Rackspace Technology, Inc. Common Stock 2026 Q2 Earnings Call

Please go ahead. Thank you, and welcome to Rackspace Technology's second quarter 2026 earnings conference call.

I'm Sagar Hebbar, head of investor relations. Joining me today are Gajen Kandiah, our Chief Executive Officer, and Mark Marino, our Chief Financial Officer. As a reminder, certain comments we make on this call will be forward-looking, including, without limitation, statements regarding our financial guidance and outlook, our enterprise AI deployment plans, capacity targets and timelines, expected capital expenditures, revenue per megawatt, and margin assumptions, our financing plans, cash flow expectations, our business strategy and product roadmap, as well as shifts in our business mix. These statements involve risks and uncertainties which could cause actual results to differ materially. A discussion of these risks and uncertainties is included in the Risk Factors and Forward-Looking Statements sections of our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the SEC.

Rackspace Technology assumes no obligation to update the information presented on the call except as required by law. Our presentation includes certain non-GAAP financial measures and adjustments to these measures which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures with their most directly comparable GAAP measures in the earnings press release and presentation, both of which are available on our investor relations website. I will now turn the call over to Gajen for an update on the business.

Thank you, Sagar. Good morning, everyone, and thank you for joining us. I want to start by reviewing our progress toward a clear strategic goal: becoming the accountable provider and operator of the full enterprise AI stack from core to cloud to edge. For more than 25 years, enterprises have trusted Rackspace to operate complex mission-critical infrastructure across Private Cloud, Public Cloud, and data centers worldwide. As enterprise AI becomes operational infrastructure, the things that have always mattered most to our customers, governance, security, sovereignty, resilience, and accountability matter even more. McKinsey & Company estimates that global inferencing workloads will surpass training by the end of 2026 and represent two-thirds of all AI workloads by 2030. Rackspace has tens of thousands of customers across its install base, and many are starting to harness inference to run their businesses more effectively.

The questions they are asking are sharpening around sovereign AI estates that run through a model-agnostic, vendor-neutral ecosystem, and we have listened carefully. Every AI interaction, an employee query, an agent evaluating a transaction, a hospital reading clinical data, pushes decision-making towards the edge driven by sovereignty, latency, and variable load. We don't see cloud versus edge. We see one integrated environment with workloads placed wherever latency, cost, security, and criticality dictate. We believe trust will become one of enterprise AI's most valuable currencies. This is why we have been very deliberate in building the right partnerships. Our Managed Compute and Inference Platform, backed by partners including AMD, Dell, Palantir, and Uniphore, gives customers a clear path to cost-efficient, controlled enterprise intelligence that scales with them. As we build out our AI infrastructure capabilities, I am excited to welcome Pranav Nambiar as SVP and GM for AI infrastructure.

Pranav brings over two decades of experience designing and building complex infrastructure systems with AWS, DigitalOcean, Google, and Microsoft. Most recently, as Senior Vice President and General Manager of AI and data cloud at DigitalOcean, he spearheaded the company's strategic pivot into a premier AI neo cloud, paving the way for the company to be recognized as a unique neo cloud with full stack AI infrastructure and data management. His best-of-breed knowledge and execution skills, honed with some of the world's most demanding companies, is exactly what we need in order to build and scale this important new business. This quarter, we entered into partnership with AMD and strengthened our partnership with Palantir as we build out our enterprise AI solutions. AMD brings their accelerated and differentiated computing platform, while Palantir brings platforms that connect AI with enterprise data and operational workflows while embedding security permissions and governance.

Rackspace then brings the knowledge, infrastructure, migration, cloud, and managed operational capabilities needed to run those platforms reliably in production across all regulated and non-regulated industries. Our Forward Deployed Engineers work in the customer environment, focusing on high-value use cases and remaining accountable beyond the initial implementation. The customer retains control of its data and operating context while Rackspace provides governance and accountability across the environment. Under our definitive agreement with AMD, we plan to deploy an initial footprint of 30 megawatts of AMD-based compute across Rackspace data centers in phases from late 2026 through 2028. The architecture incorporates AMD Instinct GPUs and EPYC CPUs, enabling us to match workloads with the appropriate compute while remaining accountable for performance and operations.

