Earnings Call Transcript - RXT Q1 2023

Operator, Operator

Good afternoon and thank you for standing by. Welcome to Rackspace Technology’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised that today’s call is being recorded. I would now like to turn the call over to Robert Watson, Vice President of Corporate Finance. Please go ahead, sir.

Robert Watson, Vice President of Corporate Finance

Thank you, and good afternoon. I am joined today by Amar Maletira, our Chief Executive Officer; and Bobby Molu, our Chief Financial Officer. This quarter we will begin reporting in our new operating segments, Public Cloud and Private Cloud. As we previously communicated, our prior Multicloud segment has been separated into its Public and Private Cloud components, and our prior Apps & Cross Platform segment has been merged into Public and Private Cloud based on the underlying nature of the products and offerings. Our prior OpenStack segment has been collapsed into Private Cloud. However, we will continue to provide visibility into OpenStack revenue. Please refer to our Investor Relations website for historical financials in the new segments, definitions of financial metrics and other supplemental materials to today’s earnings announcement. As a reminder, certain comments we make on this call will be forward-looking. These statements involve risks and uncertainties, which could cause actual results to differ. A discussion of these risks and uncertainties 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 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 most directly comparable GAAP measures in the earnings release and presentation, both of which are available on our IR website. I will now turn the call over to Amar for an update on the business.

Amar Maletira, CEO

Thank you, Robert. Let me start by sharing some of our first quarter achievements. First, we delivered revenue and profit above the midpoint of our guidance for the first quarter. Meeting our commitments remains a priority. So, I’m pleased we were able to achieve these results while navigating a challenging macroeconomic and industry environment. Second, we have now completed our first full quarter in our new two business unit operating model. We are already seeing progress with increased focus in new offerings, demand generation and targeted verticalization. We have also identified new opportunities for cost efficiencies. Third, with the creation of these new business units, today, we have published two years of quarterly financials in our new segmentation. This also fulfills another one of my commitments to provide greater transparency. Fourth, I’ve completed the buildout of my leadership team with the appointment of two talented executives, Michael Bross has been named our Chief Legal Officer, a Rackspace veteran of 16 years. Michael has most recently been serving as an Interim Chief Legal Officer, where he has clearly demonstrated skills and leadership required to take on this role full time. And Kellie Teal-Guess has been named our Chief Human Resources Officer. Kellie brings over 30 years of experience in global human resources with a strong background in strategy and execution, talent management, organizational design and change management. And finally, since the beginning of the year, we have added three highly accomplished technology executives: Anthony Roberts, Betsy Atkins and Tony Scott to the Rackspace Board of Directors. I’m very pleased that they have chosen to join our Board and look forward to working with them closely. So, we continue to make progress on the objectives I established upon becoming CEO, realigning the Company’s operating model to better address the attractive markets we operate in, build a seasoned executive team to drive our strategy forward, and strengthening our Board. We are still in the early days of these changes, so it will take time for progress to be reflected in our financial results. Before we provide an update on the new operating segments, let me give my perspective on the market. There has been little improvement to the macro environment since we last spoke with you. Customers remain cautious, resulting in lengthening sales cycles and deferred decisions. Other companies in our industry are reporting the same trends. However, we still expect our market to enjoy strong growth over the long-term as multicloud is a key enabler of digital transformation and improving business outcomes. So, we are using this flattening of the market to better position our company to capitalize when