunity for additional earnings leverage.

Amar, now in his sixth month, is taking a fresh look at everything we do. As a result, we've driven a number of changes in our decision-making process and management system. To give you a few examples, we revamped the way we analyze deal profitability and decide which deals to pursue. This, in turn, has informed how we structure our sales force and which product lines we lean into for growth.

We have reexamined our expense structure and uncovered additional efficiencies that we can drive in 2021 and beyond and identified areas where we can invest these savings to accelerate the trajectory of our top line. Additional discipline in working capital management has led to a significant turnaround in cash flow. Amar will provide more details in a moment. And we continue to improve our investor reporting and give the investment community more insight into our growth drivers and value creation strategies.

New sales bookings in the first quarter were $244 million, up 6% compared to the first quarter of 2020. This was a solid bookings quarter. The year-over-year bookings growth was lower than in past quarters for a number of reasons. Firstly, we are lapping our own efforts and are up against tough compares from a bookings growth standpoint.

This will continue throughout the year as we landed a number of marquee multicloud deals, including the state of Texas deal in the second quarter of last year. So while we expect continued strong bookings in 2021, the year-over-year compares will be more modest. We remain confident in our revenue guidance for fiscal 2021 and expect double-digit revenue growth for the year. Secondly, we are focused on driving the right mix of business and increasing the initial margin we are willing to accept on new deals.

This is a benefit of the bookings success we've had, as we now have a significant installed base of enterprise accounts that will serve as a foundation for our growth. Thirdly, we adjusted sales incentives and realigned our sales force to prioritize high-value deals, in line with our land-and-expand strategy. As these changes have taken root, we are encouraged that bookings accelerated and grew sequentially each successive month of the year. Slide 7 shows how we're evolving the strategy of the company.

We have gotten encouraging signals from customers that they see us as the opposite of the global systems integrators, or GSIs. This is because we bring the benefits of a GSI, including size and scale. But unlike the GSIs, we're also cloud focused, disruptive, flexible, fast, agile, and we have our fanatical customer experience. So we are staking our claim as the un-GSI.

We believe this makes a clear statement with customers and prospects about who we are and the competitive advantages we bring to the table. On Slide 8, our positioning as the un-GSI, as well as market trends have influenced our product development efforts. As a result, we recently introduced two new offerings that we believe hit the sweet spot in the market. Many of you participated in our webinar on Rackspace elastic engineering in April, and that service offering has garnered significant early interest from customers around the world.

Last week, we introduced Rackspace services for VMware Cloud as VMware is, in many cases, the platform of choice for private cloud workloads. Looking forward, we believe VMware is an important fourth cloud platform alongside AWS, Azure and Google Cloud. On Slide 9, Rackspace elastic engineering is the next iteration of our service blocks. We are very excited about this new offering and believe it is exactly what the market needs to move cloud adoption to the next level.

Rackspace elastic engineering is on-demand access to a pod of multidisciplinary cloud specialists who will know the customers' application, team and desired business objectives and will be laser-focused on driving their cloud outcomes. The pod will work seamlessly with the customers' internal dev ops teams, essentially becoming a trusted part of their permanent cloud team. The pod is capable of delivering a broad spectrum of outcomes without the constraints of a fixed scope of management. This is a complete opposite of how a GSI structures and prices their services.

Rackspace elastic engineering is already available and fully supported across AWS, Azure, Google Cloud and VMware. This really cracks the code for customers who are trapped between running their traditional operations and evolving to be more cloud-native and modern. After just a few weeks, elastic engineering has been one of the most successful new product launches in Rackspace history. We've already closed significant deals in all three regions of the world, and the pipeline for this offering is growing very fast.

On Slide 10, last week, we announced our rebranded private cloud offering, Rackspace services for VMware Cloud. In conversations with customers, it became clear that they needed a solution that provided a public cloud experience with private cloud security, data sovereignty, low latency and pricing flexibility. We are excited about this offering and view it as a way to significantly increase growth in private cloud and further extend our lead in multicloud. In addition, this offering aligns to our capex light business model.

In the early going, it is clear that customers were hungry for this kind of architecture, as we are off to a great early start with this offering as well. As I've done in past quarters, I'd like to highlight some customers who are doing truly innovative things in the cloud. On Slide 11, let's talk about Porsche, which is a signature enterprise cloud customer for Rackspace Technology. As you can imagine, automobile manufacturing is a complex undertaking in a complex industry, and it requires best-of-breed systems and tools across a variety of IT environments to execute at the very highest level like Porsche does.

So Porsche is, in many ways, a textbook case study for multicloud as the company leverages all three hyperscalers, AWS, Microsoft Azure and Google Cloud for its cloud environment. Accordingly, we are very proud to have been selected as Porsche's cloud partner of choice to help this world-renowned automaker harmonize and govern its multi-cloud platform. On Slide 12, Autodesk's subsidiary, Innovyze, is one of the preeminent software companies for the water industry. The company knew that it needed to be on the technological forefront to continue to lead its industry.

They had to modernize their solution, which was a desktop app with on-premise client servers. While the company had highly skilled SaaS engineers and machine learning and DevOps teams, they did not have the resources to meet an aggressive timeline. Pivoting from a desktop-centric product suite to a SaaS solution would require all hands on deck. They needed to bolster their teams with equally skilled engineers.

