Rackspace - Earnings Call - Q4 2024

Executive Summary

• Q4 revenue was $686 million (-4.7% YoY) with GAAP diluted EPS of $(0.26); management said revenue, operating profit, and EPS all exceeded guidance, and bookings hit the highest level since early 2023.
• Private Cloud revenue rose 4% sequentially to $269 million, above guidance, with non-GAAP segment operating margin at 30.0% (+130 bps seq) on healthcare strength; Public Cloud revenue was $417 million (above guide) but margin contracted on higher infrastructure resale mix.
• Cash from operations was $54 million and free cash flow was $34 million in Q4; liquidity ended at $519 million (cash $144 million, undrawn revolver $375 million).
• Q1 2025 guidance: revenue $653–$665 million, non-GAAP operating profit $19–$21 million, non-GAAP loss per share $(0.07)–$(0.09); segment revenue guide Private $247–$253 million, Public $406–$412 million; seasonality cited.

Note on estimates: S&P Global consensus for Q4 2024 EPS and revenue was unavailable at request time (API limit). Management repeatedly noted beats vs internal guidance rather than Street estimates.

What Went Well and What Went Wrong

What Went Well

• Record sales bookings: “highest level since early 2023,” with Q4 bookings (ACV) growing high double digits both sequentially and YoY; full-year bookings +14% YoY; H2 bookings +32% vs H1.
• Private Cloud execution: Q4 Private Cloud revenue $269 million (above guide), +4% seq; non-GAAP gross margin 39.8% (+120 bps seq), segment operating margin 30.0% (+130 bps seq) on healthcare onboarding; healthcare revenue +34% YoY, sovereign +59% YoY.
• Public Cloud momentum: Q4 Public Cloud revenue $417 million (above guide) with high double-digit YoY bookings growth driven by services and infrastructure resale; data services bookings more than doubled, aided by AI projects.

What Went Wrong

• YoY declines persisted: Q4 total revenue $686 million (–4.7% YoY); Private Cloud (–6.0% YoY) and Public Cloud (–3.9% YoY) remained down YoY; GAAP gross margin fell to 19.2% from 21.4% in 4Q23.
• Margin mix headwind in Public Cloud: non-GAAP gross margin fell to 8.2% (–210 bps seq) and segment operating margin to 2.4% (–130 bps seq) on higher infrastructure volumes at lower margins.
• GAAP losses continue: Q4 net loss $(60.4) million (vs $28.0 million in 4Q23); full-year 2024 net loss $(862.6) million; shareholders’ deficit widened to $(1,008.6) million at year-end.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Rackspace Fourth Quarter 2024 Earnings Webcast. At this time, all participants are on listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to our first speaker today, Sagar Hebbar, Head of Investor Relations. Please go ahead.

Sagar Hebbar (Head of Investor Relations)

Thank you, and welcome to Rackspace Technology's Fourth Quarter 2024 Earnings Conference Call. I am Sagar Hebbar, Head of Investor Relations. Joining me on today's call are Amar Maletira, our Chief Executive Officer, and Mark Marino, our Chief Financial Officer. 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 press release and presentation, both of which are available on our Investor Relations website. I will now turn the call over to Amar for an update on the business.

Amar Maletira (CEO)

Thank you, Sagar. Our fourth quarter results exceeded guidance for revenue, profit, and EPS, marking the 10th consecutive quarter of meeting or beating expectations. We also achieved a record-breaking quarterly sales booking, reaching the highest level since early 2023 and the formation of our two business units. Bookings, as measured by annual contract value for the fourth quarter, grew high double digits, both sequentially as well as year-over-year, reflecting excellent go-to-market execution in a strengthening demand environment. I'm also pleased with our sales execution in fiscal 2024. Full-year sales bookings grew by 14%, fueled by strong performance in the Americas and the increasing adoption of hybrid cloud solutions across multiple industries. Notably, second-half bookings grew 32% over the first half, underscoring the accelerating momentum across both business units. This reaffirms that our strategy and go-to-market execution are driving tangible results.

We initiated this approach two years ago amid significant market uncertainty, and today, both market conditions and customer demand validate our direction. As we move into 2025, we are leveraging this momentum, and with our strategic focus, optimized operating model, and a strong team, I'm confident we will accelerate our progress. With that, let's dive into the performance of our business units, starting with Private Cloud. Fourth quarter of 2024 was a record sales bookings quarter for Private Cloud. Private Cloud bookings in the fourth quarter more than doubled sequentially and grew high double digits year-over-year, driven by the strong performance across most of our go-to-market segments. For the full year of 2024, Private Cloud sales bookings were up 4% year-over-year. Bookings in the second half of 2024 grew 42% compared to the first half, highlighting significant acceleration towards the end of the year.

