Rackspace Technology, Inc. (NASDAQ: RXT) is a leading end-to-end, hybrid, multicloud, and AI solutions company that has been at the forefront of cloud computing and managed services for over two decades. The company's unique blend of expertise, innovation, and customer-centric approach has positioned it as a trusted partner for organizations seeking to navigate the complex and rapidly evolving technology landscape.
Business Overview and History Rackspace Technology, Inc. was formed in July 2016 through the acquisition of Rackspace Hosting, Inc., a global provider of modern information technology-as-a-service. The company completed this acquisition in November 2016, marking the beginning of its operations as Rackspace Technology. It serves as the holding company for Rackspace Hosting and its subsidiaries, handling corporate functions and ownership of the capital stock.
Since its formation, Rackspace Technology has faced several challenges. In 2021, the company experienced a sustained decline in its stock price, resulting in its market capitalization falling below the carrying value of its reporting units. This triggered a series of interim goodwill impairment analyses, leading to substantial non-cash impairment charges being recorded in 2023. Additionally, the company underwent a business reorganization in early 2023, which impacted the allocation of costs between its reporting units.
Another significant challenge was the Hosted Exchange incident in 2022, which resulted in expenses related to the incident, net of insurance proceeds. The company has also incurred costs related to various acquisition activities, integration efforts, and business transformation initiatives over the years, which have had a substantial impact on its financial results.
Under the leadership of CEO Amar Maletira, who joined the company in 2021, Rackspace has undergone a strategic transformation, pivoting its focus towards hybrid cloud and AI-powered solutions. The company has invested heavily in developing new capabilities, strengthening its partnerships with leading cloud providers, and enhancing its customer experience.
Financial Performance and Liquidity Rackspace Technology reported total GAAP revenue of $2.05 billion for the nine months ended September 30, 2024, a decrease of 8.3% compared to the same period in the prior year. This decline was primarily driven by a 15.4% decrease in Private Cloud revenue and a 3.3% decrease in Public Cloud revenue.
For the most recent fiscal year (2023), Rackspace reported revenue of $2.96 billion, with a net income of -$837.8 million. The company's operating cash flow (OCF) for 2023 was $374.9 million, with free cash flow (FCF) of $278.0 million.
In the most recent quarter (Q3 2024), Rackspace reported revenue of $675.8 million, down 8% year-over-year. Net income for the quarter was -$186.6 million, with OCF of $51.8 million and FCF of $27.3 million.
Despite the revenue decline, Rackspace maintained a strong liquidity position, with $157 million in cash and cash equivalents and $532 million in total liquidity as of September 30, 2024. The company's cash flow from operations for the nine-month period was $14.4 million, with free cash flow of negative $68.9 million.
Rackspace's non-GAAP operating profit for the nine months ended September 30, 2024, was $73.3 million, a decrease of 45.7% compared to the prior-year period. The company's non-GAAP operating margin was 3.6%, down from 6.0% in the same period of the previous year.
As of Q3 2024, Rackspace's debt-to-equity ratio stood at -5.13, with $157.1 million in cash and cash equivalents. The company had access to a $375 million credit line under its New Revolving Credit Facility. The current ratio and quick ratio were both 0.84.
Segmental Performance Rackspace Technology operates through two main business segments: Private Cloud and Public Cloud.
Private Cloud The Private Cloud segment, which includes the company's legacy OpenStack offerings, generated GAAP revenue of $258 million in the third quarter of 2024, within the guided range but down 1% sequentially. The segment's non-GAAP gross margin improved by 120 basis points sequentially to 38.6%, while non-GAAP operating margin increased by 210 basis points to 28.9%.
Private Cloud revenue decreased 14.4% on an actual basis and 14.7% on a constant currency basis compared to the same period in 2023. The decline was due to customers rolling off old generation private cloud offerings and a decrease in legacy OpenStack offerings. Private Cloud segment operating profit decreased 13.6% year-over-year, with the segment operating margin decreasing 140 basis points to 28.9% due to the 15.0% decline in segment revenue, partially offset by a 14.0% decrease in segment operating expenses driven by a reduction in personnel costs.
Rackspace has seen strong momentum in its healthcare and sovereign cloud offerings, with the healthcare business projected to grow by nearly 30% year-over-year in fiscal 2024 and the sovereign cloud vertical expected to grow over 50% compared to the previous year. The company's commitment to innovation is evident in the launch of 15 new products and the enhancement of 19 others during the third quarter.
