Rackspace 32Q26 Earnings Webcast - RACKSPACE TECHNOLOGY INC

Financial Performance:

• Q3 2026 total GAAP revenue was $609 million, a 9% year-over-year (YoY) decrease.
• Adjusted EBITDA was $75 million, up 8.5% YoY, with a non-GAAP gross margin of 19.5% (down 40 bps YoY).
• Non-GAAP operating profit was $36 million, up 12% YoY, driven by cost actions and reduced payroll/marketing spending that offset lower gross profit.
• Non-GAAP loss per share was $0.06, compared to $0.05 in the prior year quarter, as higher interest expense offset profit growth.
• Operating cash flow was positive $36 million; free cash flow was positive $1 million.
• Capital expenditures were $104 million (vs. $34 million previously), primarily due to private cloud equipment and preliminary AMD initiative hardware.
• Ending cash and cash equivalents were $108 million, with total liquidity of $170 million (a $33 million sequential decline).
• Raised $12 million in net proceeds via the ATM program and $66 million from an investor group led by Voss Capital LP.

Guidance and Future Outlook:

• Full-year 2026 GAAP revenue guidance raised to $2.51–$2.56 billion (midpoint $2.535 billion, down 6% YoY), narrowing the range and increasing the midpoint by $35 million.
• Non-GAAP operating profit guidance maintained at $125–$135 million (midpoint up 3% YoY); Adjusted EBITDA guidance maintained at $285–$295 million (midpoint up 5% YoY).
• Public cloud consumption is trending higher, prompting an upward revision; private cloud revenue is modestly adjusted due to a customer deployment shift to H1 2027.
• Cumulative AI compute deployment target: 20–22 megawatts by end of 2027, including the Together AI (NVIDIA) deal.
• Projected annualized run-rate revenue from this AI capacity is $420–$460 million with EBITDA margins exceeding 60% upon full deployment.
• AMD deployment schedule: ~2 MW in Q1 2027, accelerating to ~17 MW by year-end 2027, excluding the NVIDIA Together AI deployment.

Business Segments and Product Lines:

• Private Cloud: Revenue $260 million, up 4.2% YoY; driven by healthcare vertical implementation revenue (ADH migration) and improved churn rates.
• Public Cloud: Revenue $349 million, down 17.2% YoY, due to non-renewal of a large state government contract and customers moving to direct hyperscaler contracts.
• Strategic Partnerships:
  • Signed definitive agreement with Together AI (NVIDIA GB300 infrastructure) for ~$380 million total contract value (TCV), expected service by mid-2027.
  • Executed Letter of Intent (LOI) with Together AI for potential multi-billion dollar expansion and joint go-to-market.
  • Signed definitive agreement with Blacksmith (AMD EPIC CPUs) for ~$230 million TCV, deploying in early 2027.
  • Palantir: 7 contracts signed (5 active deployments, 2 in production); Palantir now owns ~2% of Rackspace stock; over 800 Palantir certifications held by staff.
• Product Strategy: Introduction of "Pods" (Enterprise Sovereign, Healthcare) combining compute, governance, and engineering to accelerate AI deployment in regulated sectors.

Market and Competitive Landscape:

• Competitive advantage derived from existing data center footprint, power, and cooling, enabling faster time-to-market than greenfield developers.
• Market tailwinds expected from potential increased greenfield permitting restrictions and political uncertainty, favoring operators with immediate capacity.
• Strategy focuses on being the operator of the full enterprise AI stack rather than speculative GPU capacity, leveraging 25 years of enterprise operating experience.
• Strong pipeline of Global Systems Integrators (GSIs) acting as partners to deliver customized enterprise AI solutions.

Risks and Challenges:

• Execution risks related to financing availability, vendor (GPU/CPU) lead times, and data center readiness for planned deployments.
• Potential delays in realizing anticipated contract values and margins from the AMD/NVIDIA agreements.
• Ongoing challenge of public cloud revenue decline due to contract non-renewals and channel shifts.
• Regulatory and permitting risks in specific markets potentially affecting future greenfield expansion, though Rackspace relies on existing capacity.

Management Commentary and Tone:

• CEO Gajen Kandiah expressed confidence in transitioning from strategy formulation to execution, citing signed contracts and active deployments.
• Tone emphasized "disciplined execution" and capital efficiency, prioritizing cash returns and customer commitments over speculative growth in megawatts.
• Management highlighted the strategic advantage of deploying AI workloads into existing facilities rather than building new ones.
• Focus remains on maintaining balance sheet strength while funding growth initiatives through separate financing structures for hardware.

Analyst Questions and Answers:

• David Page (RBC Capital Markets): Asked for clarification on why revenue guidance increased while profitability/EPS guidance remained unchanged.
  • Response: CFO Mark Marino clarified that public cloud revenue was revised higher (stronger renewals/consumption) while private cloud was revised lower, resulting in a net revenue increase but keeping EBITDA and EPS guidance within prior ranges.
• Follow-up on Market Dynamics: Asked about the impact of post-election greenfield permitting difficulties on Rackspace's demand and pricing power.
  • Response: Management noted demand is solid; while pricing power is unclear, existing capacity offers a distinct advantage for quick ramp-up on inference workloads compared to the long lead times of new builds.

Other Key Points:

• Hardware for the Together AI deployment (NVIDIA GB300 NVL72 systems) is expected to be financed separately, with active discussions ongoing with potential lenders.
• The $66 million Voss Capital investment is designated for general corporate purposes, working capital, and growth capital including GPU initiatives.
• The company is actively managing the transition of legacy service lines and optimizing the public cloud mix toward higher-margin opportunities.