growth rebounds. Our customers know they need our help in migrating and leveraging multicloud. So our focus is on building the tools and services to meet them wherever they are in their digital transformation journey. Now, let me turn to our new segments. With the two business unit structure and the hiring of new leadership, we are prepared to better leverage the unique competitive advantages of each business. We are now engaging more closely with our customers and developing products and solutions that align to their specific market needs. We have a global footprint, flexible delivery model, and the depth and breadth of capabilities, all strong competitive advantages that enable us to deliver differentiated value for our customers. And since we address both public and Private Cloud, we can provide an unbiased point of view to ensure our customers achieve an optimal outcome. The Public Cloud business unit operates as a service-centric, capital-light model. We engage deeply with customers to manage cloud complexity and deliver value-added cloud solutions in infrastructure, application, data and security, through managed services, Rackspace Elastic Engineering and professional services engagements. D K Sinha, leader of the Public Cloud business unit, joined us mid-last year and has been instrumental in shifting the organization from infrastructure resale to value-added services with an emphasis on customer partnership. DK and his team are driving our customer-first approach and developing strong relationships with both current and prospective customers. As an example, we recently helped a large North American university to containerize the PeopleSoft environment, and we also partnered with a large Asian customer to unify seven disparate data systems onto the Azure platform, enabling business insights for their stakeholders. We have built a services-oriented leadership team, and our focus is to continue to flawlessly execute our strategy to deliver industry-leading growth. Turning to the Private Cloud, this business operates under a technology-forward, capital-intensive model. We are one of the largest scale players in hosted Private Cloud and have a diverse set of offerings to address a broad set of customer segments and industries. Our strategy is to help customers efficiently and effectively move workloads from in-house data centers as well as workloads that may not operate efficiently in the Public Cloud. Rackspace’s Private Cloud solutions can help customers address these challenges. Brian Lillie joined us to lead the Private Cloud business unit last quarter and is improving our execution, management focus and accountability. He has already made management changes and recently hired a new Chief Product Officer and Chief Revenue Officer. I’m also delighted to see us innovating again in a business we had taken for granted for far too long. As an example, Brian, in collaboration with our CTO, Srini Koushik, has plans to launch a next-generation Private Cloud offering later in the year. This will take advantage of modern open-source and cloud-native technologies like Kubernetes and Containers. This will offer customers a full suite of Private Cloud offerings that span from bare metal to virtual machines to containers to serverless computing. Our strategy supports the secular trend of customers moving to a more capital-light model, migrating workloads out of their data centers to a managed solutions environment. Hence, this is just one of our initiatives to provide customers with a broader set of options in areas where they lack multicloud capabilities. It’ll take time to show results, but Brian and his team are focused on growing the business and improving our execution. There is a bright future ahead for Private Cloud with an immense market opportunity. In summary, just four months into this new model, we are already seeing some of the benefits. First, each segment is more focused on identifying opportunities that they can leverage their unique competitive advantages to capitalize on their attractive growth market. Second, we have uncovered potential new operating efficiencies at both the business unit and corporate levels. And third, we have increased accountability across the Company. As we have stated previously, our goal is to exit 2023 with a competitive cost structure and a strong pipeline backlog to drive profitable growth heading into 2024. I will now turn the call over to Bobby for an update on the financials before wrapping up with some closing thoughts. Bobby, over to you.