In the fourth quarter, we also signed a transformative multi-year managed cloud agreement with Seattle Children's Hospital. Under this 10-year multi-million dollar deal, Rackspace will deliver an end-to-end managed cloud solution designed to revitalize the hospital's data center operations and modernize its infrastructure for both clinical and non-clinical workloads. This strategic partnership will enable Seattle Children's to seamlessly transition to Rackspace's state-of-the-art healthcare cloud, ensuring enhanced performance, efficiency, and security. Overall, on the sales front, we are consistently gaining market traction by leveraging our strong installed base and attracting new customers. Private Cloud GAAP revenue was $269 million for the quarter, exceeding our guided range and rising 4% sequentially. This growth was driven by the successful onboarding of a major healthcare customer secured in 2023. Our Private Cloud segment is making significant progress, particularly in the Healthcare and Sovereign markets.

In fiscal 2024, Healthcare revenue grew 34% year-over-year, while Sovereign revenue surged by 59%. Within the Sovereign segment, we are expanding our footprint in the U.K. and the Kingdom of Saudi Arabia, and we are seeing interest from other nation-states driven by rising data, sovereignty, security, and compliance requirements. For the past two years, our value proposition in Private Cloud has evolved from an infrastructure-as-a-service provider into a specialized, high-value solutions partner. In 2024, we launched several innovative solutions and platforms. Notably, we expanded our Rackspace Anywhere offerings to capture new and incremental workloads in customers' data centers, delivering unparalleled flexibility and enabling true hybrid cloud environments. We are also excited to announce the upcoming release of Open Cloud, our next-generation cloud platform targeting customers across large enterprises, sovereign organizations, and other cloud service providers.

Leveraging our deep open-source expertise, Open Cloud unifies existing silos into a single operational platform, simplifying internal cloud operations while delivering hyperscale capabilities to end users. In fiscal 2025, we expect a modest year-over-year decline in Private Cloud revenues, with a leveling effect by year-end as we onboard a large deal signed in 2024. We are seeing strong momentum in our bookings, driven by an increasing mix of large deals that will underpin a sustainable recurring revenue base. Moreover, in fiscal 2025, our annualized sales bookings for new offerings are expected to be in line or outpace the run-off from legacy Private Cloud products, highlighting a shift from a turnaround to a more resilient, growth-focused business model beyond 2025. Given the rapid expansion of the Private Cloud market, we are exceptionally well-positioned to emerge as one of the world's largest Private Cloud providers. Now, turning to Public Cloud.

In the fourth quarter of 2024, our Public Cloud GAAP revenue was $417 million, surpassing our guided range due to an uptick in higher cloud consumption. Building on record third-quarter bookings, we sustained strong sales momentum into the fourth quarter, with the fourth-quarter bookings growing in the high double digits year-over-year, driven by robust performance in both our services and infrastructure resale. For the full fiscal year, Public Cloud bookings grew 22% year-over-year, with both services and infrastructure resale posting double-digit growth. Notably, data services bookings more than doubled, driven in part by AI-related projects, though other factors also contributed to this growth. This results underscore a significant progress in 2024 as we strategically shifted our focus to a services-led sales motion rather than low-margin infrastructure resale.

This transformation has been propelled by refreshing over 70% of our sales team, revamping our go-to-market strategy, and building a strong services value proposition. In the fourth quarter, Rackspace was recognized by ISG as a leader in the AWS Ecosystem Partners category in the U.S. We also earned the AWS Small and Medium Business Competency, differentiating us as a partner with expertise and commitment to enable small and medium businesses to leverage AWS Cloud. Throughout 2024, we strengthened our partnership with key hyperscalers by focusing on high-demand areas with significant revenue potential. We signed 16 new master service agreements, creating fresh growth opportunities through our land and expand strategy. These initiatives have fostered deeper collaboration, bolstered partner support, and increased sales leads, demonstrating our ability to deliver tailored solutions that meet customer needs. Our Public Cloud segment continued to innovate with the introduction of new services.