Public Cloud The Public Cloud segment generated GAAP revenue of $418 million in the third quarter of 2024, down 2% sequentially but above the guidance midpoint. The segment's non-GAAP gross margin improved by 50 basis points to 10.4%, and non-GAAP operating margin increased by 110 basis points to 3.9%.
Public Cloud revenue decreased 3.1% on an actual and constant currency basis compared to the same period in 2023. The decline was due to continued cyclical headwinds in IT services. Public Cloud segment operating profit decreased 19.2% year-over-year, with the segment operating margin declining 80 basis points to 3.9% as the 3.1% decrease in segment revenue outpaced a 2.0% decrease in segment operating expenses.
Rackspace's Public Cloud business saw a record bookings quarter, with strong performance across all regions and product lines. The company's strategic collaboration agreement with AWS, announced in October 2024, is expected to further enhance its ability to deliver comprehensive cloud and AI solutions to customers globally.
Risks and Challenges Rackspace Technology operates in a highly competitive and rapidly evolving technology services market, which poses several risks and challenges. The company faces competition from large cloud providers, such as Amazon Web Services, Microsoft Azure, and Google Cloud, as well as other managed service providers.
Furthermore, Rackspace's reliance on partnerships with leading cloud platforms exposes it to the risks associated with those platforms, including changes in pricing, product offerings, and competitive dynamics.
The company's transition towards a services-led, hybrid cloud, and AI-focused strategy also carries execution risks, as it requires significant investments in talent, technology, and go-to-market capabilities.
Outlook and Recent Developments For the fourth quarter of 2024, Rackspace Technology expects GAAP revenue to be in the range of $668 million to $680 million, with non-GAAP operating profit expected to be between $34 million and $36 million. The company anticipates a non-GAAP loss per share of $0.03 to $0.05.
For the Private Cloud segment in Q4 2024, Rackspace guided for revenue of $258 million to $264 million, up 1% sequentially at the midpoint. The Public Cloud segment is expected to generate revenue of $410 million to $416 million, down 1% sequentially at the midpoint, due to reduced consumption and lower margin infrastructure resale.
Additional guidance details for Q4 2024 include a non-GAAP tax rate of 26%, non-GAAP other expense of $47 million to $51 million, and a non-GAAP share count of approximately 240 million shares.
It's worth noting that Rackspace has met or exceeded its guidance for nine consecutive quarters, including Q3 2024, where they exceeded the midpoint of their guidance for revenue, profit, and EPS.
In recent months, the company has announced several strategic initiatives and partnerships that are expected to drive its future growth and differentiation:
1. Joining the AWS Generative AI Partner Innovation Alliance to help customers build and deploy generative AI solutions. 2. Launching Rackspace Spot, a new platform offering on-demand GPU-as-a-Service powered by NVIDIA accelerated computing. 3. Strengthening its commitment to the global OpenInfra Foundation by joining the Board of Directors and becoming a Platinum Member. 4. Signing a multi-year strategic collaboration agreement with AWS to deliver accelerated digital transformation for customers.
Industry Trends The private and public cloud markets are maturing, with customers increasingly embracing a hybrid cloud model that leverages both private and public cloud environments. Rackspace noted a 41% year-over-year increase in its private cloud pipeline, indicating growing demand for these solutions. The company also highlighted strong momentum in the healthcare and sovereign verticals, with private cloud revenue for the healthcare vertical projected to grow nearly 30% year-over-year in fiscal 2024 and the sovereign vertical projected to grow over 50% in 2024 compared to 2023.
Conclusion Rackspace Technology's transformation into a leading hybrid cloud and AI solutions provider has positioned the company for long-term success in the rapidly evolving technology services market. While the company has faced some near-term challenges, including revenue declines in both its Private Cloud and Public Cloud segments, its strong liquidity, innovative product portfolio, and strategic partnerships with cloud giants like AWS provide a solid foundation for future growth and differentiation.
The company's focus on expanding margins by driving cost efficiencies and growing higher-margin services revenue in its Public Cloud segment, while defending and expanding revenue with new solutions in its Private Cloud segment, demonstrates a clear strategy for navigating the current market dynamics. Additionally, Rackspace's consistent ability to meet or exceed its guidance over nine consecutive quarters showcases its strong execution capabilities.
As Rackspace continues to execute on its strategic priorities, investors will closely monitor its ability to drive sustained profitability and capture the significant opportunities in the hybrid cloud and AI services market. The company's performance in high-growth verticals like healthcare and sovereign cloud, coupled with its investments in AI and GPU-as-a-Service offerings, position it well to capitalize on emerging trends in the technology services industry.