Bobby Molu, CFO

Thank you, Amar. I will cover the total company results for the first quarter, then share some details on our segment performance, followed by our Q2 guidance. Total company revenue of $759 million was down 2% year-over-year and slightly above the midpoint of our guidance. Non-GAAP net revenue is a metric we are introducing that applies net accounting to Public Cloud infrastructure resale revenue. For clarity, non-GAAP net revenue includes all revenue from our Private Cloud business unit, Public Cloud services revenues, and only the profit component of Public Cloud infrastructure resale. We believe non-GAAP net revenue provides investors with visibility into the true margin profile of our business. Please refer to our Investor Relations website for more details and definitions. For the first quarter, total non-GAAP net revenue was $460 million, down 9% year-over-year, driven by continued declines in Private Cloud, which as a reminder now includes legacy OpenStack. Non-GAAP gross profit of $179 million was 24% of total revenue and 39% of non-GAAP net revenue. Non-GAAP operating profit was $51 million, slightly ahead of the midpoint of our guidance. This was down 55% year-over-year, primarily due to revenue declines in our Private Cloud business unit. Non-GAAP operating margin was 7% of total revenue and 11% of non-GAAP net revenue, and non-GAAP loss per share was $0.02, within our guided loss per share range of $0.01 to $0.05. Cash flow from operations was negative $2 million and free cash flow was negative $14 million in the first quarter. These results were in line with expectations due to our strong working capital management, which largely offset the impacts of the Company bonus payout and a large vendor prepayment. We ended the quarter with a cash balance of $174 million and remained laser-focused on cash flow generation. Total CapEx for the first quarter was $72 million, while cash CapEx was $12 million. CapEx intensity was 9% and 2%, respectively. CapEx for the quarter was higher than recent quarters, driven in part by capital requirements for a new customer we signed in Q3 2022. With regards to this customer, as we began to execute in Q1, we became concerned about the viability of the arrangement and ultimately it did not materialize as anticipated. The capital purchase is fungible and will be redeployed to other business requirements. As such, you should expect CapEx to be lower for the next few quarters and remain in our typical 5% to 7% total CapEx intensity range for the full year. Additionally, in the first quarter, we recorded $543 million of non-cash goodwill impairment charges as a result of the January 1st relocation of goodwill due to the business unit realignment and the decrease in our market capitalization. Onto our segment results. Now that we are operating in our new segments, Public Cloud and Private Cloud, we will no longer report the Multicloud, Apps & Cross Platform and OpenStack segments after this quarter. Please refer to our Investor Relations website for historical financial information in the new segments and our earnings presentation for an estimate of our Q1 2023 revenue in the prior segments. For Public Cloud, revenue of $445 million was up 7% year-over-year, driven primarily by our infrastructure resale business. Public Cloud non-GAAP net revenue, again, this includes our Public Cloud services revenue and infrastructure resale profit, was $146 million, up 1% year-over-year. While revenue growth in services was 3% in Q1, it will take some time for the business to reach sustained growth, in line with the market as we pivot to a services-led motion. Gross margin for our Public Cloud segment was 12% of total revenue and 37% of non-GAAP net revenue. Segment operating profit in Public Cloud was $25 million, which was 6% of total segment revenue and 17% of non-GAAP net revenue. In Private Cloud, total revenue for Q1 was $314 million, which includes legacy OpenStack revenues of $34 million and was down 12% year-over-year. The Private Cloud segment revenue decrease resulted from declines in our Private Cloud offerings and legacy OpenStack as well as the impact from the December Hosted Exchange ransomware incident. As a reminder, the Hosted Exchange email business represented less than 1% of the total company revenue and roughly 2% of Private Cloud revenue. Private Cloud gross margin was 40% and segment operating profit was $93 million at an operating margin of 30%. Given the continued widespread attention to the macro environment and financial sector disruption, I would like to reiterate some important points regarding our balance sheet and capital structure. First, we have a solid debt structure with favorable terms, which was less impacted by the recent run-up in interest rates. Over 70% of the debt is either fixed or hedged and the average interest rate on our total debt was 5.5% for the first quarter. We have no funded debt maturities until 2028 and we have no maintenance covenants, which gives us significant flexibility and runway as we execute our transformation plan. Second, Rackspace has nearly $550 million of liquidity comprised of $174 million of cash on the balance sheet and a $375 million undrawn revolver. It is worth noting that our revolver commitments are provided by some of the largest global financial institutions, and we have no exposure to the U.S. regional banks that have recently faced challenges. And finally, in the first quarter, we opportunistically spent $10 million of cash to repurchase $23 million of our senior unsecured notes in the marketplace at a deep discount. These transactions were at an average price of approximately $0.43 on the dollar and will result in $1.2 million of annual interest expense savings. We will continue to monitor and assess further opportunities to deploy capital and drive shareholder value. As Amar noted in his prepared remarks, 2023 will be a transformational year, and we believe our performance will reflect that. We will continue to focus on preserving cash and optimizing our expenses. We know it will take time for the transformation to drive improved financial performance, but we expect to begin seeing sustained progress in 2024. And with that backdrop, here’s the guidance for Q2. We expect total revenue in the range of $725 million to $735 million. From a segment perspective, we expect Public Cloud revenue of $430 million to $435 million; and Private Cloud revenue of $295 million to $300 million; non-GAAP operating profit of $33 million to $37 million; non-GAAP loss per share of $0.07 to $0.09; additionally, non-GAAP other expense of $57 million to $59 million; non-GAAP tax rate of 26%; non-GAAP share count of 214 million to 216 million. And as we noted last quarter, we expect Q2 cash flow from operations and free cash flow to be positive. Lastly, we expect Q2 operating profit to be the trough with sequential profit improvement anticipated for the remainder of 2023, driven primarily by cost reduction and some improvement in mix.