This quarter, we launched Edge Security, a cloud-native managed security services designed to protect online applications, remote workers, and networks from cyber threats. We also unveiled our AWS Accelerated Migration Analysis offerings, which helps organizations build data-driven business cases for cloud migration by emphasizing cost optimization, licensing flexibility, and enhanced performance. In summary, 2024 marked a significant inflection point for our Public Cloud business, driven by improving IT budgets, growing interest in our solutions, and outstanding sales execution in the latter half of the year. As we look to 2025, our focus is on solidifying a sustainable business model centered on managed cloud services, migration, modernization, and data services, setting the stage for consistent revenue and profit growth. Recent booking trends and stronger customer engagement position us well to accelerate that momentum in 2025.

Turning to AI, we continue to be optimistic with the progress made, with more than 50 customers and close to 200 opportunities in the pipeline at various stages. In the fourth quarter, we successfully deployed multiple customer solutions leveraging multimodal GenAI and agentic AI, enabling them to process and analyze text, images, videos, and structured data simultaneously. This delivered richer, more contextual insight that enhanced operational efficiency, decision-making, compliance, and automation. In Private Cloud, we launched a solution which accelerates the deployment and management of AI tools, frameworks, and applications, as well as a high-performance platform optimized for AI workloads, enabling organizations to leverage hybrid AI capabilities. Before wrapping up, I want to highlight a consistent execution and a focus on three key strategic priorities. First, we are making steady progress on our operational turnaround. This is reflected in our bookings growth and efficiency improvements in 2024.

Second, we continue to position Rackspace as a forward-leaning, innovative hybrid cloud and AI solutions company. We are launching new products, solutions, and offerings that target the next big secular waves of growth in both hybrid cloud and AI. And third, we remain focused on improving our capital structure to support and sustain profitable growth over the long term. We have ample liquidity and flexibility to focus on our operational priorities. Finally, I would like to thank our customers, Rackers, partners, and suppliers. I'm proud of all we have achieved together during this year of change. I will now turn the call over to Mark Marino for an overview of our financial results and guidance.

Mark Marino (CFO)

Thank you, Amar. In the fourth quarter, total company GAAP revenue was $686 million, above our guided range, driven by solid performance across the board. For the quarter, non-GAAP gross profit margin was 20.6% of GAAP revenue, down 50 basis points sequentially. For the full year 2024, non-GAAP gross profit margin was 20.6%, down 172 basis points year-over-year. Non-GAAP operating profit was $39 million in the fourth quarter, exceeding the high end of our guidance range. Non-GAAP operating margin for the quarter was 5.7% of GAAP revenue, an increase of 94 basis points sequentially. For the full year 2024, non-GAAP operating margin was 3.9%, down 146 basis points versus prior year. Non-GAAP loss per share was $0.02 higher than our guided range, driven by better-than-expected operating profit. Cash flow from operations was $54 million, and free cash flow was $34 million in the fourth quarter.

For the full year, cash flow from operations was $40 million, and free cash flow usage was $71 million. We ended the year with $144 million in cash on hand and $519 million of total liquidity, including $375 million of undrawn commitments. Turning to our segment results, for Private Cloud, GAAP revenue for the fourth quarter was $269 million, above our guided range. This includes legacy OpenStack revenue of $27 million. Total Private Cloud revenue was up 4% sequentially due to strength in our Healthcare segment. Private Cloud Non-GAAP gross margin was 39.8%, up 120 basis points sequentially due to higher revenue and cost efficiencies. Non-GAAP segment operating margin at 30% was up 130 basis points sequentially, driven by gross margin expansion and improved cost management.

In our Public Cloud segment, GAAP revenue was $417 million, above our guided range, driven by higher cloud infrastructure volumes, partially offset by a slight decline in services. Non-GAAP gross margin was 8.2%, down 210 basis points sequentially, driven by an increase in infrastructure revenue mix. Non-GAAP segment operating margin was 2.4%, down 130 basis points sequentially due to lower gross margins partially offset by operational efficiencies. Now on to guidance. We expect first quarter GAAP revenue to be $653 million-$665 million, consistent with normal seasonality. From a segment perspective, we expect Private Cloud revenue of $247 million-$253 million, and Public Cloud revenue of $406 million-$412 million. Total non-GAAP operating profit is expected to be $19 million-$21 million, and non-GAAP loss is expected to be from $0.07-$0.09 per share.

Our non-GAAP tax rate is expected to be 26%, while non-GAAP other expense will be in the $46 million-$50 million range. Non-GAAP share count is expected to be approximately 245 million shares. I'll now turn the call back over to Sagar.