With Rackspace Technology's help, they built and introduced Info360, a SaaS offering based on AWS, which also included advanced IoT analytics using real-time data. The new platform was built with serverless technology, and micro services enabled their customers to transfer their asset network information to the cloud. It also leveraged geospatial mapping functionalities, which were previously available only with additional third-party software. I'm so proud of the Rackers who helped Innovyze meet its aggressive timeline so that it could maintain its lead in the industry.

Now, Amar will take you through our financial results in more detail. Then I'll make some concluding remarks before we open for Q&A. Amar?

Amar Maletira -- President and Chief Financial Officer

Thank you, Kevin. And thank you, everyone, for joining our call today. Slide 14 recaps our financial results for the quarter. Demand trends across our customer segments and geographical markets continue to remain robust which, coupled with strong execution, drove another quarter of double-digit top and bottom line growth.

In our first quarter of fiscal 2021, we posted revenue of $726 million, an increase of 11% year over year. This was ahead of our expectation, driven by strong performance in our core business. Our core business revenue at $677 million grew 15% year over year. Non-GAAP gross margin at 34.4% in the first quarter came in within our expected range and was down compared to prior year, reflecting the mix shift from strong growth in our multi-cloud business, decline in our legacy OpenStack and ongoing investments.

While the mix primarily impacted our gross margins, our operating margin at 16.4% was relatively unchanged year over year. Compared to prior year, non-GAAP gross profit at $250 million was down 2% due to a decline in our legacy OpenStack revenue, partially offset by growth in gross profits in our core business. Our non-GAAP operating profit was above our expectations at $119 million, up 10% year over year. This was a result of operating leverage from strong revenue growth in our multi-cloud business and opex efficiencies, primarily in G&A.

Non-GAAP earnings per share at $0.23 likewise beat our expectations and was up 44% from last year. This reflected strong growth in operating profit and also lower interest expense from debt repayment and our recent debt refinancing. Slide 15 shows the company's revenue mix in the first quarter by segment and by geography. Multicloud continues to represent the vast majority of revenue at 80% of the mix, and it grew 14% year over year.

Apps and cross platform at 13% of total revenue grew 19% year over year, driven by strong performance in application services coupled with strength in our data and security services businesses. OpenStack, which is a legacy business, declined 23%, in line with our expectations. This segment now represents only 7% of total revenue. From a regional perspective, Americas continues to represent 75% of our revenue and had a solid 11% year-over-year growth.

APJ grew at 28%, while EMEA grew 8% year over year. Now, moving to Slide 16. Let me give you more color on our Multicloud segment, which represents 80% of our total revenue. The trending bar chart on this slide shows our successful strategy of driving the significant mix shift to the higher-growth markets within this segment.

The purple bar represents estimated revenue from our solutions in high-growth markets, which include all four cloud platforms -- AWS, Azure, Google and VMware. The gray bar represents revenue from our solutions in low-growth and mature markets, primarily non-VMware private cloud and managed hosting. This chart really shows the business transformation that's taken place since mid-2019. We leaned into high-growth areas of the market, such as managed public cloud by winning new logos while also proactively transitioning some of our existing customers to newer cloud platforms.

This was a purposeful strategy to extend our customer relationship and position us well in an attractive and growing cloud services market. On a trailing 12-month basis, in our fiscal first-quarter 2021, our revenue in high-growth markets made up approximately 65% to 70% of our multi-cloud segment revenue and grew roughly between 30% and 40% year over year. Within this segment, our managed public cloud revenue grew even faster, outpacing the overall public cloud market growth. We are targeting the high-growth revenue mix within this segment to exceed 80% of total multi-cloud revenue in the next 12 to 18 months.

We believe our gross margins will stabilize within 12 to 18 months period for two reasons. First, this mix shift within the multi-cloud segment will be largely complete, and the majority of our revenue in multi-cloud will come from high-growth areas. Second, we are confident that our land-and-expand strategy with the new customers we have onboarded since early 2020 will work and drive higher margins in the installed base. I'll explain why we have this confidence in the next slide.

All this bodes well for Rackspace to deliver long-term growth in profit through both revenue growth and operating margin expansion. On Slide 17, you see some proof points of our land-and-expand strategy with two very different real customer examples. Delivering a solution, which includes cloud services and infrastructure, is a key value proposition to help customers optimize their costs, it creates stickiness in the relationship, and provides an opportunity for Rackspace to upsell and cross-sell more higher-value solutions. In the first case on the left, we show a long-term customer in the financial services industry.

In this case, we led with services. And as infrastructure mix grew, you can see a modest decrease in sold gross margin. But as we have cross-sold additional services to this customer, you can see that the margin rebounds and exceeds the starting point. On the right is a relatively new customer in the manufacturing industry.

This was one of the new logos we onboarded in the first quarter of 2020. Again, you can see that the initial services-led margin is high. And as the customer deploys a multi-cloud solution, which includes cloud infrastructure, the margin dips. But then as we expand our relationship with higher-value services, the margin recovers.

These are the types of customer use cases that we are focused on replicating across our entire customer base. And we are having some good success in this regard. On Slide 18, we analyze the managed public cloud customer cohort from the first quarter of 2020. And as you can see, our cumulative bookings have increased 21% in the first year and sold gross margins have expanded over 200 basis points.

