Rackspace’s operational turnaround accelerates, despite more revenue declines

Rackspace Technology Inc. posted its third straight quarterly loss and saw revenue decline in both of its major business segments, but it still delivered a considerable boost to its bottom line in its first-quarter results, and its stock moved higher after-hours.

The company reported a loss before certain costs such as stock compensation of 6 cents per share, beating the analysts’ forecast, which called for a bigger loss of 8 cents per share. Revenue for the period came to $655 million, above the $658.2 million estimate, but down 4% from a year earlier.

All told, the company reported a net loss of $71.5 million, which doesn’t sound great but is quite an improvement from the $640.6 million loss it recorded in the same period one year ago.

Rackspace Chief Executive Amar Maletira (pictured) was quick to point out that the results marked the 11th successive quarter in which the company had met or beat Wall Street’s targets. “Revenue was at the high end of our guidance, while profit and earnings per share exceeded our guidance range,” he added.

On a conference call, the CEO admitted that he’s feeling uneasy about the economy, and said the company may not be able to add new customers as quickly as before. However, investors were probably relieved to hear that Rackspace’s exposure to cuts by Elon Musk’s Department of Government Efficiency are minimal. According to Maletira, just 1% of the company’s revenue is derived from government contracts.

“That said, we remain cautious of the broader macroeconomic environment, which may impact onboarding timelines for recently closed deals and customer decision cycles in the short term,” Maletira said.

Since taking over as CEO in 2022, Maletira has reorganized Rackspace’s business around two key segments – public cloud and private cloud – while stepping up investments in artificial intelligence and reducing its debt.

The company today is almost unrecognizable from the time when it was considered as a competitor to the likes of Amazon Web Services Inc. and Microsoft Corp. in the public cloud infrastructure business. Unable to match the level of investment of its rivals, Rackspace pivoted and instead focused on providing managed cloud services, operating and maintaining third-party cloud infrastructures on behalf of enterprises.

That model was successful for a time, but Rackspace’s growth had stalled by early 2022, prompting Maletira’s arrival in the hot seat. He immediately initiated a second major restructuring of its business, and the company is now more of a cloud consultancy, helping organizations to architect hybrid and multicloud computing environments and integrate AI applications with them.

“Our operational turnaround is gaining steady momentum,” Maletira said, citing improved business efficiencies.

During the quarter, private cloud revenue declined 7% to $250 million, while public cloud revenue was down 2% to $422 million. Declining revenue is never a good thing, but investors were clearly pleased to see the company’s operational improvements. In addition to almost breaking even, the company delivered an operating profit of $26 million, up 83% from a year ago.

Investors appeared satisfied with the company’s progress, as shares of Rackspace gained more than 2% in extended trading.

Looking to the current quarter, the company said it’s targeting a loss of between four and six cents per share. The midpoint is just ahead of the Street’s target of a six-cent loss. It’s also forecasting revenue of between $653 million and $665 million, a tad lower than the $663.9 million consensus.

Maletira also talked about the company’s new strategic partnership with the data security firm Rubrik Inc. Announced last week, the partnership will see the two companies collaborate on a new data recovery service that can help customers boost resilience to cyberattacks. The new offering will help customers to recover critical data and restore business systems within just a few hours following any kind of breach, the CEO said.

Photo: MIT Sloan CIO Symposium Videos/YouTube