Sagar Hebbar (Head of Investor Relations)

Thank you, Mark. Let us begin the question and answer session. We ask everyone to limit discussion to one question and one follow-up. Please go ahead.

Operator (participant)

Thank you. At this time, we'll conduct a question and answer session. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster, and our first question comes from the line of Kevin McVeigh of UBS. Your line is now open.

Kevin McVeigh (Managing Director)

Great. Thank you so much, and team, congratulations on the strong results. You continue to really execute well, so we appreciate that. Hey, maybe, Amar, can you maybe talk to, I think you talked about some of the trends within, you know, the private business, and did you say you expected that to be down for the year in 2025, and you know, if that is the case, it sounds like there was a lot of momentum in the second half of 2024 as opposed to the first half of 2024, so maybe help us understand that a lot because it seems like that business is really starting to lack.

Amar Maletira (CEO)

Hey, Kevin, thank you very much. I really appreciate your question here. Hope you're doing well. So yes, Kevin, you heard it right. I think we saw some, and I will give you some color on the outlook for 2025 for Private Cloud, the way we look at it right now. But you know, I'm really, really pleased with the overall sales bookings performance, Kevin, and it was a combination of both improving demand environment as well as very good sales execution. And you're spot on. In the second half of 2024, we did see not only an improving demand environment for our Hybrid Cloud solutions, but we also started seeing some you know, some faster decision cycles coupled with a great execution from our go-to-market team.

So in Private Cloud, you know, we are seeing increased interest for our custom cloud solutions, specifically around data center transformation, resulting in higher mix of larger deals. So Private Cloud bookings did grow 4%. The Americas sales bookings within Private Cloud grew more than 20%. Healthcare grew more than 60%. Commercial segment, which is the, you know, the SMB also grew roughly 8%. So overall, I think it was a very good bookings quarter. So you heard it right. We expect Private Cloud revenues after a couple of years of double-digit declines to show modest declines in fiscal 2025, which is definitely a good indicator of a turnaround in this business.

Now, it's still early to say, but in the second half of 2025, I expect revenues in Private Cloud to be flattish year-over-year, given the deals that we signed in 2024. So I think, you're spot on with that question. There's a lot of static noise on the line, operator.

Kevin McVeigh (Managing Director)

Got it. And then, Amar, any thoughts as to free cash flow in 2025? Do you think we'll be able to hold that break-even in 2025?

Amar Maletira (CEO)

Yeah. So I'll let Mark talk about it.

Mark Marino (CFO)

Hey, Kevin. Yeah, look, I anticipate both positive operating cash flow and free cash flow in 2025. Hope that's helpful.

Amar Maletira (CEO)

Kevin, did you hear that? So positive operating cash flow and free cash flow in 2025, on the backs of, you know, operating profit growth of, say, low double digits, mainly driven by margin improvements, because the mix of the business is changing, and also ongoing efficiency improvements.

Kevin McVeigh (Managing Director)

Very clear. Thank you both.

Amar Maletira (CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ramsey El-Assal of Barclays. Your line is now open.

Hi, this is Ryan on for Ramsey. Thanks for taking my questions. And congrats on a strong quarter. I wanted to ask on visibility a bit more. Have you seen any changes in the demand environment over the last 30 days? It seems like bookings are coming in well, but are deals actually converting on time? And are you seeing any additional green shoots as 2025 budgets are being finalized? Thank you.

Amar Maletira (CEO)

Yeah. So, I think the visibility has definitely improved a bit, Ryan. That's a very good question. We closed the year on a very high note, both Q3 and Q4. Let me talk about the Public Cloud business first. Q3 and Q4, Q3 was a record quarter for Public Cloud. They continued the momentum into Q4, which is our December quarter. And, you know, we continue. We are hoping that we can continue this momentum into fiscal 2025. Now, that's on the backs of multiple things. I believe that we are, I would say, outperforming the market, when it comes to sales bookings, especially in the markets that we play in, compared to our competitors. Now, there are several reasons for that. Number one, of course, good execution.

Number two, we laid a solid foundation in our Public Cloud business in the last year and a half, where we refreshed 70% of our sales force, enabled the sales organization, came up with new offerings, you know. Our relationship with hyperscalers has become very strong, and we have also led with services, and that's also starting to pay dividend here, so I think it's more of a value play as opposed to an infrastructure resale-led motion, which still happens because, you know, we still sell a lot of infrastructure, but at the same time, our attach rate, our services attach rate on the infrastructure has really gone up, so in terms of visibility, yes, I think the visibility is a bit improved.

