Rackspace Technology, Inc. (RXT) Earnings Call Transcript & Summary

Thank you. Thank you for standing by and welcome to Rackspace's second quarter 2026 earnings conference call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the queue, please press star 1-1 again. I would now like to hand the call over to Sagar Habar, Investor Relations. Please, go ahead.

Thank you and welcome to Rackspace Technologies' second quarter 2026 earnings conference call. I'm Sagar Habbar, head of investor relations. Joining me today are Gajan Kandia, 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, including without limitation, statements regarding our financial guidance and outlook, our enterprise AI deployment plans, capacity targets, and timelines. expected capital expenditures, revenue per megawatt, and margin assumptions, our financing plans, cash flow expectations, our business strategy, and product roadmap, as well as shifts in our business mix. These statements involve risks and uncertainties which could cause actual results for different material. Discussion of these risks and uncertainties is included in the risk factors and forward-looking statement sections of our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the SEC. 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 compatible GAAP measures in the earnings press release and presentation, on our investor relations website. I will now turn the call over to Gajan for an update on the business.

Thank you, Sagar. Good morning, everyone, and thank you for joining us. I want to start by reviewing our progress toward a clear strategic goal, becoming the accountable provider and operator of the full enterprise AI stack from core to cloud to edge. For more than 25 years, enterprises have trusted Rackspace to operate complex mission-critical infrastructure across private cloud, public cloud, and data centers worldwide. As enterprise AI becomes operational infrastructure, the things that have always mattered most to our customers, governance, security, sovereignty, resilience, and accountability matter even more. McKinsey and Company estimates that global inferencing workloads will surpass training by the end of 2026 and represent two-thirds of all AI workloads by 2030. Rackspace has tens of thousands of customers across its install base, and many are starting to harness inference to run their businesses more effectively. The questions they are asking are sharpening around sovereign AI estates that run through a model-agnostic, vendor-neutral ecosystem, and we have listened carefully. Every AI interaction, an employee query, an agent evaluating a transaction, a hospital reading clinical data, pushes decision-making towards the edge, driven by sovereignty, latency, and variable load. We don't see cloud versus edge. We see one integrated environment with workloads placed wherever latency cost security and criticality dictate we believe trust will become one of enterprise ai's most valuable currencies This is why we have been very deliberate in building the right partnerships Our managed compute and inference platform, backed by partners including AMD, Dell, Palantir, and Unifor, customers a clear path to cost-efficient, controlled enterprise intelligence that scales with them. As we build out our AI infrastructure capabilities, I am excited to welcome Pranav Nambiar as SVP and GM for AI infrastructure. Bernhard brings over two decades of experience designing and building complex infrastructure systems with AWS, DigitalOcean, Google, and Microsoft. Most recently, as Senior Vice President and General Manager of AI and Data Cloud at DigitalOcean, he spearheaded the company's a strategic pivot into a premier AI Neo Cloud, paving the way for the company to be recognized as a unique Neo Cloud with full-stack AI infrastructure and data management. His best of breed knowledge and execution skills, honed with some of the world's most demanding companies, is exactly what we need in order to build and scale this important new business. This quarter, we entered into partnership with AMD and strengthened our partnership with Palantir as we build out our enterprise AI solutions. AMD brings their accelerated and differentiated computing platform, while Palantir brings platforms that connect AI with enterprise data and operational workflows while embedding security permissions and governance. Rapspace then brings the knowledge, infrastructure, migration, cloud, and managed operational capabilities needed to run those platforms reliably in production across all regulated and non-regulated industries. Our forward-deployed engineers work in the customer environment, focusing on high-value use cases and remaining accountable beyond the initial implementation. Customer retains control of its data and operating context while Rackspace provides governance and accountability across the environment. Under our definitive agreement with AMD, we plan to deploy an initial footprint of 30 megawatts of AMD-based compute across Rackspace data centers in phases from late 2026 through 2028. Architecture incorporates AMD Instinct GPUs and EPYC CPUs, enabling us to match workloads with the appropriate compute while remaining accountable for performance and operations. We believe the combination of more efficient silicon, smaller domain-specific models, and intelligent workload routing can materially improve the economics of enterprise AI, while simultaneously mitigating exposure to a single model, whether it be for bare metal, inference-as-a-service, fully managed enterprise inference or enterprise AI cloud. The attractive economics of our new growth vector bears repeating with the following illustrative example. The first deployment is expected to be nearly 2 megawatts, targeted for completion by the end of 2026. Capital expenditures for the first deployment are expected to be approximately 75 million. Our goal is to ramp to cumulative capacity of 15 megawatts by the end of 2027 and a total of 30 megawatts of capacity by the end of 2028. We expect to average 15 to 20 million in revenue per megawatt deployed with some variability based on CPU, GPU, and customizing. This range translates to $450 to $600 million in annual revenue for the full 30 megawatt deployment. We expect EBITDA margins in enterprise AI to be in the 50% plus range. We are evaluating financing for a significant portion of the compute hardware through a combination of OEM financing, equipment financing, and other asset-backed credit facilities, with the financing collateralized by the newly acquired. hardware. Early demand signals give us reason to be optimistic about the pace of deployment. Given the market's continued demand for high performance compute and AI infrastructure and the long lead times for the Greenfield and Brownfield data center projects, Rackspace is well positioned as we have the infrastructure, power, cooling, and talent already available to us and have placed our initial order for AMD GPUs and CPUs. Alongside inbound calls, our optimism is also driven by our installed base of enterprise customers interested in adding capacity, as well as co-selling by AMD, Palantir, Unit 