Rackspace reports strong progress following business realignment, pleasing investors – Business

Cloud services provider Rackspace Technology Inc. beat Wall Street’s targets on earnings and revenue today as it continues to transform itself and pay off a huge debt refinancing deal that followed a major strategic realignment of its business last year.

Although the company reported a significant decline in revenue, investors appeared satisfied with its progress, as its shares gained just over a percentage point in extended trading, adding to a 5% gain during the regular session earlier in the day.

San Antonio-based Rackspace reported a loss before certain costs such as stock compensation of 11 cents per share, ahead of the Street’s forecast of a 13 cent per share loss. Revenue was down 9% from a year earlier to $691 million, but came in above the analyst consensus estimate of $684.25 million.

The company said its net loss will range from between $545.3 million to $645.3 million. The uncertainty was attributed to the “size and uncertainty” of a series of debt refinancing transactions earlier in the year that have not yet been fully resolved. It will clarify the exact numbers in a future filing with the Securities and Exchange Commission, officials said. One year ago, the company posted a net loss of $612 million, which suggests little overall improvement in terms of profitability.

That said, Rackspace Chief Executive Amar Maletira (pictured) told analysts on a conference call that the company is making “steady progress” on its turnaround. “Results in the first quarter of 2024 exceeded the high end of our guidance for revenue, profit and earnings per share. We have now either met or exceeded guidance, the last seven quarters.”

Rackspace has undergone a tumultuous period over the past couple of years. The company, which began life as a provider of public cloud infrastructure services that once competed with the likes of Amazon Web Services Inc. and Microsoft Corp., has long since pivoted to providing managed services, operating cloud infrastructure on behalf of enterprises. Its services include designing, building and operating cloud environments within its former rivals’ platforms.

While that model was initially successful, the company’s growth later stalled, and in 2022 its board of directors announced it was conducting a strategic review and a search for prospective buyers. Ultimately, a buyer was not found, and Maletira stepped up to replace former CEO Kevin Jones and head up a “business realignment” that now sees it reporting revenue under two main segments – public cloud and private cloud.

On the conference call, Maletira told analysts he’s encouraged by the company’s progress in “implementing an operational turnaround” that involves repositioning itself as an “innovative hybrid multicloud and AI solutions” provider and “right sizing our capital structure.”

Rackspace’s private cloud business segment delivered $268 million in sales during the quarter, down 15% from a year earlier, while public cloud revenue came to $422 million, down 5% from the year before.

Despite the revenue drop, Maletira noted a few bright spots, saying the company’s healthcare vertical in the private cloud segment gained significant traction in terms of deals with large customers. Another bright spot is the company’s U.K. Sovereign Services business, which is a new platform designed to cater to that country’s government and National Health Service systems.

Rackspace’s guidance for the coming quarter seems to reinforce the optimism declared by Maletira. For the second quarter, it sees revenue of between $668 million and $678 million, which is more or less in-line with Wall Street’s forecast.

The CEO also spoke about the company’s efforts to integrate artificial intelligence throughout its core services, saying this will dramatically transform its offerings. “Later this year, we will be introducing AI Business, an AI-optimized platform for fine-tuning and inferencing AI workloads,” he said.

That new platform builds on an earlier initiative announced last year called Foundry for Generative AI or FAIR, which aims to provide customers with everything they need to build generative AI applications that can run on-premises or in the cloud. The company followed up by announcing partnerships with Dell Technologies Inc. and Nvidia Corp. to provide customers with access to the full-stack infrastructure, software and expertise they need to run advanced AI models

Rackspace Chief Financial Officer Mark Marino told analysts that Rackspace completed a debt exchange earlier in the quarter that reduced its principal by more than $300 million, saving the company around $11 million in interest repayments.

Photo: Rackspace