We feel that, in fiscal 2025, customers are typically looking to go drive more of their transformational projects they were keeping on hold for the last couple of years. We should benefit from that. Plus, we should benefit from better execution in the Public Cloud business. You can see that that also show up on the growth numbers for the hyperscalers too. Our Private Cloud business, you know, we are starting to see a lot of green shoots in Private Cloud. You know, Private Cloud business of two, three years ago, you know, people assumed that all the workloads will move to Public Cloud. Well, that's not happening, clearly. Hybrid is the way to go. We are starting to see a lot of workloads now landing in Private Cloud. So we are doing a lot of data center transformation deals in Private Cloud.

The deal sizes have gone up significantly, so larger mix of large deals, multi-year deals, which also helps us to build a good annuity base in this business, and so that's what's happening, so I think, pretty pleased with some of these, you know, strategy and execution that we have in place, and if the market improves, I think we should be doing better.

Great. Thanks. And just a quick follow-up for me. The infrastructure resale ticked up just a bit in the quarter. Is there anything specific that drove that or any seasonality? And how should we think about it into 2025?

Yeah. So let me just give some color and Mark, please jump in here with additional color here. So the infrastructure volumes, you know, we have limited visibility, to be honest with you. So we always plan a bit conservative, because of that. And the infrastructure volumes, because of seasonality, you know, Q4 is typically pretty strong going into the month of December. And so we saw an uptick in infrastructure volumes. So that was good, good guy. Of course, it comes in at lower margins. So we'll take it any day as long as the margins are okay. Now, going into fiscal 2025, first of all, Q1 is a seasonally low quarter. So you typically see in Public Cloud business, as well as in the Private Cloud business, the revenues and the volumes decline going from December quarter to the March quarter. So that's going to happen.

Now, when it comes to infrastructure resale for Rackspace, I think the market will continue to grow. So for Rackspace, it's a little hard for us to predict because we are going to make some very informed decisions when it comes, when some of these deals come up for renewal, whether we want to renew these contracts, or walk away if it doesn't hit certain profitability threshold. And that's something that we've been doing all along, even in fiscal 2024 as well as in 2023. So we'll continue that in 2025. So it's a little hard for me to predict whether the infrastructure business is going to grow. I expect it to be flattish to slight decline depending on, you know, what we do when these, big contracts come up for renewal. But overall, the market, I think the market will continue to grow.

Great. Thank you, and congrats again.

Thank you very much, Ryan.

Operator (participant)

Thank you. One moment for our next question. And our next question comes from the line of Frank Louthan of Raymond James & Associates. Your line is now open.

Frank Louthan (Managing Director)

Great. Thank you. Can you walk us through the new logo growth in Q4? Where have you seen that? Any particular segments that were better or worse there? And then with the booking success, how should we think about the time for book to bill? Has that been, is that elongated at all? How should we think about that?

Amar Maletira (CEO)

Yeah. So, Frank, thank you for the question. So new logos, we continue to sign new logos across multiple industries, in both Public Cloud as well as Private Cloud. In Private Cloud, you know, we are focusing on specific verticals: healthcare, BFSI, sovereign, public sector, energy. And we also have horizontal plays. Okay? So we saw over 250 new logos in our Private Cloud business. So some of these might be small, some might be sizable, but it's mainly important for us to expanding in these accounts. As an example, we announced Seattle Children's, which is a multi-year, multi-million-dollar agreement that we signed with Seattle Children's Hospital. We had actually landed this logo in early 2024 or late 2023, if I recall. And that was with an Epic workload.

You know, eight, nine months after that, we actually expanded to go and do an entire data center transformation for this customer. This, we continue to, you know, hunt for new logos and land in these new logos. Then we will have specific plans and execution plans to go expand into these new logos going forward. Now, your second question is regarding deal cycles and whether deal cycles are. The deal cycles in Private Cloud continue to remain the same, Frank, because we are now closing really large deals. This, you know, the last couple of years, the mix of business that we are winning are pretty large compared to what we have done in the history of this company. By definition, those, though the deal cycles are longer.

In the Public Cloud business, it is relatively shorter because we go after a very high value-added services deals like migration services, advisory services, etc. So those cycles are shorter, and they continue to remain short compared to, say, Private Cloud. So no change as such. It's the same as what we are seeing in the second half of 2024.

