Executive Summary / Key Takeaways

• Rackspace Technology is executing an operational turnaround and strategic pivot towards higher-value hybrid cloud, AI solutions, and managed services, moving away from lower-margin infrastructure resale.
• Recent performance shows momentum, with Q1 2025 bookings growing 9% year-over-year (13% in the Americas) and significant bookings growth in FY 2024 (14% overall, 32% in H2 vs H1), driven by strong sales execution and a services-led motion.
• The company is making progress in stabilizing Private Cloud revenue decline and driving Public Cloud operating profit growth through cost efficiencies and a focus on higher-margin services, particularly in regulated industries and data/AI.
• A recent debt refinancing has improved the capital structure, extending maturities and reducing cash interest costs, while management anticipates positive operating and free cash flow in 2025.
• Rackspace is actively building capabilities and pipeline in the nascent enterprise AI market, positioning itself for future growth in inferencing and fine-tuning workloads, although AI currently represents less than 2% of revenue.

Setting the Scene: A Hybrid Cloud and AI Transformation

Rackspace Technology operates at the intersection of critical IT trends, providing end-to-end hybrid cloud and artificial intelligence solutions. Its business is structured around two core segments: Public Cloud, a services-centric model leveraging hyperscalers like AWS , Microsoft Azure , and Google Cloud , and Private Cloud, a more capital-intensive model focused on managed services for environments hosted in company or customer data centers. The company's history, tracing back to its founding in 1998 and the significant Rackspace Acquisition in 2016, has shaped its evolution from a hosting provider to a specialized partner navigating the complexities of modern IT landscapes.

The industry landscape is characterized by a maturing cloud market where enterprises increasingly favor hybrid environments that strategically blend public and private infrastructure. Digital transformation initiatives, coupled with rising demands for data sovereignty, enhanced security, and the burgeoning potential of AI, are driving market dynamics. Rackspace's strategy is centered on an operational turnaround, repositioning itself as a leader in this hybrid cloud and AI future, and rightsizing its capital structure to support sustainable profitable growth.

Competitive Arena: Expertise vs. Scale

In the competitive cloud services market, Rackspace faces formidable rivals, including hyperscalers like Amazon (AMZN) via AWS, Microsoft (MSFT) via Azure, and Alphabet (GOOGL) via Google Cloud, as well as established IT service providers like IBM (IBM). While hyperscalers boast immense scale, vast infrastructure, and rapid innovation cycles (e.g., AWS's estimated 31% market share and 17% YoY revenue growth, Azure's 25% share and 30% growth), Rackspace differentiates itself through a vendor-agnostic, consultative approach and its renowned "Fanatical Experience."

Rackspace positions itself as a partner capable of designing, building, and operating complex cloud environments across diverse platforms, offering a "labor-minus" model that leverages automation to deliver services more efficiently than traditional SIs. While competitors like AWS and Azure may offer superior processing speeds for certain workloads (e.g., AWS Graviton chips), Rackspace's deep expertise in multi-cloud optimization can lead to better overall efficiency and potentially lower operating costs for clients. The company's focus on specific verticals like Healthcare and Sovereign markets, driven by unique compliance and security needs, also provides a competitive edge against more generalized offerings. However, Rackspace's financial metrics, such as negative operating margins (TTM -10.87%) and lower revenue growth (Q1 2025 down 3.7% YoY) compared to the high growth and robust profitability of hyperscalers (e.g., Azure's 42% operating margin), highlight the challenge of competing on scale and raw profitability. Despite lacking proprietary, quantifiable technology differentiators, Rackspace relies on its service model and expertise.

Technological Edge: Enabling the Hybrid and AI Future

Rackspace's technology portfolio is designed to enable its hybrid cloud and AI strategy. Key differentiators include Rackspace Fabric, aimed at providing a unified experience across cloud and security footprints, and the Elastic Engineering model, offering on-demand access to specialized cloud expertise. The company is also developing Rackspace Anywhere offerings to manage workloads in customer data centers and planning the Open Cloud platform to unify operations and deliver hyperscale capabilities.

In the critical area of AI, Rackspace is developing solutions like Rackspace AI Business, an AI-ready platform optimized for enterprise AI workloads on Private Cloud infrastructure, and modern operations for data and AI in the Public Cloud. The company has also launched on-demand GPU as a Service powered by NVIDIA (NVDA) H100 GPUs on its spot platform, allowing customers to access high-performance computing without significant upfront investment. While specific quantifiable performance advantages over all competitors are not detailed for every offering, the successful migration of a large healthcare provider to Rackspace's Healthcare Cloud resulted in significant performance improvements ranging from 15% to 45%, demonstrating tangible benefits. The strategic partnership with Rubrik (RBRK) to launch Cyber Recovery Cloud leverages Rackspace's Managed Private Cloud Platform for enhanced cyber resiliency. These technological initiatives are crucial for building a competitive moat, enabling higher-value services, and positioning Rackspace for future growth in areas like AI inferencing.

Financial Performance: Signs of Turnaround

Rackspace's recent financial performance reflects the ongoing execution of its strategic pivot amidst a challenging market. In the first quarter of 2025, total GAAP revenue was $665.4 million, a decrease of 3.7% year-over-year (3.4% constant currency), primarily due to declines in both Private Cloud ($249.8 million, down 6.9% YoY) and Public Cloud ($415.6 million, down 1.6% YoY) revenue. The Public Cloud decline was attributed to lower infrastructure volumes and reduced services revenue, while Private Cloud saw customers rolling off legacy offerings.