This is an area that has intense focus in our weekly management system meetings, ensuring that we continue to execute our expand strategy. It is also one of the areas for which we elevated the focus of our sales force and account teams and aligned our incentive plans. Slide 19 provides a snapshot of our cash flow and balance sheet. Cash flow was strong in the first quarter due to improved working capital management.

We had operating cash flow at $103 million, and free cash flow was $66 million. Total capital expenditures in the first quarter was $59 million and total capex intensity was 8%, in line with our expectations. Please note that in the second quarter, we are renewing several large multiyear enterprise license agreements or ELAs. The accounting treatment for these renewals requires us to recognize the full amount of these ELAs as capex in the period the deal is signed, even though the cash payments are spread out over time.

Accordingly, we expect second-quarter capex intensity in the low teens, which is in line with our plans. But for the full fiscal year of 2021, we expect capex intensity to be in the range of 7% to 9%. Our cash capex was $37 million, and cash capex intensity was 5% in the first quarter. For fiscal year 2021, we expect cash capex intensity in the 4% to 6% range.

Total cash at quarter-end was $198 million, and we had $375 million of unused revolving credit facility. On Slide 20, we have our guidance for the second quarter and fiscal 2021. For the second quarter, we expect revenue in the range of 735 to 745 million, which at the midpoint is 13% year-over-year growth, core revenue of 690 to 698 million, which at the midpoint is 16% year-over-year growth, and non-GAAP operating profit in the range of 113 to 117 million. This guidance reflects continued investments and mix shift to high-growth areas in multi-cloud.

We also expect non-GAAP earnings per share in the second quarter in the range of $0.21 to $0.23, non-GAAP other expenses of 52 to 53 million, non-GAAP tax expense rate of 26%, and we expect non-GAAP weighted average shares of 214 to 215 million. We have made no changes to our guidance for the full year, except for a minor change to the full-year non-GAAP other expenses and 2021 weighted average share count. After six months at Rackspace, I'm more convinced than ever that we have a lot of opportunity and runway for continued growth and shareholder value creation. I will now turn the call back to Kevin for closing comments.

Kevin?

Kevin Jones -- Chief Executive Officer

Thanks, Amar. Before we open the call for your questions, let me say that I'm proud of the first-quarter results, which we believe were a strong validation of the Rackspace Technology investment thesis. We continue to grow both total and core revenue by double digits. The earnings leverage inherent in our business model and cost transformation programs are driving significant improvements in year-over-year profitability.

Finally, in the first quarter, our discipline with working capital assets resulted in a dramatic increase in both operating and free cash flow. Most importantly, we are continuing to position the company for consistent ongoing growth and earnings leverage. The new customers we landed in 2019 and 2020 provide a strong growth foundation, and the continued tectonic shift of workloads to the cloud will provide secular tailwinds for years to come. Our new market positioning as the un-GSI, as well as the new service offerings we've introduced in 2021 position Rackspace Technology as the clear partner of choice for companies that want to migrate their business to the cloud.

We are already seeing significant traction in the market for these initiatives. Also, we are committed to driving cost efficiencies and making ongoing growth investments to continue our financial momentum. So I remain excited about our opportunities in 2021 as we continue to see double-digit growth in both revenue and earnings per share for the full year. And with that, we will take your questions.

Operator?

Questions & Answers:


Operator

[Operator Instructions] Our first question today comes from Ramsey El-Assal from Barclays. Please go ahead with your question.

Unknown speaker -- Barclays -- Analyst

Hey, guys. This is Ben on for Ramsey. I wanted to ask about the -- first, the pace of bookings growth. I know like some time ago, we had talked about kind of like a low double digit, low teens kind of growth rate over like the next several years.

And I understand that you lapped tough comps. Is that sort of what we should expect as we kind of lap those comps and get into 2022? Is that sort of a reasonable expectation?

Kevin Jones -- Chief Executive Officer

Ramsey, it's Kevin here. Thanks for the question. So I'll kick off here on bookings, and I'm sure Amar will have a few things to add. So as a reminder, Ramsey, the figure for bookings that we report is only new business bookings, and the 244 million of bookings in the first quarter is very healthy.

New business bookings is just one of the factors in our revenue growth alongside recurring revenue, there's renewals, contract extensions, churn, implementation and revenue realization. That one component of revenue, new business bookings, grew a healthy 6% year on year. We were also more selective in the first quarter about the deals we pursued as we onboarded a significant installed base of new customers in 2020 and now can increase our initial margin on new deals. This, in addition to our land-and-expand strategy, drove a significant increase in sold gross margins in the first quarter.

So overall, new bookings were solid. We're committed to our revenue guidance for the year and double-digit revenue growth in 2021 and beyond. Amar, do you want to add something?

Amar Maletira -- President and Chief Financial Officer

Yes, let me add here, Ben. So just stepping back, when you take a look at bookings and the revenue growth correlation here, we've been executing very well on the sales front. We have had strong year-on-year bookings growth for the past seven quarters. And what this has done is this has significantly increased the baseline of our bookings, which captures incremental new business, as Kevin mentioned earlier.

So at an annualized bookings baseline of roughly 1 billion-plus, we will be able to deliver double-digit revenue growth in 2021 and beyond. And having said that, we are focused on continuing to drive bookings performance going forward. Hopefully, that answers the question.