4, and our growing base of FDEs. On the platform side, we continue to see increased traction in our strategic relationship with Palantir. both in pipeline and signed deals. Across these engagements, we are seeing a consistent pattern in the type of problem customers bring us in to help solve. turning fragmented legacy data environments into unified AI-ready platforms, and to do it fast with measurable ROI. Each deployment compounds what we have learned, making the next one faster and more repeatable. We will have more specifics to share as these engagements mature. Finally, our corporate focus continues to reflect where the market is heading and what our customers want. When we announced our One Rackspace initiative, our intent was to redirect the capabilities we have built over time to take advantage of the generational secular market opportunity in front of us. Enterprises are no longer choosing a single public or private environment for all their applications and data. Instead, they're asking for integrated architectures based on their requirements. As we move forward, we intend to communicate with you with that in mind to better represent our strategy and our milestones. Our priority will continue to be disciplined around capital and talent deployment as we move towards higher yielding services and a strong balance sheet. And with that, let me get into our business performance, starting with Private Cloud. Second quarter private cloud revenue was $263 million ahead of our July 9th guidance. upside was driven by the timing of revenue recognition for a long-term customer contract. Excluding this impact, revenue would have been in line with our previously guided range. Because this recognition timing pulls forward revenue from future periods, including the second half of 2026, it does not change our full-year guidance. We expect private cloud to grow this year, even as we absorb supply-related timing impacts and strategically pivot the business towards higher margin revenue. We will stay opportunistic about deals that accelerate our strategic pivot as they arise. Our customer wins this quarter reinforce a consistent story. Enterprises in regulated industries are choosing Rackspace to modernize and operate environments where governance, reliability, and compliance are non-negotiable as the foundation for AI adoption. For example, in healthcare, we deepened our relationship with AdventHealth, whose Epic EHR, one of the top five Epic systems in the world, we already host and manage. This quarter, that relationship expanded substantially. We signed a five-year agreement to host and manage infrastructure that lets AdventHealth greatly reduce their on-premises data center footprint and retire a separate disaster recovery co-location contract. This comes alongside a large-scale migration of roughly 366 applications, 2300 virtual machines, and 283 database servers onto Rackspace-hosted infrastructure with full DR failover. We also added a new non-production EPIC environment to support their IT development pipeline. Epic Managed Services is proprietary Rackspace IP, purpose-built for the governance and uptime clinical environments require. is exactly the foundation regulated healthcare organizations need as they move AI from experimentation into production. In financial services, we strengthened our position in cyber resilience with a top UK banking firm. We signed a multi-year agreement to deploy and manage a first of its kind cyber recovery cloud built on Rubrik alongside managed backup and managed Kubernetes services supporting their next generation development and test banking platform. This is the first phase of what we expect to be a multiphase deployment, extending into staging and production. Finally, I want to share where our software strategy in private cloud stands as a critical part of Rackspace's ability to stitch the full stack together. We recently completed the production release of RAC AI, our inference and fine-tuning platform that lets customers integrate AI into their workloads and applications through a simple API. Looking ahead, we'll continue building out RAC AI with additional enterprise capabilities. including intelligent model routing and access to customized model harnesses, giving customers more flexibility as they scale their AI initiatives. Now, for our public cloud update. Public cloud revenues were $407 million. Public Cloud continues its pivot towards higher value services-led work. We are aligning our capabilities from cloud adoption through AI in production, concentrating investment in the data and AI led enterprise transformation, AI ops driven managed services, and forward deployed engineering talent operating across cloud core and edge. This quarter's wins reinforce our role as a trusted partner in regulated mission-critical environments. In the Americas, we were selected for a competitively bid federal defense engagement, building a multi-cloud management practice with FinOps automation and self-service capabilities. We also expanded a multi-workstream engagement with a major U.S. commercial airline, modernizing its cloud platform and embedding AI-powered development across its engineering organization to improve observability and systems availability. In EMEA, we deepened our relationship with a UK financial services organization, expanding into a full end-to-end managed services engagement and becoming their strategic partner on a multi-year modernization and AI roadmap. These wins reflect our strength in regulated, data-intensive industries, deploying AI at scale while maintaining reliability, compliance, and operational excellence. We also expanded our public cloud portfolio this quarter with a set of entry point offerings across clouds. These are the tips of the spear, structured, often partner-funded engagements that open the door with the customer and expand into larger managed services relationships. Each one drives revenue for Rackspace and consumption for our partners, which is why AWS, Microsoft, and others are funding them. The best example is our optimization and modernization assessment powered by AWS. A fully AWS-funded engagement that turns infrastructure and licensing optimization into a single business case for enterprises carrying heavy licensing obligations. The customer gets a funded roadmap, Rackspace earns the position to execute it, and the workloads land on our partners' platform. In addition, we launched offerings on the same model this quarter across Microsoft Co-Pilot adoption, Managed Network Security, and Data Readiness. The common thread across this quarter's launches structured funded engagements that convert enterprise AI ambition into governed production-ready deployments. a clear path into Rackspace's broader managed services relationship. Our moves this quarter strengthen and expand our role as a trusted partner and operator alongside curated best of breed ecosystem partners. where we are accountable and where data sovereignty belongs to our customers and no one else. That is what today's Rackspace will continue to deliver. With that, I will turn it over to Mark for our financial results.

