Earnings call transcript: Rackspace Technology Q2 2025 misses EPS expectations

Rackspace Technology reported its second-quarter 2025 earnings, revealing a wider-than-expected loss per share and a slight revenue beat. The company posted an earnings per share (EPS) of -$0.06, falling short of the forecasted -$0.04, marking a 50% wider loss than anticipated. Revenue came in at $666.3 million, surpassing expectations of $661.96 million. Following the earnings release, Rackspace’s stock rose 4.1% in aftermarket trading, closing at $1.27. According to InvestingPro data, the stock has shown significant volatility, with a beta of 2.06, and currently trades below its Fair Value estimate.

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Key Takeaways

• Rackspace’s EPS missed forecasts by 50%, with a wider-than-expected loss.
• Revenue exceeded expectations slightly, despite a 3% year-over-year decline.
• Stock price increased by 4.1% in aftermarket trading.
• Continued growth in private cloud bookings and AI initiatives.
• Positive cash flow guidance for 2025.

Company Performance

Rackspace Technology’s performance in Q2 2025 showed mixed results. The company achieved a revenue of $666 million, which, although slightly above expectations, represented a 3% decline from the previous year. This aligns with the broader trend shown in InvestingPro data, revealing a 6.14% revenue decline over the last twelve months. Despite this, Rackspace reported a 34% increase in non-GAAP operating profit to $27 million, highlighting operational improvements. The company maintained its streak of meeting or exceeding guidance for the 12th consecutive quarter, though its gross profit margin remains challenged at 20.17%.

Financial Highlights

• Revenue: $666 million, down 3% year-over-year.
• Non-GAAP gross profit margin: 19.8%.
• Non-GAAP operating profit: $27 million, up 34% year-over-year.
• Cash from operations: $8 million.
• Cash on hand: $104 million at the end of the quarter.

Earnings vs. Forecast

Rackspace reported an EPS of -$0.06, missing the forecasted -$0.04, resulting in a 50% surprise on the downside. Revenue, however, was a positive surprise, coming in at $666.3 million compared to the expected $661.96 million, a 0.66% beat. The EPS miss highlights ongoing challenges, while the revenue beat indicates resilience in certain business segments.

Market Reaction

Following the earnings announcement, Rackspace’s stock rose by 4.1% in aftermarket trading, reaching $1.27. This movement comes despite the EPS miss, suggesting investor optimism driven by the company’s revenue beat and strategic initiatives. InvestingPro data shows the stock has experienced a significant 57.09% decline over the past six months, though it has shown resilience with a 7.63% gain in the past week. The stock remains near its 52-week low of $1, indicating cautious investor sentiment despite the recent uptick.

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Outlook & Guidance

For the third quarter, Rackspace expects GAAP revenue between $660 million and $674 million. The company also anticipates positive free cash flow ranging from $70 million to $80 million for the full year 2025. Public cloud services are projected to grow by 10-20% in the fourth quarter, reflecting ongoing demand for cloud solutions.

Executive Commentary

CEO Amar Malatira emphasized the company’s strategic focus: "We are really building a good book of business here across most of the verticals." He also highlighted the shift in the company’s services: "We are starting to turn the corner on services." Malatira’s comments underscored Rackspace’s transformation into an AI-driven enterprise: "We are internally becoming an AI company."

Risks and Challenges

• Continued pressure on profitability due to wider-than-expected EPS losses.
• Revenue decline in traditional segments, despite growth in newer areas.
• Competitive pressures in the cloud services market.
• Economic uncertainties that could impact enterprise spending.
• Execution risks associated with new AI and cloud initiatives.

Q&A

During the Q&A session, analysts probed into the company’s free cash flow trajectory and AI partnership strategy. Rackspace’s management detailed efforts to stabilize its private cloud offerings and expand market presence, particularly in healthcare and telecom sectors. The focus on AI was highlighted as a key growth driver, with initiatives aimed at reducing operational overhead and migration times.