Unknown speaker -- Barclays -- Analyst

Yes, very helpful. If I could ask one more, just in the quarter, apps and cross platform, the revenues came in a bit higher than we were expecting, which is great to see. Is that related to maybe like the timing of the state of Texas deal? Or is that just kind of a broader outperformance? And is that level of revenue growth kind of indicative of what we should see in that line for the rest of the year? Or should it perhaps moderate a little bit?

Amar Maletira -- President and Chief Financial Officer

So that's a great question. So it was very broad-based. It was not just application services. So within the applications and cross platform, we have three services offerings at a high level.

There's an application services offering, there's data services, and security services. And we saw broad-based growth across all those three service offerings. And of course, application services also benefited from the Texas DIR deal, so you should expect that kind of level going forward. Now, it will moderate here and there because some of it is transactional business, but we are confident on this particular portfolio.

Kevin Jones -- Chief Executive Officer

Yes. I would also say, Ben, we're pretty excited about this area. We've got lots of investment that we're making in cloud-native application development, artificial intelligence, machine learning, a lot of our IoT and edge computing services here. So yes, broad base.

And when you kind of look at the short and medium-term future, we're pretty excited.

Amar Maletira -- President and Chief Financial Officer

Yes. So just to add there, we'll be -- we were at about $97 million in Q1. We should be slightly in that particular range between, say, 93 to 97 going forward. There will be some quarters that are up, some quarters will be down based on the seasonality of the business.

Unknown speaker -- Barclays -- Analyst

OK. That's super helpful. Thank you, guys, so much.

Operator

Our next question comes from Amit Daryanani from Evercore. Please go ahead with your question.

Amit Daryanani -- Evercore ISI -- Analyst

Thank you very much for taking my questions. I have two as well. I guess, first, maybe if I can just go back to the free cash flow discussion, Amar, a little bit, really good quarter performance for sure. Maybe just walk me through, given some of the comments you had around Q2, how should we think about free cash flow conversion as we go forward? And do we think Q2 is a bit negative, and then you ramp up in the back half?

Amar Maletira -- President and Chief Financial Officer

So overall I think as you know, Amit, there's an intense focus in the entire company around free cash flow. And I often repeat my CFO mantra in the company. As I say, revenue is vanity, property is sanity, and cash is reality. The entire company has heard this hundreds of times since I joined the company in November.

And I think we have made tremendous -- we have tremendous opportunity to continue to drive improved cash flow. And we are executing against the transformation program that we talked about, Amit, in the last quarter that addresses the entire life cycle of cash flow, including forecasting the cash flow, the collections aspect of it, credit terms, the payables, and so on, and so forth. So I would say we will deliver a significant increase in cash flow from operations, as well as free cash flow compared to fiscal 2020. So fiscal 2021 should be much higher than fiscal 2020.

And there will be some quarters will be lower, some quarters will be higher; but I do believe what we are focused on is to driving higher and healthy quality of earnings. And I believe our cash flow from operations should be roughly about 80% to 85% of our operating income in the longer term, so that's what we are focused on.

Amit Daryanani -- Evercore ISI -- Analyst

Got it. And then, if I just kind of go back or kind of have you guys talk a little bit on the gross margin line for the March quarter, year over year, I think the performance is sort of notable in terms of the drop. I know you guys have talked about this in the past. So I'd love to understand, when you look at the gross margin contraction on a year-over-year basis, how much of that do you think was investments Rackspace is making in their business versus mix implications? I would love to understand those two buckets.

And then, should we feel comfortable that gross margins have troughed for calendar '21 at this point?

Amar Maletira -- President and Chief Financial Officer

Yes. So let me start here by saying our gross margins, Amit, are not declining due to any competitive pricing or market pressures. And the decline in gross margin is mainly a result of mix shift in our business, driven by three factors very clearly. First is, as you know, our OpenStack business, which is our legacy business, is declining as expected.

And this is a higher-margin business, so there's an unfavorable mix impact. Second, we are onboarding new business with initial low margins due to the higher mix of cloud infrastructure in the solutions, as I discussed earlier, and also the start-up costs associated with it. And third is customer migration from older-generation private cloud offerings and managed hosting to newer cloud platforms. And in many cases, we are proactively managing this for our customers.

So all this has a near-term dilutive impact on the gross margins because the older-generation offerings were capex-intensive. And now as we drive -- and it also had higher gross margins. While the newer offerings that we are selling are capex-light, it has initially low gross margins. But as we upsell higher-value services, the gross margins improve, as I've shown in the earnings presentation with the Q1 2020 cohort of customers.

So Amit, we believe our gross margins will stabilize within the next 12 to 18 months for two reasons, as I mentioned during my prepared remarks. First is this mix shift to high-growth areas within the multi-cloud segment will be largely complete. And second, as we discussed, we are confident that our land-and-expand strategy with the new customers that we onboarded will drive higher margins in the installed base. With that said, I do expect even during this period, our operating margins to remain in the mid to high teens, in line with other best-in-class U.S.-based IT service providers.

Does it help, Amit?

Amit Daryanani -- Evercore ISI -- Analyst

No. That's really helpful. Thanks, Amar.

Operator

Our next question comes from Ashwin Shirvaikar from Citi. Please go ahead with your question.

Ashwin Shirvaikar -- Citi -- Analyst

Hey, guys. Sorry. Hello? Can you hear me?

