Rackspace Lifts 2026 Revenue Outlook on AI Compute Push

Rackspace Technology raised its full-year revenue forecast to $2.51 billion to $2.56 billion on Wednesday, up from a prior range of $2.45 billion to $2.55 billion, after signing AI infrastructure contracts worth a combined $610 million in anticipated value. The cloud services provider, listed on NASDAQ as RXT, paired the rosier top line with an aggressive plan to operate 20 to 22 megawatts of high-performance AI compute by the end of 2027.

The numbers behind the raise tell a split story. Third-quarter revenue came in at $609 million, down 9% year over year, as Public Cloud weakness outweighed Private Cloud growth. Adjusted EBITDA rose 8.5% to $75 million. Non-GAAP operating profit climbed 12% to $36 million. Even so, the company posted a non-GAAP loss of $0.06 per share, wider than the $0.05 loss a year earlier, because higher interest expense outweighed the operating gain.

Chief Financial Officer Mark Marino said savings from workforce reductions, lower marketing spending and reduced bad debt expense more than offset lower gross profit. The new revenue midpoint of $2.535 billion implies a 6% annual decline, an improvement on the 7% drop previously anticipated. Rackspace reaffirmed its forecasts for non-GAAP operating profit of $125 million to $135 million, adjusted EBITDA of $285 million to $295 million, and a non-GAAP loss of $0.25 to $0.30 per share.

Why did Public Cloud revenue fall 17%?

Public Cloud revenue dropped 17.2% to $349 million in the quarter. Marino attributed the decline to three drivers:

• The non-renewal of a large, low-margin state government contract
• A shift by some large resale customers to direct contracts with hyperscalers
• The wind-down of certain legacy services

The segment's non-GAAP operating margin still rose to 7.8% from a year earlier, helped by lower payroll costs and favorable bad debt expense. For the full year, Rackspace expects Public Cloud revenue of $1.515 billion to $1.545 billion — a 10% decline at the midpoint, better than the 13% drop previously forecast, on stronger renewals and higher customer consumption.

Private Cloud moved the other way. Revenue rose 4.2% to $260 million, driven by upfront implementation revenue from an AdventHealth migration. Its non-GAAP gross margin fell to 31.5%, mainly on the mix impact of implementation revenue and higher customer license and data center costs. Rackspace cut its Private Cloud forecast to $995 million to $1.015 billion, citing the shift of a large healthcare implementation into the first half of 2027 and reserved data center capacity for AI compute. The revised midpoint implies 2% growth, versus 4% before.

What do the AI deals deliver?

The center of gravity is shifting toward AI infrastructure. Chief Executive Officer Gajen Kandiah said Rackspace signed a definitive agreement with Together AI for infrastructure built on NVIDIA GB300 systems, with an anticipated total contract value of $380 million over several years, subject to conditions, and service expected by mid-2027. The companies also signed a letter of intent covering potential future capacity expansion and a proposed joint enterprise AI offering. Kandiah described the expansion as a potential multibillion-dollar long-term opportunity, but stressed the letter is not a definitive agreement.

A second deal adds Blacksmith, an AI-powered developer platform, with an anticipated total contract value of $230 million. Rackspace will supply dedicated bare-metal compute using AMD EPYC CPUs and storage, with deployment starting in early 2027.

Once fully deployed, the planned capacity could generate $420 million to $460 million in annualized run-rate revenue at EBITDA margins above 60%, assuming deployment and utilization proceed as expected. The AMD deployment plan alone calls for roughly 17 megawatts by the end of 2027, excluding the NVIDIA-based Together AI capacity. Kandiah cautioned that financing availability, vendor delivery and data center readiness could affect the schedule.

Is the balance sheet ready?

Cash and equivalents stood at $108 million at quarter-end, with $170 million in total liquidity including the undrawn portion of the revolving credit facility. Operating cash flow reached $36 million; free cash flow was $1 million. Capital expenditures totaled $104 million — spanning customer equipment and software, an internal-use Palantir license and preliminary AMD purchases — while cash capital expenditure was $35 million.

Rackspace recently entered share purchase agreements for an aggregate $66 million investment from a group led by Voss Capital, earmarked for corporate purposes and growth initiatives including GPU-related projects. Hardware for the Together AI deployment will be financed separately, and the company is in discussions with potential lenders, Kandiah said.

The Palantir partnership, meanwhile, keeps producing: seven contracts signed since the previous call, with five in active deployment and two in production. Palantir owns approximately 2% of Rackspace's common stock, Kandiah noted.

Asked whether tighter permitting controls could lift demand or pricing, Kandiah said it was too early to tell. He added that existing capacity could still give customers seeking inference workloads a faster ramp-up. In plain terms: Rackspace is trading shrinking resale revenue for a smaller, far more profitable AI compute business.