Full transcript - Rackspace Technology Inc (RXT) Q2 2025:

Conference Operator: Good day, and thank you for standing by. Welcome to the Brackspace Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you’ll need to press 11 on your telephone.

You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to Sagar Habar, Head of Investor Relations. Please go ahead.

Sagar Habar, Head of Investor Relations, Rackspace Technologies: Thank you, and welcome to Rackspace Technologies second quarter twenty twenty five earnings conference call. I’m Sagar Habar, Head of Investor Relations. Joining me on today’s call are Amar Malatira, 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. Black Space 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 Omar for an update on the business.

Amar Malatira, Chief Executive Officer, Rackspace Technologies: Thank you, Sagar, and welcome, everyone, to our second quarter twenty twenty five earnings conference call. Results for the second quarter met our expectations across all key metrics. Revenue and operating profit exceeded the midpoint of our guided range, while EPS was within our guided range, marking our twelfth consecutive quarter of meeting or exceeding guidance. Sales pipeline generation remains strong across both the business units, with bookings as measured by annual contract value growing 2% sequentially and 16% year over year. The outperformance was primarily driven by private cloud, which secured several key wins.

Non GAAP operating profit grew 34% year over year, and we delivered positive cash from operations of 8,000,000 for the quarter, reflecting our operational and financial discipline. Now, let me get into our segment performance, starting with private cloud. Private cloud bookings in the 2025 grew 24% sequentially and 42% year over year, driven by several large long term deals across key industries, including healthcare, BFSI, and telecom. We also saw double digit year over year bookings growth across both The Americas and EMEA, underscoring the broad based strength of our go to market efforts. This solid bookings performance was despite a large healthcare deal that got pushed, and we expect this opportunity to close within the third quarter.

Revenue for the private cloud segment came in at $250,000,000 in line with guidance and down 4% year over year. We are seeing continued revenue stabilization as prior year bookings convert into revenue, reflecting the strength of our underlying business. Our disciplined focus on revenue retention and growing bookings momentum continues to lay a solid foundation for a long term sustainable growth. We’re also making strong progress in our strategic expansion into the mid market and enterprise segments, positioning us to capture new opportunities and drive future scale. In April, we signed long term agreement with a leading healthcare provider in The US to host their virtual desktop infrastructure supporting clinical kiosks.

This was previously hosted on a hyperscale public cloud. The customer is getting enhanced control, consistent performance, predictable and highly competitive cost by transitioning the environment to Rackspace’s secure private cloud. This win underscores Rackspace’s expertise in delivering compliant, high performance infrastructure for critical healthcare and other enterprise workloads. We also expanded our relationship with a large UK bank through a strategic engagement to modernize its entire edge infrastructure. We have been engaged to deploy a secure network solution across approximately 80 branch locations.

Our engagement is a comprehensive end to end managed service over five years. Our private cloud team continues to deliver innovative solutions. In the second quarter, we had 13 product releases and 28 enhancements. More notably, we announced Rackspace OpenStack business, a new open source dedicated solution for organizations running mission critical or regulated workloads. This fully managed offering delivers enhanced performance, improved security, and comprehensive operational support, all without the overhead and complexity of managing your own infrastructure.

Overall go to market and solutions momentum in the private cloud segment remains strong, reflected in both our results and customer wins. We remain focused on expanding our footprint while continuing to defend and grow our private cloud business. Now, turning to public cloud. In the second quarter, bookings for public cloud grew 1% year over year, primarily driven by strong performance in EMEA. Services bookings increased 6% sequentially, reflecting our disciplined focus on higher value engagements.

Revenue for the segment totaled $417,000,000 exceeding our guided range. Revenue declined 2% year over year due to expected declines in lower margin infrastructure resale. We continue to focus on services revenue, which grew 3% sequentially and remained flat year over year. We are also seeing success in increasing our footprint with existing relationships. In the second quarter, we expanded our engagement with a top tier aircraft leasing company.