Joe Crivelli -- Vice President of Investor Relations

Yes. Hey, Ashwin. We can hear you.

Ashwin Shirvaikar -- Citi -- Analyst

Great. I guess, I wanted to ask about the pipeline that you're seeing in terms of the split between multi-cloud and apps -- versus apps and platform. Are you just seeing -- are you beginning to see maybe a shift toward more apps and cross platform? And then, sort of a related question as you introduce elastic engineering, does that, down the road, have an impact on bookings [Inaudible].

Kevin Jones -- Chief Executive Officer

Right. Thanks, Ashwin. Yes, I'll start with that, and then Amar can jump in as well. So let me give you just a little bit color on the pipeline, as you had asked.

And I'll talk about apps and cross platform as it relates to the pipeline; and then elastic engineering, and kind of what I see there for the future. So Ashwin, pipeline is strong, healthy, continues to build. As I did mention on the earnings call, we are being more selective on the deals we pursue. So I'd also say it's a very high-quality pipeline of higher-margin deals.

So excited about the pipeline, it's growing. And I would say it's broad-based. There's still a massive opportunity in multi-cloud, but we are seeing a lot of opportunity in apps and cross platform as well. So I would say really high in both areas.

I'm really excited about the early signs of Rackspace elastic engineering, right? We've really, we believe, reinvented managed services for the cloud with Rackspace elastic engineering. And what's happened here, Ashwin, is this really shortened our sales cycles on these deals, which is great for future conversion of revenue. Rackspace elastic engineering, one of the most successful new product launches in the history of the company, closed many deals. Already closed another one in Europe over the weekend.

So in three weeks of this offering being released, signed deals in every region, new and existing customers. We've got nearly 100 new business opportunities identified for Rackspace elastic engineering. So excited about that one. Excited about Rackspace services for VMware Cloud.

That was just released on Thursday of last week. That's going to be tremendous as well. Pipeline for professional migration services is growing very strong also.

Ashwin Shirvaikar -- Citi -- Analyst

Got it. And then, a question, I guess, for Amar. After 4Q, you've provided a very detailed split across quarters in terms of the cadence that we should expect. Would you say that anything has changed relative to what you've indicated back then in terms of revenues and profits?

Amar Maletira -- President and Chief Financial Officer

I think -- so thanks, Ashwin, for the question. So our guidance for -- I've not changed the guidance for the full year. And let me give you -- let me start with the big picture here and answer your question on the seasonality and authorization of the guidance. So if you look at the big picture and if you look at the first half profit in total, I'm just talking on the operating profit side and then I'll come to the revenue side, too.

If you look at the first half operating profit in total, we are on pace with our original guidance even with the lower expected Q2 operating profit. And then, going forward, let me walk you through the four key drivers of improved second half profitability. First, as I've indicated earlier, the seasonal expense headwinds, such as the U.S. payroll taxes that impacts our first half -- are weighted more toward the first half and will subside in the second half of the year.

Secondly, we are also making investments, as I mentioned earlier, in the business that are going to be sort of moderate in the second half. Third is we have opex efficiency programs that will kick in and generate additional savings in the second half compared to the first half. And finally, the second half revenue growth will be higher than the first half and will also drive incremental profit. Now, this is all baked into our full-year guidance.

So in summary, feel good about the full-year guidance, and we expect to be within the guided range for revenue, for operating profit, as well as EPS. And as you can see in the first half, we are exceeding -- certainly on the revenue side, we are exceeding the midpoint of the guidance. And so, I think there's a little bit of an upward bias to the revenue compared to the midpoint of the revenue guidance for the full year.

Ashwin Shirvaikar -- Citi -- Analyst

Thank you.

Operator

Our next question comes from Frank Louthan from Raymond James. Please go ahead with your question.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. Walk us through some of the cost savings initiatives that you're putting into place, and where should we see those show up? And then talk to us a little bit about churn. What has that been running? And do you expect anything different in churn for the remainder of the year?

Amar Maletira -- President and Chief Financial Officer

Sure. So let me start with your question on the cost savings. One of the things that I keep reminding people is first of all, the cost takeouts and opex efficiencies are all embedded within our guidance. So we would encourage you to follow the guidance from that perspective.

But we approach cost initiatives overall the same way we approach sales. We build a funnel of efficiency programs, which we regularly fill and convert, and that's how we look at it. And so, just specifically on, say, opex side because I do believe there is immense opportunity on opex to continue to drive efficiency. There are four areas that we are focused on.

First is more automation and streamlining processes. Now, this is I would say, Frank, this is technology-driven efficiency programs and productivity improvements that will come through automation. That is the first one. Second is leveraging the G&A as revenue grows and also increasing the leverage of partner R&D, the product development costs that they put in, as well as the market development.

So we can leverage that given the relationship we have with our partners. Third is driving higher offshore mix across the company. I do believe that there is a huge opportunity there. We need to continue driving that as we grow.

And the fourth is on the nonlabor expense side. There are various ways to optimize our nonlabor expenses through supply chain management. We can optimize our real estate footprint. There are legal entities that we are looking around the world to see how we optimize those legal entity, do better management on the vendor side.

So these are all the cost savings initiatives that we have in the funnel that we'll continue driving as the business model continues to transform. And we will reinvest some of it back into the business, as we have done, to continue driving the top line growth and also investing in continuous automation and productivity improvements.

