Rackspace Technology, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Results for Q2 met expectations with revenue and operating profit exceeding guidance midpoint, EPS within range. 12th consecutive quarter of meeting/exceeding guidance. Bookings grew 2% sequentially and 16% year-over-year. Non-GAAP operating profit grew 34% year-over-year, and positive cash from operations of $8 million.
• Private Cloud bookings strong with double-digit growth in Americas and EMEA despite a pushed healthcare deal, expected to close in Q3. Progress in mid-market and enterprise expansion with key wins in healthcare and banking.
• Public Cloud saw services revenue growth, focusing on higher-value engagements. Introduced Rackspace CloudOps, a managed service for mid-market organizations.
• AI progress: FAIR has over 80 wins and over 235 opportunities in pipeline. Strategic alliance with Sema4.ai and launched Fair Model Context Protocol Enterprise Accelerator. AI integration in services accelerating cloud migration, reducing operational overhead, and automating security operations.

Segment Performance

• Private Cloud: Bookings in Q2 2025 grew 24% sequentially and 42% year-over-year. Revenue was $250 million, down 4% year-over-year. Non-GAAP gross margin was 36.8%, and non-GAAP segment operating margin was 24.6%. Notable wins include a long-term agreement with a leading healthcare provider and expanding with a large UK bank. Had 13 product releases and 28 enhancements, and launched Rackspace OpenStack Business.
• Public Cloud: Bookings grew 1% year-over-year. Revenue totaled $417 million, down 2% year-over-year. Non-GAAP gross margin was 9.6%, and non-GAAP segment operating margin was 3.9%. Services bookings increased 6% sequentially. Expanded engagement with a top-tier aircraft leasing company and a mid-sized cybersecurity company.

Guidance

• Q3 GAAP revenue expected to be $660 million to $674 million, flat sequentially and down 1% year-over-year at midpoint.
• Private Cloud revenue expected $246 million to $254 million, flat sequentially and down 3% year-over-year at midpoint.
• Public Cloud revenue expected $414 million to $420 million, flat sequentially at midpoint.
• Total non-GAAP operating profit expected $30 million to $32 million, non-GAAP loss per share $0.04 to $0.06.
• Expect strong free cash flow generation in second half of 2025, aiming for $70 million to $80 million positive free cash flow by year-end.

Q: Congratulations on the results. Talk about guidance and free cash flow conversion.

A: Mark Marino discussed Q3 guidance of $660 million to $674 million with midpoint around $667 million, noting flat sequential from Private Cloud and uptick on Public Cloud services. Free cash flow improvement due to no seasonality factors like onetime vendor prepayments in second half. Amar Maletira added on Private Cloud deal sizes and contract lengths flipping, and Public Cloud services revenue expected to grow in second half.

Q: You mentioned getting more traction in mid-market. What investments needed? And about AI partnership.

A: Amar Maletira said mid-market focus investments made, with Public Cloud bookings growing, and CapEx investments success-based. On AI, Private Cloud aims to be private AI infrastructure provider with wins in healthcare, and Public Cloud has partnerships like with Sema4.ai and J.Crew, with AI agents delivering benefits like reduced manual review time and improved customer support efficiency.