Rackspace Technology's Q3 2025: Contradictions in Private Cloud Revenue, AI Partnerships, and Customer Behavior Amid Macroeconomic Uncertainty

Date of Call: None provided

Financials Results

• Revenue: $671M GAAP, up 1% sequentially, down 1% year-over-year
• EPS: Non-GAAP loss per share $0.05 (midpoint of guided range $0.04–$0.06 loss)
• Gross Margin: Non-GAAP gross profit margin 19.9% of GAAP revenue, up slightly sequentially, down 120 basis points year-over-year
• Operating Margin: Non-GAAP operating profit $32M, up 17% sequentially (no overall company operating margin percent provided)

Guidance:

• Q4 GAAP revenue expected $664M–$678M, flat sequentially and down ~2% YOY at midpoint.
• Private Cloud revenue expected $244M–$252M, down ~1% sequentially at midpoint.
• Public Cloud revenue expected $420M–$426M, flat sequentially at midpoint.
• Total non-GAAP operating profit $32M–$34M; non-GAAP loss per share $0.03–$0.05.
• Non-GAAP tax rate ~26%; diluted share count 242M–244M.

Business Commentary:

* Revenue Performance Across Segments: - Rackspace Technology reported total GAAP revenue of $671 million for Q3, up 1% sequentially and down 1% year-over-year, meeting the midpoint of their guidance. - The revenue performance was driven by strong sales momentum in bookings, particularly in Private Cloud and strategic wins in sectors like telecommunications and sovereign governments.

• Private Cloud Revenue and Growth Opportunities:
• Private Cloud revenue came in at $250 million, meeting the midpoint of their guidance and reflecting a 3% year-over-year decline.

• The decline was due to customer transitions off legacy platforms, partially offset by new bookings coming online. Growth opportunities arose from expanding relationships with sovereign and enterprise customers.

• Public Cloud Performance and Strategic Focus:

• Public Cloud revenue totaled $422 million, surpassing the high end of their guidance and increasing 1% year-over-year and sequentially.

• The growth was driven by a 3% rise in services revenue and a strategic focus on higher-value engagements, positioning Rackspace for growth in AI and enterprise footprint expansion.

• AI and Cloud Modernization Initiatives:

• Rackspace launched AI LaunchPad and other innovative solutions, enabling customers to scale AI with speed, security, and cost transparency.

• The initiatives reflected a strategic focus on leveraging AI to capture external opportunities and improve internal efficiencies, aligning with the growing demand for AI-driven services and solutions.

• Financial Performance and Profitability:

• Non-GAAP operating profit for the quarter was $32 million, meeting the high end of their guidance and rising 17% sequentially due to Private Cloud cost efficiencies and lower corporate expenses.
• This improvement supported the company's strategic focus on cost management and operational efficiency despite revenue headwinds.

Sentiment Analysis:

Overall Tone: Neutral

• Management: "Results for the third quarter met or beat our expectations across all key metrics" and bookings (ACV) grew 5% YOY. Offsetting this, GAAP revenue was down 1% YOY and non-GAAP gross margin fell 120 bps YOY, reflecting mix and cost headwinds.

Contradiction Point 1

Revenue Projections for Private Cloud

It involves varying projections for the revenue trajectory of Private Cloud services, which is crucial for understanding the company's financial performance and strategic direction.

Discuss the guidance and the increase in free cash flow? - Kevin Damien McVeigh(UBS Investment Bank, Research Division)

20251107-2025 Q3: Revenue from Private Cloud is expected to stabilize sequentially. - Mark A. Marino(CFO)

Can you discuss the guidance and the increase in free cash flow? - Kevin Damien McVeigh(UBS Investment Bank, Research Division)

2025Q2: Private Cloud is expected to stabilize with strong bookings performance. - Amar Maletira(CEO)

Contradiction Point 2

AI Integration and Partnerships

It highlights differing statements about AI integration and partnerships, which are important for understanding the company's technological advancements and strategic direction.

Can you discuss the guidance and the uptick in free cash flow? - Kevin Damien McVeigh(UBS Investment Bank, Research Division)

20251107-2025 Q3: In addition, we use AI internally to improve productivity across functional areas, including customer support and sales. We continue to explore new AI use cases that improve our productivity. - Amar Maletira(CEO)

What investments are planned for mid-market and enterprise segments? When will the benefits of the AI agent partnership be realized? - Frank Garrett Louthan(Raymond James & Associates, Inc., Research Division)

2025Q2: We are excited about the partnership with Sema4.ai in AI and expect it to bring significant benefits by providing a turnkey solution for agentic AI platforms. - Amar Maletira(CEO)

Contradiction Point 3

Customer Behavior and Macroeconomic Uncertainty

It highlights varying insights into how customers are responding to macroeconomic uncertainty, which could impact revenue projections and investor perceptions.

No specific questions were raised during the call. - Sagar Hebbar (Head of Investor Relations)

20251107-2025 Q3: We are not seeing customers delaying their decisions from a bookings perspective. Our funnel remains strong. - Amar Maletira(CEO)

Have you noticed any customer behavior changes due to macroeconomic uncertainty this quarter? - Irvin Liu (Evercore)

2025Q1: We are cautious about the conversion of bookings to revenue due to potential onboarding delays. Our Q2 performance so far looks good, but we remain cautious due to the uncertain macroeconomic environment. - Amar Maletira(CEO)

Contradiction Point 4

Infrastructure Resale Strategy

It reflects a shift in strategy regarding infrastructure resale, which could affect revenue composition and cost management.

Were any specific questions raised during the call? - Sagar Hebbar (Head of Investor Relations)

20251107-2025 Q3: Infrastructure resale should continue to decline at low to mid-single digits, but this is part of our strategy to grow profits. Operating profits for public cloud are expected to grow double digits year-on-year. - Amar Maletira(CEO)

Where are you seeing wins in public cloud services, and how should we view infrastructure resale for the remainder of the year? - Ryan Campbell (Barclays)

2025Q1: There's a good win rate in services and data services, driven by AI. We are walking away from low-margin infrastructure deals and focusing on profitable growth. - Amar Maletira(CEO)

Contradiction Point 5

Private Cloud Revenue Expectations

It involves differing expectations for revenue performance in the private cloud segment, which is a key area of focus for the company.

Can you discuss trends in the private business and explain why you anticipate a decline for 2025? - Kevin McVeigh (UBS)

20251107-2025 Q3: We expect modest declines in fiscal 2025, indicating a turnaround in this business. - Amar Maletira(CEO)

Can you explain the trends in the private business and why you expect it to decline in 2025? - Kevin McVeigh (UBS)

2024Q4: We anticipate revenues to be flattish in the second half of 2025 due to deals signed in 2024. - Amar Maletira(CEO)