Kevin Jones -- Chief Executive Officer

Amar, do you want me to start on --

Amar Maletira -- President and Chief Financial Officer

Yes, please. Please, Kevin.

Kevin Jones -- Chief Executive Officer

Frank, it's Kevin. Yes, it's a great question on churn. I'll just give you a little color here. I would say churn, particularly for the newer offerings, is coming up.

Now, it's a very favorably, certainly compared to my expectations and compared to some of our older offerings. So that's really, really encouraging that the new product offerings that were coming out are not just growing fast, but customers are keeping them and keeping them longer. And certainly, this area of the business has performed better than I had expected. So that's really, I think very, very positive.

This is obviously a revenue lever for us that we continue to spend a lot of time with our management system, with our leaders, with our customer success representatives in the field. We've got a close feedback mechanism into our new product development. So I feel like we've got a really good kind of system here to drive further benefits for the company.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you very much.

Kevin Jones -- Chief Executive Officer

Thanks, Frank.

Operator

Our next question comes from James Breen from William Blair. Please go ahead with your question.

James Breen -- William Blair -- Analyst

Thanks. You talked about bookings early on in the Q&A. I was wondering just, can you just give some color around how the bookings growth sort of translates to revenue growth, given some of the land and expand as you think about the 6% year over year, and then sort of the double-digit growth on the revenue side?

Kevin Jones -- Chief Executive Officer

Yes. Thanks, Jim. How about I start on that one, Amar? And then --

Amar Maletira -- President and Chief Financial Officer

Yes, absolutely. Go ahead, please.

Kevin Jones -- Chief Executive Officer

Yes. So a little bit more color, James, on the bookings. First of all, 6,300 deals in the quarter, very diversified bookings, broad-based strengths across geographies, customer segments and industry. We're pleased with the additional rigor sort of resulting in expansion in sold margins for deals during the quarter.

So that's good. We see momentum in large deals with more than $1 million of recurring revenue. Those were up double digits in the year. The other thing, James, we signed 25% more new logos than we did in last year's first quarter.

Excited to see continued momentum in mid-market and enterprise as well, those two customer segments. Just to name a few wins, we talked about Porsche in my prepared remarks. Apria Healthcare was a great win, TSB Bank in the U.K., Aramex in the Middle East. So again, broad-based in mid-market and enterprise as well.

So pleased with the momentum. Yes. Amar, do you want to cover kind of the translation question?

Amar Maletira -- President and Chief Financial Officer

Sure. I think -- listen, I think the way I would like to answer this question is why are we confident about the double-digit core revenue growth, whether it's sustainable or not? And the way I think about this is as I mentioned earlier that we had a strong year-on-year bookings growth for the past seven quarters. That has really elevated the baseline of our bookings, which captures incremental business, as I mentioned earlier. And when we take a look at our baseline, if you're on the baseline, annual baseline of roughly about $1 billion, I think you should be able to -- because this is all incremental business that comes from new logos, as well as new business from the existing customers, it should be able to drive double-digit growth in revenue.

That's how the model works. And second also, we are a high mix of recurring type revenue, which drives good visibility into the future. So we really feel good about the revenue growth sustainability in 2021 and beyond. And for example, the midpoint of our 2021 revenue guidance indicates that 14% core revenue growth, up from a pro forma growth of about 9% last year.

So that shows you that the baseline has gone up and elevated, and we can continuously drive double-digit growth into 2021 and beyond.

Kevin Jones -- Chief Executive Officer

Yes. I would add, Amar, would you agree our confidence in the sustainability of our revenue growth has increased since the last time we reported?

Amar Maletira -- President and Chief Financial Officer

Absolutely.

James Breen -- William Blair -- Analyst

Great. Thanks.

Operator

Our next question comes from Matt Cabral from Credit Suisse. Please go ahead with your question.

Matt Cabral -- Credit Suisse -- Analyst

Yes. Thank you. Kevin, you called out some revamped deal profitability metrics in your prepared remarks. You kind of alluded to them a couple of times during the answers as well.

Just wondering if you could expand a little bit more on what the changes are that you've made? And just if that's had any impact on how you think about forming sales quotas and the different metrics that you comp the sales force on?

Kevin Jones -- Chief Executive Officer

Matt, great question. So yes, absolutely, always looking to continue to raise the bar on sales performance and continue just to capitalize on this, I think, once in a generation opportunity here in multi-cloud. So Matt, what we did in the first quarter, particularly in the Americas region, we sort of realigned the team to kind of ensure our sales professionals, our solution architects, all of our customer success team members were aligned, particularly on this land-and-expand strategy that we've been talking about a lot. We kind of enhanced our regional structure to increase accountability.

We did -- and also improved our customer sales coverage. We did a lot of work on that. We also adjusted our compensation plans to support all the goals that we had for this year, including selling higher-margin deals. So we're very pleased with kind of the early signs of how those changes have materialized here in the results and in the pipeline.

And we expect these changes to help us continue both winning new logos and accelerate the success of this land-and-expand strategy.

Matt Cabral -- Credit Suisse -- Analyst

Got it. And then, thanks for all the additional detail you guys gave on the multi-cloud business. I guess so it's pretty clear from the chart that the margin on services is higher than infrastructure. But I'm curious if you can comment on just the magnitude of the spread between the two.

