Executive Summary / Key Takeaways

• Strategic Pivot to High-Value Services: Rackspace Technology (RXT) is executing a deliberate shift from low-margin infrastructure resale to higher-value managed services, professional services, and AI solutions across its Public and Private Cloud segments, aiming for sustainable, profitable growth.
• Operational Momentum and Bookings Growth: The company has demonstrated strong operational execution, with record sales bookings in Q4 2024 and continued momentum into 2025, driven by a refreshed sales force, new offerings, and a focus on enterprise and regulated industries.
• AI as a Growth Catalyst: RXT is strategically positioning itself to capture the burgeoning AI market, particularly in inferencing and fine-tuning workloads within hybrid environments, with new offerings like AI Launchpad and partnerships like Sema4.ai. AI currently contributes less than 2% of revenue but is projected to exceed 5% in the next few years.
• Improving Financial Health and Liquidity: Despite historical losses and a highly leveraged balance sheet, RXT is showing signs of financial stabilization, with significantly improved cash flow from operations in the nine months ended September 30, 2025, and a forecast for positive free cash flow by the end of 2025.
• Focused Competitive Differentiation: RXT differentiates itself through multi-cloud expertise, a "Fanatical Experience," and specialized solutions for regulated and mission-critical workloads, allowing it to compete effectively against larger hyperscalers and traditional IT service providers.

A Hybrid Cloud Turnaround Forged in Innovation

Rackspace Technology, Inc. (NASDAQ:RXT) is undergoing a significant transformation, evolving from its roots as a hosting provider into a specialized end-to-end hybrid cloud and AI solutions company. Founded in 1998, the company's journey has been marked by strategic shifts, including the 2016 Rackspace Acquisition and the cessation of actively marketing its legacy OpenStack Public Cloud business by 2017. Today, RXT aims to be the leading hybrid multi-cloud partner for regulated, sovereign, and mission-critical workloads, a strategic positioning that underpins its investment thesis.

The broader industry landscape is characterized by accelerating cloud adoption, the rapid emergence of AI and Generative AI, and increasingly stringent data sovereignty and security requirements. These macro trends create both immense opportunities and complex challenges. RXT's strategy is to help clients orchestrate critical workloads across private cloud, public cloud, edge, and sovereign environments, translating data into tangible outcomes through its advisory, security, and managed services. This approach differentiates it from more commoditized offerings by hyperscalers and less agile legacy IT service providers.

Technological Edge and AI-Driven Solutions

Rackspace Technology's core competitive advantage lies in its proprietary technology, automation capabilities, and deep technical expertise, which together create a value proposition difficult for competitors or in-house IT departments to replicate. The company's "Fanatical Experience" and models like Rackspace Fabric and Elastic Engineering set it apart from traditional IT service providers often constrained by fixed, project-based fee structures and less automation.

A key area of innovation is in Artificial Intelligence. RXT has launched several AI-driven solutions to meet the growing enterprise demand for moving AI from pilots to production. The Rackspace AI Launchpad is a secure managed service designed to accelerate the evaluation, piloting, and deployment of AI workloads across various industries. This service leverages Rackspace AI Anywhere, a private cloud solution emphasizing data security and privacy, deployable in third-party or co-location data centers. For instance, a healthcare provider, Compass, utilized AI Launchpad to achieve an 80% reduction in manual review time and improved documentation quality, showcasing the tangible benefits of this technology.

RXT is also integrating AI across its broader service offerings. This includes accelerating cloud migration timelines by 20% to 30%, reducing operational overhead for managed services teams by 10% to 20%, and automating security operations at scale. An example of this is the 40% reduction in migration time achieved using SnowConvert AI for a leading healthcare services company. The company's Foundry for AI by Rackspace (FAIR) initiative has garnered over 80 wins and 235 opportunities in its pipeline as of Q3 2025, with over 20% in advanced stages. While AI currently contributes less than 2% of RXT's total revenue, management projects this to grow to over 5% in the next couple of years as enterprise adoption matures from training models to inferencing and fine-tuning.