We believe the combination of more efficient silicon, smaller domain-specific models, and intelligent workload routing can materially improve the economics of enterprise AI while simultaneously mitigating exposure to a single model, whether it be for bare metal, inference as a service, fully managed enterprise inference, or enterprise AI cloud. The attractive economics of our new growth vector bears repeating with the following illustrative example. The first deployment is expected to be nearly 2 megawatts, targeted for completion by the end of 2026. Capital expenditures for the first deployment are expected to be approximately $75 million. Our goal is to ramp to cumulative capacity of 15 megawatts by the end of 2027 and a total of 30 megawatts of capacity by the end of 2028. We expect to average $15 million to $20 million in revenue per megawatt deployed, with some variability based on CPU, GPU, and customer mix.

This range translates to $450 million to $600 million in annual revenue for the full 30-megawatt deployment. We expect EBITDA margins in enterprise AI to be in the 50% plus range. We are evaluating financing for a significant portion of the compute hardware through a combination of OEM financing, equipment financing, and other asset-backed credit facilities, with the financing collateralized by the newly acquired hardware. Early demand signals give us reason to be optimistic about the pace of deployment. Given the market's continued demand for high-performance compute and AI infrastructure and the long lead times for the greenfield and brownfield data center projects, Rackspace is well positioned as we have the infrastructure, power, cooling, and talent already available to us and have placed our initial order for AMD GPUs and CPUs.

Alongside inbound calls, our optimism is also driven by our install base of enterprise customers interested in adding capacity, as well as core selling by AMD, Palantir, Uniphore, and our growing base of FDEs. On the platform side, we continue to see increased traction in our strategic relationship with Palantir, both in pipeline and signed deals. Across these engagements, we are seeing a consistent pattern in the type of problem customers bring us in to help solve. Turning fragmented legacy data environments into unified AI-ready platforms, and to do it fast with measurable ROI. Each deployment compounds what we have learned, making the next one faster and more repeatable. We will have more specifics to share as these engagements mature. Finally, our corporate focus continues to reflect where the market is heading and what our customers want.

When we announced our One Rackspace initiative, our intent was to redirect the capabilities we have built over time to take advantage of the generational secular market opportunity in front of us. Enterprises are no longer choosing a single public or private environment for all their applications and data. Instead, they are asking for integrated architectures based on their requirements. As we move forward, we intend to communicate with you with that in mind to better represent our strategy and our milestones. Our priority will continue to be disciplined around capital and talent deployment as we move towards higher-yielding services and a strong balance sheet. Let me get into our business performance, starting with Private Cloud. Second quarter Private Cloud revenue was $263 million, ahead of our July 9th guidance. The upside was driven by the timing of revenue recognition for a long-term customer contract.

Excluding this impact, revenue would have been in line with our previously guided range. Because this recognition timing pulls forward revenue from future periods, including the second half of 2026, it does not change our full year guidance. We expect Private Cloud to grow this year, even as we absorb supply-related timing impacts and strategically pivot the business towards higher margin revenue. We will stay opportunistic about deals that accelerate our strategic pivot as they arise. Our customer wins this quarter reinforce a consistent story. Enterprises in regulated industries are choosing Rackspace to modernize and operate environments where governance, reliability, and compliance are non-negotiable as the foundation for AI adoption. For example, in healthcare, we deepened our relationship with AdventHealth, whose Epic EHR, one of the top five Epic systems in the world, we already host and manage. This quarter, that relationship expanded substantially.

We signed a 5-year agreement to host and manage infrastructure that lets AdventHealth greatly reduce their on-premises data center footprint and retire a separate disaster recovery colocation contract. This comes alongside a large-scale migration of roughly 366 applications, 2,300 virtual machines, and 283 database servers onto Rackspace-hosted infrastructure with full DR failover. We also added a new non-production Epic environment to support their IT development pipeline. Epic Managed Services is proprietary Rackspace IP, purpose-built for the governance and uptime clinical environments require. This is exactly the foundation regulated healthcare organizations need as they move AI from experimentation into production. In financial services, we strengthened our position in cyber resilience with a top U.K. banking firm. We signed a 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.