Amar Maletira, CEO

Thanks, Bobby. As I mentioned last quarter, 2023 is a transformation year, and we expect performance to be choppy. This is reflected in our guidance, but as Bobby noted, we do anticipate Q2 being the low point from an operating profit perspective. We are fortunate to operate in growing markets and are working hard to improve our execution across the board. We are focused on four priorities to turn around our company’s financial performance. First, grow our Public Cloud services business at or above market; second, stem the decline in Private Cloud offerings, excluding OpenStack; third, build a highly efficient cost structure; and lastly, drive sustained growth in profit and free cash flow. We are making progress, but we have a lot of hard work ahead. We have a good strategy, a solid plan, and a strong team. So, I’m confident we’ll get this done. And with that, we’ll take your questions.

Operator, Operator

Thank you. Your first question comes from the line of Frank Louthan from Raymond James.

Frank Louthan, Analyst

Great. Thank you. Could you just give us a little more color on what’s in the Public and the Private Cloud? I assume that OpenStack and Apps & Cross Platform are in Private Cloud. And the relative profitability there, how should we think about that and how quickly you can sort of exit those businesses and then look for other opportunities for Private Cloud?

Amar Maletira, CEO

Yes. Frank, thanks for the question. So, your question is around what’s in the Private Cloud segment or both, Private and Public Cloud?

Frank Louthan, Analyst

Well, kind of how you divided them up and just what we should think about from the difference in profitability?

Amar Maletira, CEO

Yes, absolutely. So, Frank, the Private Cloud segment includes both private cloud, which includes managed hosting, and we have also included OpenStack, which shares the infrastructure with Private Cloud and is also managed by Brian Lillie. Some of the Apps & Cross Platform that pertains to Private Cloud is also included in the Private Cloud segment. So, the Private Cloud segment addresses the private cloud market and vice versa. The Public Cloud segment has infrastructure resale that we do across all three hyperscalers and the services for Public Cloud. That includes services for infrastructure, application, data and security, both in managed services, elastic engineering and professional services. So, those are the two segments. Now from a profitability perspective, in Public Cloud, when you look at gross margins, we have provided the gross margins to you in the segment financials. So, it’s operating at around 36% gross margins on a net basis, which is using gross profit as a percentage of net revenue. And Bobby defined what net revenue is in his prepared remarks. Overall, the gross margins, on a gross basis, were about close to 12%, so on a net basis, it was about 36%. Now, the reason why we provided that metric to you is so that you can really understand the underlying gross margins of the business after excluding the impact of the infrastructure resale gross margins, which basically dilutes the gross margins, as you know, gross margins for infrastructure resale is very low. On the Private Cloud side, the gross margins that we posted in Q1 are about 40%. So, as you can see here, we have given a lot of transparency in our financials now. This is how we are going to manage the business internally. So we have two leaders managing Public and Private Cloud. This is how we are going to report externally to the Street.

Frank Louthan, Analyst

Right. That’s great. And just follow-up on the trough in the Q2 profitability. So, you said it’s going to improve sequentially, mostly from cost cutting. What else can you give us? What gives you the confidence that this is the trough and we’re going to be moving forward from there?

Bobby Molu, CFO

Yes, we have indicated that Q2 is the low point for us, and we feel confident about this due to significant cost actions we have implemented. By segmenting the business into two units, we've identified major opportunities for cost reduction that we are actively pursuing. We are committed to this strategy for the second half of the year, especially as the macroeconomic conditions have stalled. We are very confident that we will see sequential improvement in Q3 and Q4, along with a mix improvement that should further benefit us. This is the basis for our confidence.

