Rackspace Technology, Inc. (NASDAQ:RXT) is a leading end-to-end, hybrid, multicloud, and AI solutions provider, serving customers across diverse industries. The company's comprehensive suite of services and expertise empowers organizations to modernize applications, build new products, and adopt innovative technologies, all while navigating the complex and evolving cloud ecosystem.

Financials

In the fiscal year 2023, Rackspace Technology reported annual revenue of $2,957.1 million and a net loss of $837.8 million. The company's annual operating cash flow stood at $374.9 million, while its free cash flow reached $278.0 million. These financial results reflect Rackspace's ongoing transformation and strategic initiatives to position the company for long-term, sustainable growth.

Business Overview

Rackspace's business is organized into two reportable segments: Public Cloud and Private Cloud. The

Public Cloud segment

Private Cloud segment

First Quarter 2024 Results

In the first quarter of 2024, Rackspace reported total GAAP revenue of $690.8 million, a decrease of 8.9% compared to the same period in the prior year. This decline was driven by decreases in both the Public Cloud and Private Cloud segments. The Public Cloud segment reported revenue of $422.4 million, down 4.7% year-over-year, while the Private Cloud segment generated revenue of $268.4 million, a 14.9% decrease compared to the first quarter of 2023.

The decline in Public Cloud revenue was primarily due to macro-economic pressures, which caused a tightening of customer discretionary spend and optimizations, along with continued cyclical headwinds in IT services. The Private Cloud segment's revenue decline was attributed to customers rolling off old-generation private cloud offerings and the expected decline in legacy OpenStack offerings.

Rackspace's non-GAAP gross profit margin in the first quarter of 2024 was 20.4% of GAAP revenue and 36.7% of non-GAAP net revenue. The company's non-GAAP operating profit for the quarter was $16 million, or 2.3% of GAAP revenue and 4.2% of non-GAAP net revenue, exceeding the high end of the company's guidance.

The company's non-GAAP loss per share for the first quarter of 2024 was $0.11, which also exceeded the high end of the guided range of $0.12 to $0.14 loss per share. Rackspace's cash flow from operations was negative $90 million, and free cash flow was negative $118 million in the first quarter, primarily due to a large vendor prepayment, annual bonus payout, and one-time outflows related to the company's debt refinancing and the exit of its corporate headquarters.

Liquidity

Rackspace's liquidity position was significantly strengthened by the successful completion of a series of debt refinancing transactions in March and April 2024. The company reduced its outstanding principal by over $300 million and annual interest cost by more than $11 million. Since the end of fiscal year 2022, Rackspace has reduced its principal debt by over $800 million and annual interest cost by more than $38 million through the debt exchange and the company's open market purchases.

The company's new debt structure includes the FLSO Term Loan Facility, the FLFO Term Loan Facility, and the New Revolving Credit Facility, which provide Rackspace with $375 million of additional liquidity. The company has no corporate maturities prior to 2028, giving it the runway to execute its turnaround strategy.

Strategic Priorities

Rackspace's strategic priorities include implementing an operational turnaround, repositioning the company as a forward-leaning and innovative hybrid multi-cloud and AI solutions provider, and rightsizing its capital structure to support long-term, sustainable profitable growth.

Private Cloud Segment

In the Private Cloud segment, Rackspace saw very strong double-digit year-over-year growth in first quarter bookings, with continued strength in the healthcare vertical. The company won several new deals in healthcare, including with two of the country's 10 largest healthcare payers, a large healthcare solutions provider, and a regional hospital and related services system provider. Many of these new engagements are for Rackspace's unique and differentiated Epic-as-a-Service offerings.

The Private Cloud segment also launched new and innovative products and solutions, such as the UK Sovereign Solutions, a digital serving platform with the ARC branded data centers in the U.K. offering flexible configurations to suit varying budgets, performance, and workload sizes.

Public Cloud Segment

In the Public Cloud segment, Rackspace reported solid double-digit growth in total bookings year-over-year and sequential growth in the first quarter, which is typically the weakest quarter. This was a result of strong execution by the company's go-to-market teams in the Americas and the U.K. regions. Rackspace's strategic focus on leading with services has yielded new wins, such as a platform services and security engagement with a large international insurance company, a platform services agreement with a large media company, and a data services engagement with another large insurance company to migrate and modernize an on-premise data warehouse to the cloud.

AI Offerings

Rackspace's AI offerings continue to gain traction, with the company's opportunity pipeline in excess of 30 opportunities across the ideate and incubate phases. The company is also developing new AI capabilities, such as Private AI Anywhere, which was launched in the Private Cloud segment earlier this year, and the upcoming introduction of AI Business and AI Optimized Platform for fine-tuning and inferencing AI workloads.

Outlook

For the second quarter of 2024, Rackspace expects GAAP revenue to be in the range of $668 million to $678 million. The company's total non-GAAP operating profit is expected to be $20 million to $22 million, and non-GAAP loss per share is expected to be $0.09 to $0.11.

Conclusion

Rackspace's resilience and innovation in the hybrid, multicloud landscape have been demonstrated through its strategic initiatives and financial performance. The company's successful debt refinancing, operational turnaround, and focus on high-growth verticals and service offerings position Rackspace well to navigate the evolving market dynamics and deliver long-term, sustainable value for its shareholders.