They are leveraging Rackspace’s data modernization and engineering services to accelerate their data transformation strategy and platform implementation. Additionally, we expanded our offering with a mid sized cybersecurity company through a long term deal that bundles infrastructure and services, demonstrating a continued ability to deliver integrated solutions that align with client needs. On the product side, we introduced Rackspace CloudOps, a managed service that offers 24 by seven operational support in the cloud. CloudOps is purpose built for mid market organizations at any stage of their cloud journey, helping them drive operational excellence, optimize performance, and maximize cloud efficiency. This expands the service offerings that can be attached to infrastructure resale.

In summary, our focus on higher value services, strategic bundling, and expanding existing customer relationship is yielding positive results. Our services revenue continued to grow sequentially, underscoring continued progress in our public cloud business. Turning to AI. We continue to make good progress with FARE, which is Foundry for AI by Rackspace, with over 80 wins and over 235 opportunities in our pipeline, of which over 20% are already in advanced stages, along with several active leads we are pursuing. Last month, we announced a strategic alliance with enterprise AI agent, innovator Semaphore dot ai, bringing together Rackspace’s application and infrastructure management expertise with Semaphore dot ai’s advanced safe AI agent platform.

Through this partnership, organizations will be able to rapidly deploy scalable production grade AI agents across key business functions, built on a foundation of strong governance, transparency, and security. Additionally, we launched the Fair Model Context Protocol Enterprise Accelerator on the AWS Marketplace, empowering organizations to deploy AI agents at scale with robust security and seamless integration. This solution delivers 70% plus reduction in legacy application integration time, accelerating value realization, and enabling real world impact across healthcare, finance, and manufacturing sectors. We are also driving AI innovation across our service offerings in public cloud. AI integration within our services spans three areas.

Accelerating cloud migration timelines by 20 to 30%, reducing operational overhead for our managed services teams by 10 to 20%, and automating security operations at scale. For example, we recently reduced migration time by 40% using Snow Convert AI for a leading healthcare services company. These AI at scale initiatives are accelerating time to value for customers, and strengthening our position in enterprise transformation through intelligent automation. Before I wrap up, I want to sincerely thank our customers, partners, and all our actors. I’m pleased with what we have achieved this quarter, and encouraged to see momentum in acquiring new and expanding with existing customers.

We remain laser focused on our key strategic priorities for 2025, building a sustainable business model that consistently delivers revenue, profit, and cash flow growth. With that, I will turn it over to Mark to walk us through the financial results and guidance.

Mark Marino, Chief Financial Officer, Rackspace Technologies: Thanks, Amar. In the second quarter, total company GAAP revenue of $666,000,000 was down 3% year over year and slightly up sequentially, beating our guidance driven by solid performance across both business units. Non GAAP gross profit margin was 19.8% of GAAP revenue, slightly down year over year, driven by lower cost absorption in private cloud, while it remained flat sequentially. For the quarter, non GAAP operating profit was $27,000,000 exceeding the high end of our guidance and up 34% year over year. The improvement was largely due to OpEx efficiencies in public cloud and in corporate overhead, partially offset by lower cost absorption in private cloud.

Non GAAP loss per share was $06 at the lower end of our guided range of $04 to $06 loss per share. This was primarily due to higher expenses within the other income and expense line, driven by accruals related to data center leases, as well as lower than expected diluted share count. Second quarter cash flow from operations was $8,000,000 and free cash flow was negative $12,000,000 We ended the quarter with $104,000,000 in cash on hand and $414,000,000 of total liquidity. Turning to our segment results. For Private Cloud, GAAP revenue for the second quarter was $250,000,000 which was in line with our guidance.

Private Cloud revenue decreased 4% year over year due to customers rolling off older generation offerings, partially offset by revenue from new bookings. Sequentially, Private Cloud revenue was relatively flat. Private Cloud non GAAP gross margin was 36.8%, down 50 basis points year over year and 30 basis points sequentially, primarily due to lower fixed cost absorption on lower revenue. Non GAAP segment operating margin was 24.6, a year over year decline of 190 basis points, driven by lower gross margins and higher OpEx. Sequentially, non GAAP segment operating margin was up 20 basis points driven by lower OpEx, partially offset by lower non GAAP gross margin.