Further technological advancements include the strategic partnership with Rubrik (RBRK) to launch Cyber Recovery Cloud, the world's first fully-managed end-to-end isolated recovery environment. This solution enables customers to recover clean data and restore critical business systems within hours following a cyber breach. Other innovations like OpenStack Flex, an enterprise-grade on-demand Infrastructure-as-a-Service, and UK Sovereign Secure, a platform for stringent UK public sector compliance, underscore RXT's commitment to specialized, high-value offerings. The company also recently appointed new Senior Vice Presidents for Business Transformation and Public Cloud Services and Delivery, signaling a continued focus on execution and integrating AI and hybrid cloud into practical client outcomes.

Competitive Dynamics in a Shifting Cloud Landscape

Rackspace Technology operates in a highly competitive market, contending with hyperscale cloud providers like Amazon Web Services (AWS) (AMZN), Microsoft Azure (MSFT), and Google Cloud (GOOGL), as well as traditional IT service integrators and other specialized cloud solution providers. While hyperscalers offer immense scale and a vast array of tools, RXT differentiates itself through its multi-cloud agnosticism and a hands-on, service-oriented approach. RXT's ability to design, build, and operate customer cloud environments across all major technology platforms, irrespective of the underlying stack or deployment model, provides a crucial edge for enterprises seeking to avoid vendor lock-in and optimize complex hybrid environments.

Compared to AWS, RXT offers more specialized managed services and professional support, emphasizing customized solutions for specific customer needs rather than a purely self-service model. Against Microsoft Azure, RXT's multi-cloud expertise allows for greater flexibility in mixed environments, potentially offering more efficient implementations for legacy systems. While Google Cloud excels in cutting-edge AI and data analytics, RXT focuses on practical, service-oriented solutions for enterprise AI adoption, especially in inferencing workloads. IBM Cloud (IBM), with its focus on regulated industries and hybrid IT, shares some common ground with RXT, but Rackspace's agility in cross-platform integration can offer a more adaptable alternative.

Management believes RXT is "outperforming the market when it comes to sales bookings, especially in the markets that we play in compared to our competitors." This is attributed to strong execution, a refreshed sales force, new offerings, and robust relationships with hyperscalers. The company's focus on regulated industries like healthcare, BFSI, sovereign, and energy also provides a competitive moat, as these sectors often require the specialized security, compliance, and reliability that RXT delivers. The shift in market perception, where "Hybrid is the way to go" rather than an exclusive move to public cloud, further strengthens RXT's Private Cloud offerings.

Financial Performance and Operational Discipline

Rackspace Technology's recent financial performance reflects a company in the midst of a strategic turnaround, marked by a deliberate pivot towards profitable growth and operational efficiency. For the three months ended September 30, 2025, total revenue was $671.20 million, a slight decrease of 0.70% year-over-year, primarily due to a decline in Private Cloud revenue. On a constant currency basis, revenue decreased 1.20% year-over-year. Gross profit for the quarter was $129.90 million, down from $137.50 million in the prior year, with gross margin contracting by 100 basis points to 19.40%. This was mainly driven by lower cost absorption in Private Cloud and slightly higher infrastructure resale costs in Public Cloud.

However, signs of operational improvement are evident. Selling, General and Administrative (SGA) expenses decreased by $6 million, or 3%, to $163.80 million in Q3 2025, largely due to reduced headcount and lower non-equity incentive compensation. Non-GAAP operating profit reached $32 million in Q3 2025, meeting the high end of guidance and increasing 17% sequentially, driven by cost efficiencies in Private Cloud and lower corporate expenses. For the nine months ended September 30, 2025, revenue decreased 2.40% to $2,002.90 million. Notably, interest expense decreased by $18 million, or 23%, to $61.90 million, partly due to accounting for contractual interest payments on debt instruments from the March 2024 Refinancing Transactions. The company also recorded significant non-cash goodwill impairment charges totaling $715 million in the nine months ended September 30, 2024, with no such impairment in the corresponding 2025 period.

Liquidity and cash flow generation are critical for RXT, a highly leveraged company. As of September 30, 2025, Rackspace Technology held $99.50 million in cash and cash equivalents and had $286.50 million of available commitments under its New Revolving Credit Facility, bringing total liquidity to $386 million.