Frank Louthan (Managing Director)

Okay. All right. Great. Thank you.

Operator (participant)

Thank you. One moment for our next question, and our next question comes from the line of Irvin Liu of Evercore ISI. Your line is now open.

Irvin Liu (VP)

Hi. Thank you for letting me on. I also have two related to your strong bookings performance. I think, you know, it's, it's good to see broader booking strength, but can you just talk about your overall headcount utilization and whether there's a need to increase headcount to deliver on some of your recent bookings?

Amar Maletira (CEO)

Yeah. I think that's a great question. Thank you very much for joining the call. So first of all, let me continue with this bookings because I gave you color on Private Cloud. Let me give you some color on Public Cloud because your headcount-related question is more related to Public Cloud than to Private Cloud. Because in Private Cloud, you know, we have managed services offerings, and we are an infrastructure as a service provider. So it is not as labor-intensive as you typically that you'd see in service SIs. Now, Public Cloud business has a labor play, but we are the way we differentiate ourselves against the SIs is we are a labor-minus model. We bring in more automation to deliver our services.

It is exactly opposite than what you will find in some Indian SIs where they, you know, they will basically, give you the headcount growth numbers, attrition numbers, so on and so forth. We actually are exactly opposite. With that said, let me give you some color on Public Cloud. In Public Cloud, just, dovetailing on what I just said, on the Private Cloud side, our interest in elastic engineering, platform support, application, and data continues. And data interest is mainly driven through AI. In Public Cloud, we saw bookings also grow 22%. I did mention that, on my prep, in my prepared remarks. When I look at it from a geography perspective, Americas actually grew more than 30%. EMEA grew mid-single digit, although in a very tough macro environment. We have three horizontal market segments that we go and attack: enterprise, mid-market, and commercial.

Sales bookings in all those three segments grew high double digits. From an offerings perspective, professional services and data were real standouts. And both of these businesses, in fact, data grew high triple digits. In terms of labor and headcount, I think it's in professional services and in data where we will see an increase in headcount, but very, very surgically, and also an increase in the current utilization of our resources.

Irvin Liu (VP)

Got it. Thank you for that. I wanted to ask about the Public Cloud, but specifically the topic of AI. Can you just help us or talk about whether this was a meaningful contributor or driver of your booking strength? And if so, can you help us quantify the AI, overall AI contribution?

Amar Maletira (CEO)

Yeah. So, it is, yes, it did contribute to some of the bookings in data. As I said, you know, data, it was primarily driven by AI, although there are other factors that contributed to the data services bookings. But let me give you our how we look at the AI world and how we play in that AI lifecycle. So there are three phases in an AI, any AI lifecycle that the way we look at it. One is the design, build, and the re-architect phase, which is mainly services-related where you do POCs and pilots. That's where most of our 50+ engagements are in the POC and pilot phase. The second phase is mainly around creating landing zones on a hybrid AI environment, whether it's Public Cloud or Private Cloud. That's what we call as an implementation or a production phase.

The third phase is the manage and operate, which is the managed services phase, which is the long tail. Now, where we play right now is in phase one and a little bit in phase two. That's where the reason why we are there today is because we are very early days from an enterprise adoption perspective in AI. I'm not surprised that we are in those two phases. Given the strength we have with a hybrid AI approach, both on public as well as private, I feel that we are very well positioned when, you know, customers start moving from a training phase, training the models into inferencing and fine-tuning, because that's where we believe 90% of the workload should be in training, in inferencing as well as fine-tuning. That's where our hybrid AI, you know, solutions will play very strongly.

So today, just to size it, probably it's less than 2% of our revenue today in AI. It was almost zero a year ago. It's less than 2%. And I expect in the next couple of years to be probably 5%+, a conservative estimate, so to speak. So there is, still early cycles. There's a long way to go, especially in enterprise. And that's where we play. And I think I feel very strongly, in our offerings as well as approach to actually capture this AI market when it starts, taking off in enterprise. Does it help, Irvin? Hello?

Operator (participant)

Thank you. This concludes the question and answer session. I would now like to turn it back to Sagar Hebbar for closing remarks.

Sagar Hebbar (Head of Investor Relations)

Thank you, everyone, for joining us. If we did not get your question or if you have a follow-up, please email us at [email protected]. Have a great evening, everyone. Thank you.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.