In our Public Cloud segment, GAAP revenue was $417,000,000 surpassing the high end of our guidance. Public Cloud revenue was down 2% year over year as a result of a decline in infrastructure volumes and flat sequentially driven by growth in high margin services business, offset by declines in low margin infrastructure resale. Non GAAP gross margin was 9.6%, down 20 basis points year over year, reflecting one time benefits realized last year. Sequentially, non GAAP gross margin was up 10 basis points, driven by favorable rate and mix. Non GAAP segment operating margin was 3.9, up 140 basis points year over year due to improved OpEx efficiency and slightly down sequentially as a result of higher OpEx.

Now on to guidance. We expect third quarter GAAP revenue of $660,000,000 to $674,000,000 flat sequentially and down 1% year over year at the midpoint. In private cloud, we expect revenue of $246,000,000 to $254,000,000 flat sequentially and down 3% year over year at the midpoint. We expect public cloud revenue of $414,000,000 to $420,000,000 flat sequentially at the midpoint. Total non GAAP operating profit is expected to be 30,000,000 to $32,000,000 and non GAAP loss per share is expected to be $04 to $06 Our non GAAP tax rate is expected to be 26% and non GAAP share count is expected to be $239,000,000 to $241,000,000 shares.

In the 2025, we expect strong free cash flow generation positioning us to exit the year with 70,000,000 to 80,000,000 in positive free cash flow. This trajectory reflects the strength of our business model and financial discipline. I’ll now turn the call back over to Sagar.

Sagar Habar, Head of Investor Relations, Rackspace Technologies: 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.

Conference Operator: As a reminder, if you’d like to ask a question at this time, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question will come from Kevin McVeigh with UBS.

Kevin McVeigh, Analyst, UBS: Great, thank you so much and congratulations on the results. I know whether it’s for Amor, but maybe both. Maybe talk about the guidance, it looks like a little bit of uptick sequentially, but definitely more outpaced success on the free cash flow. So maybe talk about, is there any seasonality to think about in the guidance sequentially, just relative to kind of where you came in and then ultimately, you could spend a minute on the free cash flow conversion as well.

Mark Marino, Chief Financial Officer, Rackspace Technologies: Yeah, sure. So, thanks, Kevin, for the question. Yeah, in terms of our Q3 guidance, right, overall June to June with the midpoint around June, Right? We’re seeing things ultimately kind of flat sequentially from a private cloud perspective. We are forecasting some uptake on the public cloud side, especially on the services while infra continues to stay sort of flattish to slightly down.

You know, and in terms of free cash flow for the year, you saw we called out, you know, positive for the second half, positive for the full year. We did have some seasonality in the first half of the year related to some kind of one time vendor prepayments, and those will not cycle in the second half. So that’s driving a lot of our improvement as well as higher adjusted EBITDA and overall working capital performance. So I feel pretty confident about that free cash flow range.

Kevin McVeigh, Analyst, UBS: Terrific. Thank you.

Amar Malatira, Chief Executive Officer, Rackspace Technologies: And so, Kevin, if I may just give some color on private cloud. So as Mark mentioned, we are forecasting a flat revenue in private cloud sequentially. Now, this will be Kevin, as you know, this is three quarters in a row. As we had mentioned before, we expect private cloud business to start stabilizing, and that’s exactly what we are seeing. And we feel good about the bookings performance that we had.

The mix of the bookings also came in quite favorable because of broad based bookings performance in the private cloud business. And so, pretty pleased with the performance there. In fact, just to give you some color here, the mix of the bookings in private cloud has actually changed significantly from a deal size perspective. Now, if you go back to fiscal ’twenty two, roughly about 60% of the deals that we had were about small sized deals, right? The lower ACV value.