Net cash provided by operating activities for the nine months ended September 30, 2025, saw a substantial improvement, reaching $91.70 million compared to a net cash use of $14.40 million in the prior year. This turnaround was fueled by a $49 million decrease in cash operating expenses, a $22 million increase in cash proceeds from sold accounts receivable, and the absence of one-time refinancing and headquarters early termination fees incurred in 2024. Capital expenditures also decreased by $18 million to $91.60 million in the nine months ended September 30, 2025, reflecting an internal focus on optimizing asset inventory and lower capital requirements for recent deals.

Segmental Performance and Outlook

Public Cloud: This segment, a services-centric and capital-light model, saw revenue increase 0.80% year-over-year to $421.60 million in Q3 2025, driven by a 3% rise in services revenue and increased infrastructure volumes. For the nine months ended September 30, 2025, Public Cloud revenue slightly declined by 0.90% to $1,253.80 million, but segment operating profit increased 38% to $47.50 million, with margins expanding by 110 basis points to 3.80%. Management's strategy here is to expand AI offerings and enterprise footprint, focusing on higher-value engagements. The company expects its Public Cloud services business to grow 10% to 20% year-over-year in Q4 2025, while infrastructure resale is projected to decline by low-to-mid single digits for the full year, a purposeful shift to improve profitability.

Private Cloud: Operating on a more capital-intensive model, this segment reported revenue of $249.60 million in Q3 2025, a 3.10% year-over-year decrease. However, revenue is stabilizing as prior period bookings convert into revenue. For the nine months ended September 30, 2025, Private Cloud revenue decreased 4.70% to $749.10 million, and segment operating profit declined 11.30% to $189.70 million. The segment is securing large, long-term enterprise deals, particularly in regulated industries like healthcare and sovereign markets. In fiscal 2024, healthcare revenue grew 34% and sovereign revenue surged 59%. Management anticipates a modest year-over-year decline in Private Cloud revenues for fiscal 2025, with a leveling effect by year-end as large deals signed in 2024 are onboarded. Annualized sales bookings for new offerings are expected to be in line with or outpace the runoff from legacy products, signaling a shift towards a more resilient growth model beyond 2025.

Forward Guidance and Investment Considerations

Rackspace Technology's guidance for Q4 2025 projects GAAP revenue between $664 million and $678 million, which would be flat sequentially and a 2% year-over-year decline at the midpoint. Non-GAAP operating profit is expected to be between $32 million and $34 million, with a non-GAAP loss per share in the range of $0.03 to $0.05. Mark Marino, CFO, anticipates positive operating cash flow and free cash flow for the full year 2025, with strong free cash flow generation in the second half positioning the company to exit the year with $70 million to $80 million in positive free cash flow. This outlook is predicated on operating profit growth driven by margin improvements and ongoing efficiency initiatives.

Key risks for investors include the company's highly leveraged balance sheet and its dependence on favorable relationships with third-party cloud platform providers. Macroeconomic uncertainty could also impact onboarding timelines for new deals and customer decision cycles. However, Rackspace Technology's strategic focus on high-value, services-led growth, particularly in hybrid cloud and AI for regulated industries, positions it to capitalize on secular trends. The company's consistent track record of meeting or exceeding guidance, coupled with accelerating bookings momentum, suggests a disciplined execution of its turnaround strategy.

Conclusion

Rackspace Technology is executing a focused transformation, shifting its business model towards high-value hybrid cloud and AI solutions for enterprise and regulated customers. This strategic pivot, underpinned by significant investments in sales force revitalization, new product development, and technological differentiation, is beginning to yield tangible operational and financial improvements. While the company still contends with a leveraged balance sheet and a competitive landscape dominated by hyperscalers, its specialized multi-cloud expertise and AI-driven offerings create a distinct value proposition. The projected stabilization of Private Cloud revenue, anticipated growth in Public Cloud services, and a clear path to positive free cash flow by year-end 2025 underscore a compelling turnaround narrative. Investors should monitor the continued execution of its services-led strategy and the expansion of its AI footprint as key indicators of long-term value creation.