Amar Maletira, CEO

So, if I can just build on that, Frank, if I may, right? I think, the other question is for us, what are the early indicators of progress, right? And as we go segment the two businesses of our entire business into two business units, I’m focused on three indicators as a measure of a successful turnaround of this company. First, in Public Cloud, I’m keeping a close watch on service growth and how the mix of the business is changing from low-margin infrastructure to a high-margin services business. Now, as you know, since building a services backlog typically takes around six to nine months, and that’s the process we already initiated. I expect fiscal ‘23 to be a very low growth year for services with growth acceleration in fiscal 2024. So, that’s the first indicator. The second in Private Cloud, I’m very focused on making sure that we arrest the decline in revenue excluding the impact of OpenStack. So we have initiatives in place to both grow the bookings and backlog while also actively reducing the churn. And in Private Cloud, as you know, given the long sales cycle and time it takes to implement the solution, I do expect better performance starting in 2024. And just to give you a little bit additional color here, Frank, every percentage point of improvement in revenue growth adds roughly about $7 million to $8 million of incremental profit due to the high fixed cost and the positive operating leverage we have in the Private Cloud business. And the final metric, both Bobby and I are very much focused on is making sure that we drive cost efficiencies. As you know, as we split the business into two business units, we have uncovered additional operating efficiencies that we can go drive and also on the cash flow side, focused on cash flow generation and preservation. These are things that Bobby and I will be keeping a close tab on.

Operator, Operator

Our next question comes on the line of Kevin McVeigh from Credit Suisse.

Kevin McVeigh, Analyst

Thank you for the additional disclosures. Amar or Bobby, can you provide guidance on what the free cash flow expectations are for 2023 and the EBITDA linked to that? Also, how do you view the macro environment? Are you comfortable with the current conditions, and what macro outlook are you considering during this transition?

Bobby Molu, CFO

So Kevin, look, for free cash flow, like we said in our Q4 earnings call back in February, we did anticipate Q1 cash flow to be slightly negative, but we do expect positive cash flow from operations in the remaining quarters. And we do expect free cash flow to be margin positive for the full year. From an EBITDA perspective?

Amar Maletira, CEO

From an EBITDA perspective, we expect EBIT to reach its lowest point this quarter in Q2 and then improve sequentially. We prefer to provide our EBITDA forecast one quarter at a time due to the uncertain macro environment and the ongoing transformation within the business. We need the flexibility to adjust our business model towards more services rather than infrastructure resale. There are many factors at play, so we will provide guidance one quarter at a time. However, as Bobby mentioned, we anticipate free cash flow to be slightly positive, and we finished Q1 in a solid position despite the one-time cash expenses we incurred.

Bobby Molu, CFO

From a macro perspective, it's a challenging environment right now. Our assumption is that it will continue to be tough and that the market won't improve either. This is the basis for our guidance for Q2 and our full-year cash flow and free cash flow outlook.

Kevin McVeigh, Analyst

Great. And then it looked like you took the opportunity to acquire some senior notes about $23 million. Should we expect more of that over the course of the year or just any thoughts around that?

Bobby Molu, CFO

Yes. Look, Kevin. Look, our debt is trading at high discounts, so we do see that. And we did purchase $23 million of unsecured bonds at the $10 million that you talked about. When it comes to repurchasing debt, I mean, we will consider it, but our priority is investing in the business, so that we can pivot to profitable growth going forward. That’s our priority. Our capital allocation priorities haven’t changed and our top priority remains investing in the business.

Amar Maletira, CEO

And if I can just add to that, Bobby, very well said, we also want to be prudent about maintaining liquidity, Kevin, given the uncertain macro environment and also our ongoing transformation. So we will balance all those things. Investing organically as Bobby mentioned, being opportunistic if you have to, but also making sure that we maintain sufficient liquidity, given the transformation and the macro outlook.

Kevin McVeigh, Analyst

Thank you.

Operator, Operator

The next question comes from the line of Ramsey El-Assel from Barclays. Please go ahead with your question.

Unidentified Analyst, Analyst

Hi. This is Ryan Campbell on for Ramsey. Thanks for taking my questions today. I was hoping you could provide a little additional color on the bookings pipeline. What dynamics are you seeing from current clients versus new logos? And then, from a sales perspective, has your approach changed in order to accelerate the shift to higher value services?