Despite the top-line pressure, there are positive signs in profitability and efficiency. Gross profit in Q1 2025 was $126.9 million, with a gross margin of 19.1%. Selling, general and administrative expenses saw a significant decrease of 14% year-over-year, driven by cost optimization initiatives and the absence of one-time fees incurred in Q1 2024 (including a $9 million headquarters sale termination fee). This focus on efficiency contributed to a substantial 83% year-over-year increase in Non-GAAP Operating Profit, reaching $25.6 million in Q1 2025. Segment operating profit trends also showed progress, with Public Cloud operating profit increasing 111% year-over-year due to operational improvements and cost optimization, despite a revenue decrease. Private Cloud operating profit decreased 14% year-over-year, impacted by lower revenue, though partially offset by cost optimization.

Liquidity and Capital Structure: Rightsizing for Stability

Rackspace is a highly leveraged company, with $2,444.4 million in aggregate principal debt outstanding as of March 31, 2025. Addressing this leverage and improving financial flexibility has been a key strategic priority. The comprehensive debt refinancing transactions completed in March and April 2024 were significant steps, resulting in a $56.7 million gain on debt extinguishment in Q1 2024 and extending maturities on key debt instruments, with no corporate maturities prior to 2028.

The company's liquidity position includes $128 million in cash and cash equivalents as of March 31, 2025, and $345 million of available commitments under its $375 million New Revolving Credit Facility.

Cash flow generation showed improvement in Q1 2025, with net cash provided by operating activities reaching $12.6 million, a significant increase compared to Q1 2024, largely due to reduced operating expenses and the absence of prior-year one-time payments. Capital expenditures decreased to $26.7 million in Q1 2025, reflecting an internal focus on optimizing asset inventory and lower requirements on recent deals. Management anticipates positive operating cash flow and free cash flow for the full year 2025, driven by expected operating profit growth and ongoing efficiency improvements.

Outlook: Momentum Towards Stabilization and Growth

Rackspace's guidance for the second quarter of 2025 reflects a continuation of recent trends and the impact of its strategic decisions. GAAP revenue is projected to be between $653 million and $665 million, down 4% year-over-year at the midpoint. This expected decline is partly attributed to a reduced forecast for low-margin infrastructure resale volume, a purposeful decision to improve profitability. Private Cloud revenue is guided to be flat sequentially ($247 million to $253 million), signaling progress towards stabilization after periods of steeper decline. Public Cloud revenue is expected to decrease sequentially ($406 million to $412 million), also influenced by the disciplined approach to infrastructure resale.

Management's outlook for the full year 2025 anticipates a modest year-over-year decline in Private Cloud revenue, with a leveling effect expected by year-end as large deals signed in 2024 are fully onboarded. They project that annualized sales bookings for new Private Cloud offerings will be in line with or outpace the runoff from legacy products, indicating a shift towards a more resilient business model beyond 2025. Public Cloud services revenue is expected to perform well in 2025, contributing to a projected double-digit year-on-year growth in Public Cloud operating profit. The overall goal for 2025 is to build a sustainable business model that consistently delivers revenue, profit, and cash flow growth, supported by continued operational improvements and strategic focus areas like AI.

Risks and Challenges

Despite the positive momentum, Rackspace faces notable risks. High leverage remains a significant factor, and while the recent refinancing improved the debt structure, the ability to service and potentially refinance debt depends on generating sufficient cash flows and market conditions. Macroeconomic uncertainty could impact customer decision cycles and the crucial booking-to-billing conversion timeline, potentially delaying revenue realization from signed deals.

Competition in the cloud market is intense, and hyperscalers' scale and innovation speed could pressure Rackspace's pricing and market share, particularly if its technological differentiation or service value proposition is not effectively communicated or maintained. The judgmental nature of goodwill and intangible asset valuations means that changes in market conditions or internal forecasts could lead to future impairment charges. Furthermore, foreign currency fluctuations and rising power costs, as a large consumer of energy, pose ongoing operational and financial risks.

Conclusion

Rackspace Technology is undergoing a significant transformation, pivoting towards a services-led, hybrid cloud, and AI-focused model while simultaneously addressing its capital structure. The recent financial results, particularly the strong bookings growth in the latter half of 2024 and Q1 2025, the improvement in Non-GAAP Operating Profit, and the strategic debt refinancing, demonstrate tangible progress in its operational turnaround.

While top-line revenue continues to face near-term pressure, partly due to the deliberate strategy to shed lower-margin business, the underlying trends in bookings, pipeline growth, and efficiency gains suggest building momentum. The focus on high-growth verticals like Healthcare and Sovereign, the increasing services attach rates in Public Cloud, and the early traction in AI position Rackspace to capitalize on secular market trends. The anticipated positive cash flow generation in 2025 further strengthens the investment narrative. Investors should closely monitor the execution of the services-led strategy, the conversion of the growing pipeline into revenue, the continued stabilization of the Private Cloud segment, and the progress in scaling the AI business as key indicators of Rackspace's potential for sustainable profitable growth.