And about 40% was mid sized to large sized deals. And that has now actually flipped in 2024 and 2025. ’5, 40% of the deals were small deals, and 60% was large and mid sized deals. So that’s the very important dynamics that we’re starting to see, and this is on top of us growing a double digit CAGR in the last two

Sagar Habar, Head of Investor Relations, Rackspace Technologies: and

Amar Malatira, Chief Executive Officer, Rackspace Technologies: a half years. Similarly, the contract length has also gone up. In fact, the contract length, if I have to just go back to ’twenty two, we had roughly 25% of our bookings in fiscal ’twenty two were deals with longer than twenty four months. Today, in ’5, as well as in fiscal ’twenty four, that number is now close to 50%. So the deal sizes have gone up, the contract length has gone up, which means we are really building a good book of business here across most of the verticals as well as from a geo perspective.

And on public cloud, because since you asked about the guidance, in public cloud, we feel good about the services performance. This quarter we saw services revenue in Q2 was flat sequentially. We expect that to was actually up sequentially and flat year on year. We expect that to services revenue to start growing in the second half. In fact, in 2025, our fourth quarter, we expect our services business in public cloud to grow anywhere from 10% to 20% year on year.

So which will be a real good turn in the public cloud business. So pretty pleased with the performance in the public cloud business too.

Kevin McVeigh, Analyst, UBS: And, Amar, just remind me, know we’ve talked about this a couple of times, but the services on the private side and I guess what’s driving the strength on the public side? And then just any thoughts on the services, I guess, more on the implementation work on the private? Just anything just around services on the private side as well. I know maybe just any thoughts.

Amar Malatira, Chief Executive Officer, Rackspace Technologies: Yes, yes. Thank you very much. So let’s start with the public cloud side, Kevin. Just as a recap, we have three types of services that we offer to our customers. On one end is professional services, and then you have managed services on the other end of the spectrum, which is long term contracts and very sticky.

And then right in the middle is elastic engineering. And then we offer this across applications, platform, as well as data. We are starting to see broad based strength across all those three services, mainly professional services. As we go and drive more cloud migration work, we also drive work in AI, as an example, which are mainly professional services kind of engagement. We are starting to see our data business, for example, I mentioned that before, our data business this quarter in Q2, I mean, the second quarter, grew sequentially the bookings grew sequentially significantly.

So, we are starting to see strength in data, strength in applications, strength in platform support across professional services, elastic engineering, and managed services in that quarter. And the attach of our services to infrastructure also went up. When we do an infrastructure sale today, 70% we attach 70% of services to it. So for every dollar of infrastructure, we are attaching at least $0.70 of services to this infrastructure resale business. So the services attach motion is working well, good execution on the field.

And also, offerings that we have is playing to where the market is heading. More and more work is on the transformational side, digital transformations led by cloud and AI, and that really plays to a strength in public cloud. So those are the factors, macro as well as our execution, that gives us confidence that we are now turning the corner on services. On the private cloud side, we offer managed private cloud for our customers. Clearly, healthcare, we really hit the sweet spot with healthcare.

It was strong even in Q2. When I look at just the healthcare vertical, in the first half, it grew 60 plus percent year on year compared to first half of last year from a revenue perspective. So really, really good performance there. We have good deals in the funnel. And we also are starting to see traction.

We had a good traction in the telco sector with some very good deals signed. And if I look at the services component, the main services component in private cloud, Kevin, is all managed services. Very, very sticky business. Once we get this business, it stays with us for the next three to close to seven years. And that’s the average contract length has also gone up significantly in that business.

Hopefully, that’s helpful.

Kevin McVeigh, Analyst, UBS: Very helpful. Thank you so much, Amar.

Amar Malatira, Chief Executive Officer, Rackspace Technologies: Thanks, Kevin.

Conference Operator: Our next question comes from Frank Louthan with Raymond James.

Frank Louthan, Analyst, Raymond James: Great. Thank you. You mentioned getting some more traction in market. Kind of what investments do you think you’ll need to make there either on the sales support side? And then with regard to the partnership with some of the AI agents, how did that come about?