I guess what I'm really trying to get at is if I take a step back, this segment used to do profitability in the low 40s from a gross margin standpoint. And I'm just wondering as the services mix on public cloud matures, do you think you'll be able to get back to those levels? Or should we start thinking about maybe rebasing to a different margin structure as the mix shifts more toward cloud going forward?

Amar Maletira -- President and Chief Financial Officer

So well, listen, I think I'm not going to give specific guidance here on the margin, on the gross margins. But as I mentioned earlier that if you think about our gross margin profile, today we are in a transient stage as we are having a major mix shift going on in the business to high-growth areas, as we are onboarding new customers and also migrating existing customers. So you have all those headwinds from a margin perspective initially. We do believe that the gross margins will expand as we upsell and cross-sell more services.

And you saw, Matt, in one of the charts that I provided, which was taking Q1 cohort of customers where we were able to expand the gross margins by about 200 basis points-plus while growing the bookings about 20%-plus, right? Now, I would want you guys to focus on operating margins, which we will continue to operate between the mid to high teens because of the all the operating leverage we have in the model, as well as the ongoing opex efficiency programs. So just to give you an example why we should be focused on that, and we do believe that the gross margins will stabilize. If you think about gross margins, let's say, our corporate average is, say, mid-30s today. When we sell incremental business, even if the gross margins in those incremental business in our current installed base, say, comes in below the corporate average, let's say, I'll just make up a number here, say, 30% or so.

We would spend about maybe 5 to 7 percentage points of that in incremental SG&A. And you will see at least 20 to 25 points actually drop to the operating profit line. So which means that there is such a high operating leverage in the model, it creates an upward bias to your operating margin rate. That's how we should be seeing this business.

So currently, Matt, the way I think about it is, for the next 12 to 18 months, we'll be in the transient phase. It will stabilize. But ultimately, we want to drive operating margins into mid to high teens. And as we start selling, upselling and cross selling more services, you should see upward bias on those operating margins and operating margins have a tendency to start expanding.

So our long-term goal is to grow revenue, grow profit faster than revenue. The only way you do that is by expanding your margins.

Operator

Our next question comes from Dan Perlin from RBC Capital Markets. Please go ahead with your question.

Unknown speaker -- Barclays -- Analyst

It's actually Matt on for Dan. Following up on the bookings question. Is there any way to kind of frame the sort of amount of deals that you walked away from because of the new focus on corporate profitability? And then, I have a follow-up.

Kevin Jones -- Chief Executive Officer

Yes, I'll start there. In terms of the more selective kind of approach that we took, Dan, in Q1, it was really as a result of the success that we had onboarding all the new logos in 2019 and 2020. And so, as a result of all that success that we had, we really have a strong foundation for growth for the next decade. So we spent quite a bit of time in that land-and-expand strategy as we kind of talked about.

And now really, our focus is on up leveling the initial margin of the new deals that we run after to drive profitability. So I don't have a specific figure other than to say we booked good growth in bookings. We did it at higher margins. Our margins grew.

So we're actually very pleased with that result. And as Amar kind of mentioned, our propensity for confidence in revenue growth just continues to increase. I think we did a really nice job balancing here. And it was because of the success that we've had with all the new logos and the onboarding last year and the year before.

So we're in a really good spot here.

Unknown speaker -- Barclays -- Analyst

OK. And then, as a follow-up, what are you seeing in terms of like employee costs, availability, etc.?

Kevin Jones -- Chief Executive Officer

Yes. So it's an interesting question here, Dan, employee cost, as Amar mentioned, we've got payroll taxes and things like that that make that cost heavier in the first half of the year compared to the second half of the year. One thing to keep in mind about our business is we're really more of a technology- and software-driven business than a heavy labor business. So in terms of the availability of resources and people, we're in a great -- a really great situation there.

You may remember, Dan, we talked about we select fewer than 2% of our job applicants to the company, so very well positioned in terms of labor force availability. We continue to expand our labor force globally. We've got a great workforce management system, all aided by the fact that the core of this business is very strong because Rackspace Fabric, the software and the IP that automates 75% of our multi-cloud workloads, still we believe the highest automation in the industry. So well positioned here as well.

Amar Maletira -- President and Chief Financial Officer

If I can just add a quick -- I'm sorry. So I just wanted to add to Kevin's remarks there. At the end of the day, we have a good management system, Dan, internally to tightly manage our labor costs and nonlabor costs. And we do that on a very regular basis, and also a very good hiring engine as we ramp up, for example, professional services because we are seeing a lot of opportunity for growth in the migration services and cloud services in general.

So feeling good about how we manage our labor and non-labor costs in this company.

Unknown speaker -- Barclays -- Analyst

Thank you.

Operator

And our next question comes from Tien-Tsin Huang from JPMorgan. Please go ahead with your question.

Tien-Tsin Huang -- J.P. Morgan Chase & Co -- Analyst

Thanks. Yeah. I just had a follow-up on the being more selective comment you just made there. Just is it more of your -- maybe I may ask it differently.

Initial pricing, are you just being a little bit more careful with some of the deals, or are you just taking a view on finding clients that meet a certain land-and-expand threshold? Just trying to make sure I understand that as best as possible.

Kevin Jones -- Chief Executive Officer

Tien-Tsin, yes, I'll start. And Amar, if you want to, you can jump in. It's a little bit of both, really. We do have a land-and-expand strategy.

