RXT - NASDAQ

Good day, and welcome to the Rackspace Technology, Inc. Q3 2025 Earnings Call and Webcast. Today, all participants will be in a listen-only mode. Should you need assistance during today's event, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Sagar Hebbar, Head of Investor Relations. Please go ahead.

Thank you, and welcome to Rackspace Technology, Inc.'s third quarter 2025 earnings conference call. I am Sagar Hebbar, Head of Investor Relations. Joining me today are Amar Maletira, our Chief Executive Officer, and Mark A. Marino, our Chief Financial Officer. As a reminder, certain comments we make on this call will be forward-looking. These statements involve risks and uncertainties which could cause actual results to differ. A discussion of these risks and uncertainties is included in our SEC filings. Rackspace Technology, Inc. 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 to 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 Amar for an update on the business.

Thank you, Sagar, and good morning. I spent the first couple of months figuring out what we have a terrific company centered on trust both with each other as Rackers as well as with our customers and partners. And I will be devoting the next few months to accelerating growth including how to best leverage advances in AI, to capture external opportunities and to improve internal efficiencies. Reflecting on my initial weeks at the company, three strengths stand out. First, a record culture that blends deep engineering with an obsession for customer outcome. Second, a portfolio built for regulated environments where reliability, security, and compliance are non-negotiable. And third, significant growth potential in at least three markets. Two verticals in healthcare and sovereign, the other horizontal in AI, where our capabilities match real demand. In sum, we do not try to be everything to everyone. We aim to be the partner of record when it matters. The enterprise market is shifting from pilots to production in AI, and it is growing more complex as data sovereignty and security requirements tighten. In this dynamic complex space, our role is clear. To help our clients orchestrate critical workloads across private cloud, public cloud, edge, and sovereign environments. We turn data into outcomes through our advisory, security, and managed services. We will build on our strengths, we will focus where we win, and we will execute with precision to deliver stronger reliability, greater predictability, and enhanced security for our customers. This is how we earn and keep trust. Now, getting back to commentary on our quarter, results for the third quarter met or beat our expectations across all key metrics. Revenue, operating profit, and EPS met or exceeded the midpoint of our guided range. Sales momentum remains strong with bookings as measured by annual contract value growing 5% year over year. The growth was primarily driven by private cloud which secured several key wins. Now, let's get into our segment performance starting with private cloud. Private cloud continued to win several large long-term enterprise deals. Revenue came in at $250 million, meeting our guidance midpoint and down 3% year over year. Revenue continues to stabilize as prior period bookings ramp reflecting business strength and consistent execution. Our focus on retention and bookings momentum is driving a solid path to long-term growth. We are expanding relationships with enterprise and sovereign customers positioning Rackspace Technology, Inc. to capture new opportunities and drive future scale. In Q3, we signed a leading global telecommunications provider to enhance the experience for more than 30 enterprise clients worldwide. This engagement centered on Rackspace Technology, Inc.'s private cloud and professional services. Created a software-defined data center environment built for agility, scalability, and consistency on a global scale. Beyond measurable value, it deepened our partnership and reinforced Rackspace Technology, Inc. as a trusted extension of our customers' service delivery model. Another major win this quarter comes from a sovereign government customer focused on data and AI. Rackspace Technology, Inc. will manage a secure cloud environment enabling multiple departments to host mission-critical applications safely and accelerate digital services for millions of citizens. These wins demonstrate the strength of our cloud capabilities and the trust customers place in Rackspace Technology, Inc. to deliver a secure, reliable solution at scale. Private cloud also continued to deliver innovative solutions with eight new releases in the third quarter. A key highlight was the launch of Rackspace Technology, Inc.'s electronic health record Cloud Enterprise. A fully dedicated platform for mission-critical healthcare systems like Epic. It delivers leading availability, compliance, and performance aligned with Epic Honor Roll Standards and healthcare regulations such as HIPAA and HITRUST. It provides a strong foundation for healthcare organizations that need secure and compliant infrastructure for patient care. We also introduced AI LaunchPack, a fully managed service that helps customers move from AI experimentation to production. With GPU-powered environments, preconfigured AI tooling, and expert support, AI Launchpad helps enterprises scale AI with speed, security, and cost transparency. Together, these launches show how private cloud continues to innovate across cloud, AI, and security. We help customers modernize their most critical workloads with trust and speed. Now, turning to public cloud, in the third quarter, bookings grew 2% sequentially led by The Americas. Revenues for the segment totaled $422 million, exceeding our guided range. Revenue increased 1% year over year and sequentially driven by a 3% rise in services revenue. Reflecting our disciplined focus on higher value engagements. We are executing our strategy to expand our AI offerings and enterprise footprint positioning Rackspace Technology, Inc. for growth ahead. In the third quarter, we signed a services engagement with a leading global e-commerce platform. To provide site reliability engineering, and AI ops services on their live streaming platform improving performance and overall experience for the buyers and sellers. We are also supporting a leading financial services firm that continues to invest in AI, cloud modernization, and data analytics to enhance customer insight, automate decision making, and strengthen regulatory compliance. This customer partnered with Rackspace Technology, Inc. to develop an AI-driven governance platform that automates risk and compliance workflows reducing approval cycles from months to days. Additionally, we were selected to lead one of the most advanced AI-led modernization programs in financial services using our agentic AI solution to autonomously transform legacy code into AWS native platforms creating a repeatable blueprint for enterprise modernization. In Q3, our product launches reinforce our services for strategy and expanded our portfolio capabilities. We introduced solutions that industrialized AI agents, modernized contact centers, and enabled flexible cloud environments. Helping businesses scale autonomous operations, transform legacy systems, and migrate workloads efficiently. These innovations expand our addressable market and position Rackspace Technology, Inc. as a trusted strategic partner for enterprises navigating complex cloud, AI, and digital transformation. Rackspace Technology, Inc. has an exceptional foundation with clarity, focus, and discipline. We will unlock its full potential. We will build on our strengths, focus where we win, and execute with precision to deliver stronger reliability, greater predictability, and enhanced security for our customers. With that, I will turn it over to Mark for financial results and guidance.