Amar Maletira, CEO

Yes, I'll address both points. First, let’s discuss the macro environment briefly and then I'll provide some insights on bookings and changes within our go-to-market organization to enhance our service margin. Similar to our remarks last quarter, many competitors in the cloud ecosystem are cautious about the overall macro outlook and its effect on demand. We are observing different trends in our Public Cloud compared to our Private Cloud business. For instance, many Public Cloud customers are concentrating on optimizing their cloud spending and are scrutinizing all discretionary expenses, while Private Cloud customers are looking to exit their data centers, minimize their capital expenditures, and migrate workloads that are inefficient in Public Cloud. As Bobby noted, we are ready to manage the slowdown while also gearing up for a potential rebound. We will keep managing our costs and are expanding our services and solution offerings in both public and private sectors. In summary, we aim to leverage the current macro conditions to finalize our transformation and improve execution so that when customer spending normalizes, we will be ready to meet the demand and grow at or above market rates. Regarding bookings, we anticipated a slight slowdown in volume due to both macroeconomic factors and organizational changes. As I indicated in my earlier comments, we are noticing extended sales cycles as companies reassess their spending and focus on cost efficiency. For our first quarter performance, while we don’t share specific booking numbers, the bookings began slowly across all regions. However, as the quarter progressed, we saw typical sequential improvements in bookings and continued to shift our mix to services in our Public Cloud business. I’m pleased with our overall mix results, but we need to ensure we start increasing our service bookings at or above market levels, which still requires effort. We have seen improvement in our funnel in certain sectors of the Private Cloud, especially in healthcare, which is encouraging. From a sales standpoint, our go-to-market approach has certainly evolved. We're transitioning from a model focused on infrastructure resale with services to a service-led approach that incorporates infrastructure resale where feasible. We are also engaging in the right discussions with chief data officers for our data services or with business executives for application modernization services. This approach is distinct from what we’ve done in the past few years. We are prioritizing enterprise accounts and mid-market opportunities, concentrating on a select group of large accounts to penetrate using a client principal model, while developing different strategies for the mid-market, which we see as a substantial growth opportunity for our Public Cloud services. We have established a regional model, service line approach, and have designated sales specialists. This transformation in how we engage with customers puts them at the center of everything we do, aiming to create stronger connections and drive more business. Any other questions? John, can you hear us?

Operator, Operator

It would appear who was on mute? Let’s move to the next question. Our next question comes from the line of Abdullah Khan from Evercore.

Unidentified Analyst, Analyst

Hi everyone. Abdullah speaking in for Amit Daryanani. And I wanted to ask about specifically Public Cloud gross margins in the quarter. And I noticed that they’re at about 36%, as you mentioned number versus like 46% in Q1 of ‘22, and that’s based on marginally higher net revenue. So I just wanted to ask what drove the decline and how we can expect that to beat or grow or stabilize going forward.

Amar Maletira, CEO

Yes. Thanks, Abdullah. I hope you’re doing well. I think you’re absolutely right. Our gross margins were 36% on a net basis, compared to roughly 46% last year. There are two main factors at play here. First, as we shift towards our services business, we are experiencing a slowdown in demand for services due to the macro environment, leading to underutilization of our service resources. This underutilization is significantly contributing to the compression of our gross margins. Additionally, Bobby mentioned the cost efficiency programs we are implementing this quarter and in the second half of the year, which aim to improve the utilization of our service resources and ensure we maintain an appropriate operational expense structure as we align our services-led approach in the market.

Bobby Molu, CFO

I would just add, this is part of the efficiencies that we’ve uncovered as we’ve segmented the business. And as Amar said, one of the things that we are definitely looking at is we’re seeing the slowdown in our billable resources, and that’s something that we’re going to address as part of our second half cost actions.

Amar Maletira, CEO

Let me provide some additional insights, as this is our first time reporting this segment information. We view fiscal '23 as the year to begin shifting our business towards higher margin services. There are many factors at play compared to previous years or segment reports. Moving forward, this is how we will manage our approach. I believe that if you examine the Public Cloud or services companies, they typically operate with gross margins ranging from 30% to 35%. That’s the range we aim to achieve. Currently, we are on the higher end of that range, and as we pursue more growth in our business, we expect a positive impact from higher margin services, which will also drive growth. It's a competitive environment, and we anticipate gross margins in the low to mid 30% range for our services business on a net basis in Public Cloud services.