Thank you, Gajun. In the second quarter, total company GAAP revenue was $670 million, up 1% year-over-year, with the beat-verse expectations primarily driven by the aforementioned timing impact within the private cloud segment. Non-GAAP gross margin was 18.6% of GAAP revenue, down $120 billion. basis points year over year. Non-GAAP operating profit was 27 million, flat year over year as continued operating expense discipline, including payroll savings from workforce reductions, was partially offset by higher professional fees and marketing expenses. non-GAAP loss per share was $0.08 compared to $0.06 in the prior year quarter. cash flow from operations was negative 32 million and free cash flow was negative 48 million we ended the quarter with 111 million in cash and 202 million in total liquidity including the undrawn portion of our revolving credit facility During the quarter, we opportunistically repurchased $11.2 million in aggregate principal of our senior notes pursuant to a previously established 10 plan. This reduces our go-forward interest expense and further strengthens our capital structure. We remain focused on deliberate, steady deleveraging while continuing to fund strategic growth priorities. First half free cash flow reflected known seasonal cash uses, including annual incentive compensation payouts, strategic vendor prepayments, and debt repurchases. We expect free cash flow generation to accelerate through the second half, strengthening liquidity as the year progresses. turning the segment results private cloud gap revenue was 263 million up 5% year-over-year and ahead of the 242 to 246 million outlook we share on July 9 the The upside reflects a benefit from an embedded lease treated similarly to a hardware sale under a customer's managed hosting contract. timing item tied to a long-term contract rather than a change in underlying volume. gap gross margin was 32.3 percent down 460 basis points year-over-year driven by the same revenue item noted above, along with the slightly higher customer licenses and data center costs. Non-GAAP segment operating margin was 21.8% down approximately 280 basis points year over year. In public cloud, gap revenue was $407 million, down 2% year-over-year, reflecting lower infrastructure and services revenue. This was modestly ahead of the $399 to $403 million outlook we provided on July 9th due to higher reported consumption from hyperscaler partners than anticipated. Non-GAAP gross margin was 9.7%, up approximately 10 basis points year-over-year on savings from workforce reductions. gap segment operating margin was 4.7%, up 80 basis points year over year on improved operating expense efficiency. Turning to guidance. Consistent with our July 9th call, we expect full year gap revenue of 2.45 billion to 2.55 billion, a decline of 7% year over year at the midpoint. The vast majority of that change reflects our strategic decision to exit low margin public cloud revenue over time. From a segment perspective, we expect private cloud revenue of $1.0 billion to $1.05 billion, up 4% year-over-year at the midpoint, and public cloud revenue of $1.45 billion to $1.5 billion, down 13% year-over-year at the midpoint. we expect total non-gap operating profit at 125 million to 135 million up three percent at the midpoint Adjusted EBITDA is expected to be $285 million to $295 million, up 5% at the midpoint, with non-GAAP loss per share of $0.25 to $0.30. Our non-GAAP tax rate is expected to be 26%, while non-GAAP other expenses will be in the $220 to $230 million range. Non-GAAP share count is expected to be between 250 and 260 million shares, excluding any dilution from the ATM program. as future issuance under the program will depend on prevailing share price and market conditions. flow and expect $50 million to $70 million in positive free cash flow for the full year. With that, I will now turn it back over to Jen for final remarks.

For all businesses, especially those in regulated industries, the generational shift to the era of AI is imperative, and no different than the shift to client-server networks in the 90s, the Internet in the early 2000s, and mobile in the 2010s. Over 25 years, Rackspace has earned the trust of tens of thousands of customers as the accountable operator guiding their business through these infrastructure transitions. With the introduction of Rackspace's Managed Compute and Inference Platform, will continue to be that accountable partner, provider, and operator of a secure, reliable, flexible, and controlled full enterprise AI stack. That is Rackspace. Thank you to our customers, partners, and every Racker. With that, back to Sagar.

Thank you, Gajan. We will now go ahead and open the line for any questions. If you have any follow-up questions after today's call, please reach out directly at ir.rackspace.com.

Operator, please go ahead and open the line for Q&A. Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bradley Clark of BMO. Please go ahead, Bradley.

Hi, thanks for taking my question. I want to ask about the Palantir business. It seems like the partnership has been off to a strong start and just wondering if you could comment on your vision of how this partnership evolved over time and where you see it specifically adding to Rackspace's growth profile of the business.