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Rackspace (RXT) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Information Technology· Aug 11, 2026

Source: earnings call transcript

Executive summary

Rackspace Q2 FY26 — Strategic AI Infrastructure Build-Out and Strong Private Cloud Performance

Rackspace is strategically pivoting to become a leading provider of enterprise AI infrastructure, leveraging new partnerships with AMD and Palantir to build out managed compute and inference platforms. While navigating a decline in public cloud revenue due to strategic exits, the company delivered strong private cloud performance and reiterated its full-year positive free cash flow guidance, focusing on high-yielding services and a disciplined capital approach.

Highlights

5

  • Private Cloud revenue of $263 million, exceeding guidance of $242 million to $246 million.

  • New AMD partnership to deploy 30 megawatts of AI compute capacity, targeting $450 million to $600 million in annual revenue.

  • Anticipated EBITDA margins of 50%+ for the new enterprise AI growth vector.

  • Full-year free cash flow guidance of $50 million to $70 million positive, accelerating in H2.

  • Non-GAAP operating profit expected to be up 3% at midpoint for the full year, reaching $125 million to $135 million.

Concerns

4

  • Non-GAAP gross margin declined by 120 basis points year-over-year to 18.6%.

  • Free cash flow was negative $48 million in Q2 FY26, reflecting seasonal cash uses.

  • Full-year GAAP revenue guidance of $2.45 billion to $2.55 billion represents a 7% decline year-over-year at the midpoint, primarily due to exiting low-margin public cloud revenue.

  • Non-GAAP loss per share was $0.08, compared to $0.06 in the prior year quarter.

Guidance & targets

CategoryTargetConfidence
Full-year GAAP Revenue
$2.45 billion to $2.55 billion
high materiality
High
Full-year Private Cloud Revenue
$1.0 billion to $1.05 billion
medium materiality
High
Full-year Public Cloud Revenue
$1.45 billion to $1.5 billion
medium materiality
High
Full-year Total Non-GAAP Operating Profit
$125 million to $135 million
high materiality
High
Full-year Adjusted EBITDA
$285 million to $295 million
high materiality
High
Full-year Non-GAAP Loss Per Share
$0.25 to $0.30
high materiality
High
Full-year Non-GAAP Tax Rate
26%
medium materiality
High
Full-year Non-GAAP Other Expenses
$220 million to $230 million
medium materiality
High
Full-year Non-GAAP Share Count
250 million to 260 million shares
medium materiality
High
Full-year Positive Free Cash Flow
$50 million to $70 million
high materiality
High
AI Compute Capacity
15 megawatts
high materiality
High
AI Compute Capacity
30 megawatts
high materiality
High
Annual Revenue per AI Megawatt
$15 million to $20 million
high materiality
High
Annual Revenue for 30 MW AI Deployment
$450 million to $600 million
high materiality
High
EBITDA Margins for Enterprise AI
50% plus range
high materiality
High

Segment performance

SegmentRevenueYoYQoQMargin
Private Cloud
Revenue upside driven by timing of revenue recognition for a long-term customer contract, pulling forward revenue from future periods. Gross margin impacted by this revenue item and slightly higher customer licenses and data center costs. Non-GAAP segment operating margin was 21.8%.
Revenue ahead of $242M-$246M outlookGAAP gross margin down 460 bps YoYNon-GAAP segment operating margin down 280 bps YoY
$263 million5%—32.3% GAAP gross margin
Public Cloud
Revenue decline reflects lower infrastructure and services revenue, but was ahead of outlook due to higher reported consumption from hyperscaler partners. Non-GAAP gross margin improved due to workforce reductions, and GAAP segment operating margin was 4.7% due to improved operating expense efficiency.
Revenue modestly ahead of $399M-$403M outlookNon-GAAP gross margin up 10 bps YoYGAAP segment operating margin up 80 bps YoY
$407 million-2%—9.7% Non-GAAP gross margin

Product announcements

ProductTypeDetails
RAC AIlaunch
Optimization and Modernization Assessmentlaunch
Microsoft Co-Pilot Adoption Offeringlaunch
Managed Network Security Offeringlaunch
Data Readiness Offeringlaunch

Deals & partnerships

AMD Strategic partnership to deploy AMD-based compute for AI infrastructure. late 2026 through 2028

Definitive agreement to deploy an initial footprint of 30 megawatts of AMD-based compute, incorporating AMD Instinct GPUs and EPYC CPUs, across Rackspace data centers in phases.

Palantir Strengthened partnership to connect AI with enterprise data and operational workflows.

Palantir brings platforms that connect AI with enterprise data and operational workflows, embedding security, permissions, and governance. Rackspace provides the managed operational capabilities.

AdventHealth Five-year agreement to host and manage infrastructure, reducing on-premises data center footprint. 5-year

Agreement to host and manage infrastructure, retire a separate disaster recovery co-location contract, and migrate a significant number of applications and servers onto Rackspace-hosted infrastructure with full DR failover. Also added a new non-production EPIC environment.

Top UK banking firm Multi-year agreement to deploy and manage a cyber recovery cloud and managed services. multi-year

Agreement to deploy and manage a first-of-its-kind cyber recovery cloud built on Rubrik, alongside managed backup and managed Kubernetes services supporting their next-generation development and test banking platform.