Unidentified Analyst, Analyst

Okay. That’s really helpful. Thank you. And then just one additional follow-up really quickly. When you say you guys want to grow the Public Cloud at or above market, are you guys comfortable with giving me a range or a number? But that would be really helpful if possible. Thank you.

Amar Maletira, CEO

Say that again. What’s the last?

Bobby Molu, CFO

Range or number for the market growth that we expect for Public Cloud?

Amar Maletira, CEO

Yes. I believe that the market has a lot of data available. Currently, it is difficult to foresee the growth rate of the business in this macro environment. However, we anticipate that the long-term growth rate for Public Cloud services should be in the low double digits. Therefore, we are targeting a growth rate of high single digits to low double digits, which we consider to be a sustainable long-term growth rate for Public Cloud services.

Operator, Operator

Our next question comes from the line of Puneet Jain from JP Morgan. Please go ahead with your question.

Puneet Jain, Analyst

Hey. Thanks for taking my question. I just wanted to follow up on the prior question on Public Cloud. How large is the reselling business within Public Cloud?

Amar Maletira, CEO

Well, Puneet, it's good to hear from you, and I appreciate your question. Unfortunately, we cannot disclose the size of the infrastructure resale compared to our overall business due to competitive and trade reasons. However, you can derive some insights based on the visibility we've provided on net revenue. I won't be able to share the specific number for competitive reasons.

Puneet Jain, Analyst

That's fair. Can you discuss the visibility you have for the second half of this year, perhaps regarding bookings or backlog? How are bookings trending and how much visibility do you have at this point in the year?

Amar Maletira, CEO

So, Puneet, to be honest with you, I think the visibility is limited. The macro environment remains very volatile, and our customers are focused on optimizing their spending. Most of our projects are centered around cost optimization, so the visibility regarding the demand environment is constrained. However, our internal goal is to consistently drive bookings sequentially each quarter. It takes a couple of quarters for our sales organization to adjust to this new model we've created, and we hope that as we progress through the year, our bookings will improve sequentially. I’m uncertain about the future of the demand environment, but we have established a conservative plan to ensure we can execute effectively in our go-to-market strategy.

Bobby Molu, CFO

I would just say that we have a lot more confidence in the operating profit performance during the rest of the year. That’s why we are confident about saying that we will see sequential improvement in Q3 and Q4.

Amar Maletira, CEO

Yes. To reiterate, we have been emphasizing for several quarters that we are moving away from the infrastructure resale business that does not provide adequate returns on invested capital or is cash flow negative when all costs are considered. It’s important for us to maintain this discipline in order to build a services backlog in this business. Therefore, I mention that the ongoing transformation and macroeconomic conditions make it somewhat uncertain for us to predict our outlook for the second half of the year.

Puneet Jain, Analyst

Got it. Thank you.

Operator, Operator

Our final question of the day comes from the line of Brad Clark from Bank of Montreal. Please go ahead with your question.

Brad Clark, Analyst

Hi. Thank you for taking my question. I just want to ask a bigger picture question with all the buzz around AI and more specifically generative AI. I want to understand how Rackspace is looking at this space in terms of opportunities for the business but also potential risk, sort of with gen AI and AI more broadly to IT services? Thank you.

Amar Maletira, CEO

Thank you for the question, Brad. With the surge in popularity of ChatGPT and significant investments in AI from various hyperscalers, customers are clearly excited. We're also noticing their eagerness to utilize generative AI during our discussions with them. We possess the necessary capabilities to achieve the business outcomes expected in the market, spanning advisory services to transformation and data implementation as well as AI. Our team of data analysts and AI specialists is capable and distributed globally. There’s a notable excitement and interest in this area as we engage with both current and potential customers. However, to be frank, we do not anticipate this translating into substantial revenue or profit in 2023.

Operator, Operator

Thank you. We have no further questions at this time. I would now like to turn the call back to Mr. Robert Watson for any concluding remarks.

Robert Watson, Vice President of Corporate Finance

Yes. Thank you, everybody, for joining us. If you have any follow-up questions, please reach out to us at ir@rackspace.com. And we will speak with you all soon. Thanks. Thanks so much.

Operator, Operator

Thank you. This concludes today’s conference call. You may now disconnect.