Rackspace Technology (RXT) Q3 2026 earnings review
Rackspace raises its sales plan, but data center profits fall
Rackspace Technology, which manages private servers and public cloud software for businesses, raised its full-year sales plan while its core hosting margins shrank. Third-quarter revenue fell 9%, though operating profit excluding one-offs rose 12% after the company cut overhead and walked away from low-margin cloud resale contracts. Chief executive Gajen Kandiah lifted the full-year revenue outlook by $35 million at the middle of the range, but by our math that plan still has fourth-quarter sales dropping 15%.
| Total revenue | $609.1M -9.3% from a year ago |
|---|---|
| Operating profit, excluding one-offs | $35.9M +12.2% from a year ago |
| Capital expenditures | $104.0M $34.0M a year ago |
| Full-year revenue outlook | Raised $35M middle of the range: -5.6% for the year |
⚖️ Verdict: 🔴 Bearish
The story got worse because Private Cloud, the data center business meant to carry the artificial intelligence turnaround, lost profitability and had its full-year sales outlook cut. At the same time, capital spending tripled to $104 million as the AMD chip build-out began, pulling total liquidity down to $170 million while management raised its share-count forecast by 15 million shares. On the positive side, exiting pass-through cloud resale and cutting staff lifted Public Cloud operating margins.
The question now is whether Rackspace can fund and fill its new AI server capacity before its 2028 debt maturities arrive. Either the third-quarter equipment surge turns into high-margin revenue in 2027, or rising interest costs, unpaid supplier bills and stock sales overwhelm the balance sheet first. Year-end deployed megawatts and fourth-quarter free cash flow will show which path the business is on.
🐂 Bull Case
Lower Overhead And Resale Exit Lift Operating Margins
Rackspace is shrinking its Public Cloud segment, which resells computing capacity on giant networks like Amazon Web Services and manages software on top of them. Because passing through rented infrastructure carries almost no profit, walking away from those contracts hurts sales much more than earnings. At the same time, the cloud manager cut selling, general and administrative overhead after laying off 15% of its staff in June.
- Public Cloud segment operating profit: $27.2 million, or 7.8% of segment sales, up from 3.3% a year ago
- Selling, general and administrative expenses: 20.6% of total revenue, down 3.8 percentage points from 24.4% a year ago
- Operating profit excluding one-offs: $35.9 million, up 12.2% from a year ago despite a 9.3% revenue drop
What to watch: fourth-quarter operating profit excluding one-offs, which the full-year outlook puts at $36 million at the middle of the range by our math. Hitting the top of that range would show that June's job cuts are offsetting the loss of Public Cloud sales.
Capital Spending Jumps Threefold As AI Build Starts
Chief executive Gajen Kandiah wants Rackspace to become the "operator of the full enterprise AI stack" by hosting artificial intelligence chips from AMD and data software from Palantir inside its own data centers. Last quarter, the Texas company signed a contract to install 30 megawatts of AMD computing capacity through 2028, starting with a 2-megawatt build worth $75 million by the end of 2026.
Third-quarter capital expenditures reached $104 million, or 17.1% of revenue, up from $34 million a year ago. The cash flow statement shows that suppliers and lenders financed most of this equipment: over the first nine months of 2026, Rackspace added $52.3 million of equipment through unpaid bills, $46.6 million through finance leases, and $14.0 million by issuing common stock. Getting hardware onto the floor without draining cash is the first step toward earning AI revenue in 2027.
What to watch: confirmed megawatts of AMD capacity running at year-end in the fourth-quarter report. Delivering the initial 2 megawatts on time would prove that the third-quarter equipment surge is ready to generate revenue.
🐻 Bear Case
Debt Grows And Liquidity Shrinks Before 2028
Rackspace carries more than $2.5 billion in debt principal that comes due in 2028, and its total liabilities exceed its assets by $1.31 billion. Earlier this year, the business bought back notes at a discount, booking a $62.5 million debt extinguishment gain in the first half. Those buybacks stopped in the third quarter, while total debt including leases climbed to $3.22 billion.
