Rackspace Technology, Inc. earnings

Management highlights

- Strategic Transformation to Governed Enterprise AI Operator * Rackspace is executing a strategy to become the leading operator of the full enterprise AI stack, focused on regulated industries and sovereign markets where governance, data sovereignty, and operational continuity are critical requirements. * The business model leverages Rackspace's private cloud infrastructure foundation, 25+ years of production environment expertise, and embedded forward-deployed engineers to deliver guaranteed SLAs and end-to-end accountability for clients. - Partnership Ecosystem Expansion * Rackspace and Palantir expanded their strategic partnership, establishing Rackspace as a preferred deployment and operations partner for Palantir in regulated and sovereign environments. Over 400 Palantir certifications have been earned by Rackspace employees, and the first joint customer deployment was completed in 41 days, reducing the client's quote cycle times by 94%. * Additional best-of-breed partners include Unifor (enterprise AI applications), VMware (control plane/virtualization), Rubric (cyber resilience), and AMD (accelerated GPU compute foundation). Rackspace has minimum contracted revenue levels with upside for the AMD partnership. * The first 2 megawatt AMD-powered GPU deployment has secured financing and purchase orders, with completion targeted for the end of 2026 at a capital cost of ~$75 million. - Corporate Focus and Portfolio Optimization * As part of the One Rackspace initiative, management is exiting low-margin engagements across both business units to reallocate capital, capacity, and talent to higher-return enterprise AI opportunities. Total exited revenue for FY26 is $150 million, with a corresponding $20 million reduction in FY26 EBITDA guidance. * Public cloud is transitioning from an infrastructure-led model to a services-led model focused on higher-value AI-led enterprise transformation, AIOps managed services, and hybrid environment operations. Private cloud will maintain low single-digit growth after shifting away from low-margin basic hosting to higher-yield AI deployments. - Capital Raise * Rackspace announced a $250 million primary at-the-market (ATM) equity offering to fund growth capital for GPU initiatives. The ATM structure allows capital raising to align with customer demand and deployment schedules. Proceeds will primarily support AI capacity expansion, and the company plans to finance most compute hardware via asset-backed credit facilities collateralized by the assets themselves.

Guidance

- Full Fiscal Year 2026 revenue guidance is revised to $2.45 billion to $2.55 billion, representing a 7% decline at the midpoint compared to prior guidance of a 1% decline at the midpoint. 98% of the downward revision stems from the intentional exit of low-margin revenue, with 1% due to revenue timing shifts to FY27 rather than lost demand. - Full Fiscal Year 2026 EBITDA guidance is revised to $285 million to $295 million, down from the prior outlook of $305 million to $315 million. The downward adjustment reflects near-term timing mismatches between exiting low-margin revenue, pre-revenue AI investments, and workforce realignment costs; EBITDA benefits from these changes are expected to materialize in 2027. - Cumulative GPU capacity deployment targets are set: ~2 megawatts by end of 2026, 15 megawatts by end of 2027, and 30 megawatts by end of 2028. Expected revenue per deployed megawatt ranges from $15 million to $20 million, with a $10 million per megawatt floor for the initial deployment, and EBITDA margins for enterprise AI are targeted at over 50%. - Incremental revenue and EBITDA growth from the new AI compute segment is expected to begin in 2027, and the revenue mix shift is expected to be margin-accretive as AI deployments ramp up.

Segment performance

For the preliminary second quarter ended June 30, 2026: - Public Cloud: Revenue was in the range of $399 million to $403 million, accounting for approximately 62.5% of total Q2 26 revenue at the midpoint. - Private Cloud: Revenue was in the range of $242 million to $246 million, accounting for approximately 37.5% of total Q2 26 revenue at the midpoint. Total Q2 26 preliminary revenue is expected between $641 million and $649 million, a 3.1% decline year-over-year at the midpoint. For full fiscal year 2026, the updated segment outlooks are: - Public Cloud: Revenue expected between $1.45 billion and $1.50 billion, a $125 million reduction from prior guidance driven by exiting low-margin infrastructure resale. - Private Cloud: Revenue expected between $1.0 billion and $1.05 billion, a $25 million reduction from prior guidance driven by exiting low-margin co-location and basic hosting to reallocate capacity to AI deployments.

Risks & headwinds

- All forward-looking statements related to AI strategy, partnership execution, GPU deployment timing and economics, capital raising, customer demand, cost savings from workforce realignment, and financial outlook are subject to inherent risks and uncertainties that could cause actual results to differ materially. The full transformation strategy may not be achieved in full, at all, or on the expected timeline. - Preliminary Q2 2026 results are unaudited, incomplete, and subject to change during the financial closing and review process, potentially differing materially from the finalized results to be reported in the Form 10-Q. - The GPU supply chain and data center ecosystem are currently resource-constrained across power, compute, and memory, which could impact the timing and cost of capacity deployment. - Proceeds from the ATM equity offering are dependent on prevailing market conditions, and share dilution will impact near-term per-share metrics before the revenue and EBITDA benefits of AI investments are realized.

Analyst Q&A

• Q: Analyst David Page asked for additional color on the source of customer demand for the 15 megawatts of GPU capacity targeted for 2027 and 2028, specifically whether it would come from Rackspace's existing customer base or new customers. /

  A: CFO Mark Marino stated that while no specific customer names can be disclosed, current outlooks expect roughly two-thirds of demand to come from new customers and one-third from existing enterprise customers, with visible demand already emerging across Rackspace's customer base. CEO Gajen Kandiah added that in the early stages of deployment, roughly 30% of demand is expected to be for infrastructure as a service, with additional demand for raw bare-metal compute coming from third-party off-takers in the short term. Long-term, the business is being built to prioritize infrastructure as a service for regulated enterprise customers, with growth expected in inference as a service for context-specific AI workloads.