And when can we begin to see some of the benefits of that more broadly across the business? Thanks.

Amar Malatira, Chief Executive Officer, Rackspace Technologies: Yes, yes, absolutely. Thanks, Frank. So in terms of so the focus has always been, Frank, in mid market and enterprise, public cloud as well as private cloud business. And we have made those investments in the ’3 and fiscal ’twenty four, and now you’re starting to see benefit of this. For example, in a public cloud business, we have grown in public cloud for several quarters in a row from a bookings perspective.

So not much of incremental investments needed now from a go to market perspective, Frank. We will be making investments on the edge. For example, the healthcare vertical has really kicked off very well. We went from being a small player in 2022 to being a really good being a very viable, credible player in the healthcare provider space with our private cloud offerings in ’twenty four and ’twenty five. So not much of investment.

Most of the investments will be even the CapEx investments will be success based. So if you win a customer, then we’ll be making investments in CapEx. Now talking about AI, we have started to see a lot of traction in AI in both the businesses. In fact, let me start with private cloud first. As you know, our offering in private cloud is our goal is to become a private AI infrastructure provider for our customers.

So we think about workloads, and we will be focusing mainly on inferencing workloads. That inferencing workload, Frank, will either be run on public environment, public cloud, private cloud, or at the edge. And we like our chances of winning in the private AI, as well as at the edge, and we’ll partner with hyperscalers on the public cloud side. As an example, for the first time, we won a private AI infrastructure deal with a healthcare organization in The US that actually supports adults with development disabilities. Now, they were facing some major pain points there in terms of care delivery, manual and time consuming review of services notes, lack of automation.

And so we basically delivered an AI powered solution, which was a combination of a private AI anywhere managed infrastructure with NVIDIA GPUs, as well as elastic engineering services, and we wrap that around with managed services. So this has resulted in 80 reduction in the manual review time. It has improved the care of delivery. So this is a good example of how we are now basically also catering to the customers’ needs on having their private AI inferencing workload close to where the data is. Similar on the public cloud side, we implemented really a very good agentic AI platform with J.

Crew. And we went public with that. J. Crew, as you know, is a leading fashion retailer. They were really struggling with the effectiveness and efficiency of their customer, vendor, and employee support organization.

So we actually implemented three distinct AI agents, one for their IT department, one for their vendor management, and the third was for customer service. And this was architected, powered by Amazon’s Bedrock, as well as CloudSonic models. So great examples of how we are winning now in the AI space. We also announced, since you asked about AgenTik AI, I want to also highlight this. We announced a good partnership with a company called Semaphore dot ai, which is a very innovative company backed by Mayfield venture capital firm.

And our Rackspace and Semaphore AI are highly complementary in what we bring to the table for our customers. For example, Semaphore AI will provide the agentic AI platform, and Rackspace then brings in the delivery muscle, including the infrastructure. And so we are basically bringing a complete turnkey solution for, I would say, cutting edge AI agentic platform at the enterprise grade, both from implementation, operations, and governance, and bringing technology and service solutions together. So feel very good. And then lastly, we are also internally becoming an AI company, Frank.

There’s a lot to talk about AI. You know, our CTO, Srini Kaushik, and his organization, working with all the functional leaders, have done a fantastic job in implementing agentic AI within the company to drive productivity of functional personnel. It’s now we’re bringing it to the CSM as well as the sales community.

Frank Louthan, Analyst, Raymond James: Okay, great. That’s a very great answer. Thorough answer. Appreciate that.

Amar Malatira, Chief Executive Officer, Rackspace Technologies: Thanks, Frank.

Conference Operator: That concludes today’s question and answer session. I’d like to turn the call back to Sagar Hebar for closing remarks.

Sagar Habar, Head of Investor Relations, Rackspace Technologies: Thank you, Liz. Thank you, everyone, for joining us today. If we did not get your question or if you have a follow-up, please email us at irragspace dot com. Have a great evening, everyone.

Conference Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.

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