Thanks, Amar. In the third quarter, total company GAAP revenue of $671 million was up 1% sequentially but down 1% year over year, coming in above the midpoint of our guidance. Non-GAAP gross profit margin was 19.9% of GAAP revenue, up slightly on a sequential basis but down 120 basis points year over year driven by lower cost absorption in private cloud and slightly higher infrastructure resale costs in public cloud. For the quarter, non-GAAP operating profit was $32 million, meeting the high end of our guided range and up 17% sequentially due to cost efficiencies in private cloud and lower corporate expenses. Non-GAAP loss per share was $0.05 at the midpoint of our guided range of a $0.04 to $0.06 loss per share. Third quarter cash flow from operations was $71 million and free cash flow was $43 million. We ended the quarter with $100 million in cash on hand and $386 million of total liquidity. Turning to our segment results. Private Cloud GAAP revenue for the third quarter was $250 million, meeting the midpoint of our guidance. Private Cloud revenue decreased 3% year over year reflecting customer transitions off legacy platforms partially offset by new bookings coming online. Private Cloud non-GAAP gross margin was 38.1%, down 50 basis points year over year and up 130 basis points sequentially. Non-GAAP segment operating margin was 26.9%, down 180 basis points year over year driven by lower volumes and modestly higher operating expenses. Non-GAAP segment operating margin was up 230 basis points sequentially driven by improved cost management. For Public Cloud, GAAP revenue was $422 million, surpassing the high end of our guidance, up 1% year over year and 1% sequentially. Driven by higher services revenue and increased volumes across infrastructure resale. Non-GAAP gross margin was 9.2%, down 110 basis points year over year due to unfavorable product mix. Non-GAAP segment operating margin was 3.3%, down 40 basis points year over year due to unfavorable product mix partially offset by lower operating expenses. Turning to guidance. We expect fourth quarter GAAP revenue of $664 to $678 million, flat sequentially and down 2% year over year at the midpoint. In private cloud, we expect revenue of $244 million to $252 million, down 1% sequentially at the midpoint. We expect public cloud revenue of $420 million to $426 million, flat sequentially at the midpoint. Total non-GAAP operating profit is expected to be $32 million to $34 million and non-GAAP loss per share is expected to be in the range of $0.03 to $0.05. Our non-GAAP tax rate is expected to be 26% and non-GAAP share count is expected to be between 242 million and 244 million shares. I'll now turn it back over to Amar for final remarks.

Before I wrap up, I want to say thank you to our customers, partners, and all Rackers. Two months in, I am proud of how the team delivered this quarter and focused on what is next. Our ambition is clear. We will be the leading hybrid multi-cloud partner for regulated, sovereign, and mission-critical workloads. We will be the partner of record when it matters. Sagar, back to you.

Thank you, Amar. Before we move to Q&A, I would note that we will be participating in the UBS Global Technology and AI Conference in Arizona on December 3, consistent with last year. With that, we will now open the line for questions. Please limit yourself to one question and one follow-up. Please go ahead.

Thank you. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then 2. At this time, we will pause momentarily to assemble our roster. And at this time, we are showing no questioners in the queue. And I would like to turn the call at this time back over to Sagar Hebbar for any closing remarks.

Thank you, everyone, for joining us. If we did not get your question or if you have a follow-up, please email us at Rackspace Technology, Inc. Have a great evening, everyone. Thanks, Chris.