Rackspace private cloud strengthens as quarterly losses widen

Rackspace Technology posted modest second-quarter revenue growth as stronger private cloud sales offset weakness in its larger public cloud business, while higher costs and investment in artificial intelligence pushed the company deeper into the red.

The San Antonio-based cloud and technology services group generated revenue of $670.1 million for the three months ended June 30, up 0.6% from $666.3 million a year earlier. Private Cloud revenue climbed 5.5% to $263.3 million, while Public Cloud revenue fell 2.3% to $406.8 million.

The contrasting performances highlight Rackspace’s changing business mix as it seeks to reposition itself around private infrastructure, regulated workloads and enterprise AI. Public Cloud remains the company’s largest revenue generator, but Private Cloud has become increasingly important to its strategy as organisations seek greater control over sensitive data and computing workloads.

Losses nevertheless increased during the quarter. Rackspace recorded an operating loss of $33 million, compared with a $25 million loss a year earlier. Its net loss widened to about $68 million from $55 million, while the diluted loss per share increased to $0.27 from $0.23. Non-GAAP operating profit remained unchanged at $27 million.

The rise in Private Cloud revenue was partly driven by customer contracts that included hardware sales-type lease arrangements. Those deals also increased costs, illustrating the trade-off between stronger headline revenue and the spending required to deliver dedicated infrastructure. Cost of revenue rose by about $18 million, or 3%, to $555 million, with additional hardware and depreciation expenses contributing to the increase.

Public Cloud revenue declined as services income weakened. The business, which helps customers operate workloads across platforms including Amazon Web Services, Microsoft Azure and Google Cloud, traditionally carries lower margins because a substantial portion of revenue involves reselling third-party infrastructure. Public Cloud segment operating profit nevertheless rose to $19 million from $16.2 million a year earlier.

Rackspace is simultaneously directing more resources towards artificial intelligence infrastructure as management attempts to establish the company as an operator of enterprise AI systems rather than primarily a manager of traditional cloud environments.

The company has outlined plans to build computing capacity using Advanced Micro Devices processors and accelerators. It expects approximately two megawatts of AMD-powered AI capacity to be operating by the end of 2026, rising to 15 megawatts by the end of 2027 and 30 megawatts by the end of 2028. The first phase of the infrastructure programme is expected to require roughly $75 million.

Chief executive Gajen Kandiah has argued that companies operating in regulated sectors are moving artificial intelligence systems from experimental projects into production environments, creating demand for infrastructure providers capable of managing security, governance and reliability.

Rackspace has also been expanding its collaboration with Palantir as part of that strategy. Its AI plans are focused particularly on customers in industries where data sovereignty, compliance and operational continuity are critical, including healthcare and financial services.

The transformation is placing pressure on the group’s finances. Rackspace ended June with about $111 million in cash and cash equivalents and total liquidity of approximately $202 million. Its principal debt outstanding stood at roughly $2.57 billion, leaving the company balancing investment requirements against substantial financing obligations.

Management has also undertaken a workforce realignment affecting about 15% of employees, equivalent to roughly 750 positions, as resources are redirected towards AI-related operations. The restructuring is expected to produce annual savings that could reach approximately $85 million, while generating one-time costs connected with the changes.

Rackspace now expects full-year 2026 revenue of between $2.45 billion and $2.55 billion. Private Cloud revenue is projected at $1 billion to $1.05 billion, while Public Cloud revenue is expected to range between $1.45 billion and $1.5 billion. Adjusted EBITDA is forecast at $285 million to $295 million.

The financial overhaul has drawn scrutiny from investors. Rackspace, Kandiah and chief financial officer Mark Marino were named in a proposed securities class action filed in federal court in July over allegations concerning disclosures about the costs and financial effects of the company’s AI strategy. Rackspace has said the litigation is at an early stage and that the outcome cannot yet be reasonably estimated.