Capital programs

AMD AI Compute Deployment underway
Period spend: $75 million
Funding: OEM financing, equipment financing, and other asset-backed credit facilities
Start: late 2026

Benefit:30 megawatts

Under a definitive agreement with AMD, Rackspace plans to deploy an initial footprint of 30 megawatts of AMD-based compute across its data centers. The first deployment of nearly 2 megawatts is targeted for completion by the end of 2026, with capital expenditures of approximately $75 million. The goal is to ramp to 15 megawatts by the end of 2027 and 30 megawatts by the end of 2028. Financing will be collateralized by the newly acquired hardware.

Risks & headwinds

Private Cloud revenue recognition timing H2 FY26

Pulls forward revenue from future periods, including the second half of 2026.

Mitigation:Does not change full-year guidance; company expects private cloud to grow this year while absorbing impacts and pivoting to higher margin revenue.

Strategic exit of low-margin Public Cloud revenue FY26

Accounts for the vast majority of the 7% year-over-year decline in full-year GAAP revenue guidance.

Mitigation:Part of a strategic decision to pivot the business towards higher value services-led work and higher margin revenue.

Higher professional fees and marketing expenses Q2 FY26

Partially offset continued operating expense discipline.

Mitigation:Offset by payroll savings from workforce reductions.

Higher customer licenses and data center costs Q2 FY26

Impacted Private Cloud GAAP gross margin, which was down 460 basis points year-over-year.

Mitigation:Company is strategically pivoting the business towards higher margin revenue.

Seasonal cash uses H1 FY26

Resulted in negative $32 million cash flow from operations and negative $48 million free cash flow in Q2 FY26.

Mitigation:Expects free cash flow generation to accelerate through the second half, strengthening liquidity as the year progresses.

What to watch in Q3 FY26

Free Cash Flow Generation

H2 FY26
Current -$48 million
Target accelerate through the second half

Why it matters

FCF acceleration is key to strengthening liquidity and funding strategic growth priorities, validating management's expectation for H2 improvement.

First half free cash flow reflected known seasonal cash uses, including annual incentive compensation payouts, strategic vendor prepayments, and debt repurchases. We expect free cash flow generation to accelerate through the second half, strengthening liquidity as the year progresses.

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Q&A highlights

How do you envision the Palantir partnership evolving and contributing to Rackspace's growth profile over the next several years?

The Palantir partnership has gained significant traction, driven by customer demand for institutional sovereignty in AI models and data. Rackspace and Palantir employ a 'land small, scale fast' approach, moving from bootcamps to production use cases across various industries. This structured go-to-market motion is expected to yield substantial revenue.

“we land small and then scale fast, right? So the boot camps and the agent camps give us a sort of a good basis of understanding for what our customers want to do. And then once you get that first production use case in, you're able to scale from there.”

asked by Bradley Clark of BMO · answered by Unknown Speaker

2 min read 7 chapters

Detailed narrative

Enterprise AI Strategy

Rackspace is positioning itself as the accountable provider for the full enterprise AI stack, from core to cloud to edge. This involves focusing on governance, security, sovereignty, and resilience for AI workloads, particularly inferencing, which is expected to dominate by 2030. The company emphasizes trust as a critical currency in enterprise AI, offering a model-agnostic, vendor-neutral ecosystem for sovereign AI estates.

Strategic Partnerships and Talent

The company is building out its AI infrastructure capabilities through key partnerships with AMD, Dell, Palantir, and Unifor. These collaborations aim to provide cost-efficient, controlled enterprise intelligence. The addition of Pranav Nambiar as SVP and GM for AI infrastructure, with his extensive experience from AWS, Google, and Microsoft, is expected to accelerate this strategic pivot and build out the new business.

AMD Compute Deployment

Rackspace plans to deploy an initial 30 megawatts of AMD-based compute across its data centers in phases from late 2026 through 2028. The first 2-megawatt deployment, costing approximately $75 million in capital expenditures, is targeted for completion by the end of 2026.

This initiative is expected to generate $15 million to $20 million in annual revenue per megawatt, with EBITDA margins exceeding 50%, leveraging existing infrastructure and talent.

Palantir Partnership Traction

The partnership with Palantir is gaining significant traction, particularly in helping customers transform fragmented legacy data environments into unified, AI-ready platforms with measurable ROI. Engagements are characterized by a 'land small, scale fast' approach, moving from bootcamps to production use cases across diverse industries like renewable energy, packaging, chemicals, and healthcare, leading to a strong pipeline.

Private Cloud Performance and Strategic Wins

The Private Cloud segment reported revenue of $263 million, surpassing guidance, driven by a timing-related revenue recognition from a long-term customer contract. Key customer wins include a five-year agreement with AdventHealth for infrastructure hosting and migration of 366 applications, and a multi-year agreement with a top UK banking firm for a cyber recovery cloud and managed Kubernetes services, reinforcing Rackspace's strength in regulated industries.

Public Cloud Evolution and New Offerings

Public Cloud revenue was $407 million, slightly ahead of expectations, as the segment continues its pivot towards higher-value, services-led work. New offerings, often partner-funded, are designed to open doors with customers and expand into larger managed services relationships. These include AWS-funded optimization/modernization assessments, Microsoft Co-Pilot adoption, Managed Network Security, and Data Readiness, focusing on converting AI ambition into production-ready deployments.

RAC AI Platform Launch

Rackspace announced the production release of RAC AI, its inference and fine-tuning platform, enabling customers to integrate AI into their workloads via a simple API. This platform is a critical part of Rackspace's ability to stitch the full stack together. Future enhancements will include intelligent model routing and customized model harnesses, offering greater flexibility for scaling AI initiatives.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.