Rackspace Technology’s Earnings Call: Mixed Results and Strategic Wins

Rackspace Technology, Inc. ((RXT)) has held its Q2 earnings call. Read on for the main highlights of the call.

Rackspace Technology’s recent earnings call painted a mixed picture, with strong performance in bookings and AI initiatives, but challenges in revenue and cash flow. The company showed notable strategic wins in both Private and Public Cloud segments, yet faced difficulties with declining overall revenue and free cash flow, particularly in the Private Cloud sector.

Consistent Performance and Guidance Achievement

Rackspace Technology has maintained a consistent track record, meeting or exceeding expectations for the 12th consecutive quarter. The company reported revenue and operating profit surpassing the midpoint of guidance, with EPS falling within the guided range, showcasing its ability to deliver on its promises.

Strong Growth in Private Cloud Bookings

The Private Cloud segment experienced significant growth, with bookings increasing 24% sequentially and 42% year-over-year. This growth was fueled by large, long-term deals across industries such as healthcare, BFSI, and telecom, highlighting Rackspace’s strategic focus on key sectors.

Innovative AI Initiatives

Rackspace’s AI initiatives are gaining traction, with the FAIR model and partnerships like Sema4.ai leading to over 80 wins and 235 opportunities. Notably, over 20% of these opportunities are in advanced stages, indicating a promising future for AI-driven growth.

Positive Revenue and Service Growth in Public Cloud

Public Cloud services bookings saw a 6% sequential increase, while services revenue grew 3% sequentially. Rackspace anticipates a robust 10% to 20% year-on-year growth in Q4 2025, underscoring the strength of its Public Cloud offerings.

Strategic Engagements and Wins

The company secured strategic engagements, including modernizing a large UK bank’s edge infrastructure and a long-term agreement with a leading US healthcare provider. These wins demonstrate Rackspace’s ability to attract and retain high-profile clients.

AI and Public Cloud Performance

AI integration has accelerated cloud migration timelines by 20% to 30% and reduced operational overhead by 10% to 20%, showcasing the efficiency and effectiveness of Rackspace’s AI solutions in enhancing cloud services.

Decline in Overall Revenue

Despite successes in certain areas, Rackspace reported a total company GAAP revenue of $666 million, down 3% year-over-year. This decline was driven by decreases in both Private and Public Cloud segments, reflecting ongoing challenges.

Negative Free Cash Flow

Free cash flow was negative $12 million for the second quarter, highlighting financial pressures despite strong operational performance in other areas.

Challenges in Private Cloud Revenue

Private Cloud revenue decreased 4% year-over-year due to customers transitioning away from older-generation offerings. This decline occurred despite strong bookings growth, indicating a need for adaptation in product offerings.

Lower Gross Margin in Private Cloud

The Private Cloud’s non-GAAP gross margin fell to 36.8%, down 50 basis points year-over-year. This was attributed to lower fixed-cost absorption on reduced revenue, pointing to operational challenges in maintaining profitability.

Forward-Looking Guidance

Looking ahead, Rackspace expects third-quarter GAAP revenue between $660 million and $674 million. The company aims for $70 million to $80 million in positive free cash flow by the end of 2025, reflecting a commitment to improving financial health. With a 2% sequential and 16% year-over-year increase in bookings, Rackspace demonstrates strong operational and financial discipline.

In summary, Rackspace Technology’s earnings call highlighted a blend of strong strategic initiatives and ongoing challenges. While the company excels in AI and cloud services, it faces hurdles in revenue and cash flow. The forward-looking guidance suggests a focus on financial recovery and sustained growth, with an emphasis on strategic engagements and AI advancements.