And as you know, we've got a very rigorous management system. When we set off on a program, we want to execute on it, right? At Rackspace, we get work done and we focus. So that certainly is a big part. We landed all of these new logos.

Amar mentioned the strategy, if you can't land, then you can't expand. So we landed, and it's time to expand. So what that does is that is really quite beneficial for us because as you add new business to existing customers, you don't have to repeat the cost for new account managers and some of the infrastructure that we put in place and some of that more kind of recurring costs. A lot of that fixed cost is already there.

So the beauty of expanding is that you can expand the higher margins. So -- and that was certainly part of it. Part of it as well, and I'll let Amar talk to it, is kind of the rigor that he's brought in and really looking at the margins that we're willing to accept on new deals and really kind of raising -- we have talked about up-leveling that margin for initial deals. So really, a combination of both of them is where we saw the lift in the sold margins in the first quarter, and we're pretty proud of that.

Having said that, as we mentioned, I think we're doing a nice job of balancing that against just a tremendous opportunity in the market and our confidence in double-digit revenue growth. Amar?

Amar Maletira -- President and Chief Financial Officer

I think you covered it very well, Kevin. I think I would just summarize by saying, at the end of the day, we are focused on return on investments we are making. There's a huge demand out there, and we can afford to be selective. And as you mentioned earlier that if there is no expansion opportunity, I think there is no point of making an initial investment in those accounts.

And so, we take a look at where there are expansion opportunities and where we can make investments so that we can generate that return on those investments by selling higher-value services in the future. And some of this relationship can extend for a decade, and we want to make sure that we are focused on selecting those accounts where we have an opportunity for expansion for -- in the longer term.

Tien-Tsin Huang -- J.P. Morgan Chase & Co -- Analyst

I'm confident you're being thoughtful about it. Just my quick follow-up, staying on bookings, and in the last quarter -- or last year second quarter, you had the Texas contract. I think that was a mid-30, near-40 million number. So should we, at least for the second quarter, should we think about growth more sequentially from the first quarter base? I think I heard, Kevin, you say that bookings were improving month to month to month in the quarter.

So this is why I'm thinking maybe we should look at it sequentially, you're going to the second quarter given the difficult comp.

Kevin Jones -- Chief Executive Officer

Yes. Great question, Tien-Tsin. I'll start. And Amar, feel free to jump in.

So I'll give you some color here. We do not guide on bookings, but we're very confident in our pipeline. I believe we've got a lot of runway to continue to grow revenue. Yes, more difficult compares given some of the state of Texas deal, like you said, last quarter.

Well remembered. I'll just say we continue to see momentum. We did see sequential momentum monthly so far this year, and we're working hard in May as well. What I'll kind of just kind of point you back to is our bookings.

Our bookings kind of projections internally are incorporated in the guidance for revenue and committed to revenue guidance for the year. Feeling strong about that, committed to double-digit revenue growth in 2021 and beyond.

Amar Maletira -- President and Chief Financial Officer

I would just add very quickly. Again, as Kevin said, we're not guiding on bookings. But we're also looking at the quality of the pipeline, as well as quality of the bookings. It's not just the bookings dollar numbers, but how the revenue will get realized, what's the margin profile on those bookings, the length of the contracts.

So there are multiple metrics that we use to make sure that we have the right mix of bookings and the quality of bookings that we deliver, and we feel good about it. And I think as I mentioned, if you're operating at a very high baseline of $1 billion of bookings on an annualized basis, since this is all net incremental bookings, it's not -- we're not putting renewals in it or any of those things, contract extensions in it. So since it's all incremental bookings, it really helps to drive a double-digit revenue growth if you are maintaining at the billion-dollar mark or so. So I feel really confident.

I've been here now for six months. I'm still a student of the business, but have done a lot of analysis on how bookings should translate to revenue, what kind of bookings mix do we need to make sure that we deliver -- continue to deliver double-digit revenue growth at the right margin profile, and how we will be able to go expand our margins in the future, and more importantly, continue to generate increasing free cash flow for the company.

Tien-Tsin Huang -- J.P. Morgan Chase & Co -- Analyst

Yes. I appreciate it's one metric of many that's important and that's new sales. But just figured I'd ask, understanding that the Texas deal was quite special last year.

Amar Maletira -- President and Chief Financial Officer

True. Very true.

Kevin Jones -- Chief Executive Officer

Yes, very true.

Operator

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Joe Crivelli for any closing remarks.

Joe Crivelli -- Vice President of Investor Relations

Thanks. That's all the time we have for Q&A. So if you would -- if you have follow-up questions or if you'd like to schedule time with management, feel free to reach out to me at ir@rackspace.com. Thanks, everyone, for joining us today, and have a great evening.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Joe Crivelli -- Vice President of Investor Relations

Kevin Jones -- Chief Executive Officer

Amar Maletira -- President and Chief Financial Officer

Unknown speaker -- Barclays -- Analyst

Amit Daryanani -- Evercore ISI -- Analyst

Ashwin Shirvaikar -- Citi -- Analyst

Frank Louthan -- Raymond James -- Analyst

James Breen -- William Blair -- Analyst

Matt Cabral -- Credit Suisse -- Analyst

Tien-Tsin Huang -- J.P. Morgan Chase & Co -- Analyst

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