- Total liquidity: $170 million (including $108 million in cash), down from $202 million in the second quarter and $386 million a year ago
- Third-quarter free cash flow: $1.2 million by our math ($35.7 million in operating cash flow minus $34.5 million in cash capital spending), down from $42.7 million a year ago
- Full-year free cash flow target: omitted from the third-quarter outlook table after being cut to $50–70 million in July
Cash generation remains weak even after collecting $66.4 million in customer receivables during the quarter, because cash interest payments reached $97.9 million over the first nine months. Drawing down credit lines while liquidity shrinks makes refinancing the 2028 debt wall harder.
What to watch: fourth-quarter free cash flow and the balance of sold receivables in the annual filing. Generating less than $108 million in fourth-quarter free cash flow would miss the full-year cash target management set in July.
Private Cloud Outlook Cut And Margins Drop
Kandiah said Rackspace is translating its data center capacity "into further commitments, rapid deployments and high margin operations." Private Cloud, where the company operates dedicated servers for hospitals, banks and government agencies, is the home of that infrastructure. Third-quarter Private Cloud revenue rose 4.2% from a year ago to $260.0 million.
Yet the numbers inside the segment moved against Kandiah's claim. Rackspace cut its full-year Private Cloud revenue plan by $20 million at the middle of the range to $995–1,015 million, which by our math leaves $247 million for the fourth quarter—down $13 million from the third quarter. Worse, Private Cloud segment operating profit fell 20.5% from a year ago to $53.4 million, pulling the segment margin down 6.4 percentage points to 20.5%.
That margin drop shows that new hardware and AI setup costs are hitting Private Cloud before the new contracts pay off. Meanwhile, current deferred revenue—upfront customer payments for future service—dropped by $27.0 million during the quarter to $69.3 million.
What to watch: Private Cloud segment operating margin in the fourth quarter. Another decline below 20% would confirm that existing data center contracts are losing profitability faster than AI services can replace it.
Public Cloud Shrinks Faster And Gross Margin Falls
Rackspace says it is choosing to leave low-margin Public Cloud infrastructure resale as giant cloud providers move customers to direct billing. Even after raising the full-year Public Cloud target by $55 million at the middle of the range to $1,515–1,545 million, the pace of the contraction is accelerating.
Public Cloud sales dropped 17.2% from a year ago to $349.1 million in the third quarter, and by our math the updated full-year plan points to a 25.2% drop in the fourth quarter to $330.7 million. Exiting pass-through resale was supposed to lift company-wide gross profit margins, because cost of revenue—the direct cost of running servers and paying cloud vendors—would fall faster than sales. Instead, consolidated gross margin excluding one-offs slipped 0.4 percentage points from a year ago to 19.5%, as Private Cloud profitability weakened.
What to watch: consolidated gross margin excluding one-offs in the fourth quarter. A reading below 19.5% while Public Cloud shrinks by a quarter would prove that core pricing pressure is eating up the mix benefit.
Stock Issuance Dilutes Shareholders Despite Raised Guide
"This quarter we continued to execute on our business and financial plan and reaffirm our profit outlook for the full year while modestly increasing our revenue outlook," Kandiah said. The $35 million revenue raise recovers less than a quarter of the $150 million cut management made in July, and shareholders now own a smaller slice of the business.
Diluted shares excluding one-offs jumped 11.7% from a year ago to 270.5 million in the third quarter. Over the first nine months, Rackspace raised $11.6 million in cash by selling common stock and handed over another $14.0 million in stock to pay for equipment and software. Management raised its full-year share count forecast by 15 million shares to 265–275 million, even though the table still notes that "Non-GAAP Weighted Average Shares guidance excludes any dilution from the ATM program."
What to watch: total shares outstanding in the year-end balance sheet. Further stock sales to fund everyday operations or partner software will deepen per-share losses before AI capacity comes online.
💲 Other KPIs
Interest costs jumped 67.5% from $21.2 million a year ago, rising to 5.8% of revenue from 3.2%. An interest-rate swap that protected the IT group from higher rates expired in February 2026, and new credit line borrowings added to the bill. Higher interest wiped out operating improvements and pushed per-share losses excluding one-offs to $0.06.
Deferred revenue—cash customers have paid upfront for services not yet delivered—fell 28.0% from $96.3 million last quarter and 5.2% from $73.1 million a year ago. After rising to $130.4 million in the first quarter on a prepaid contract, the balance has shrunk for two straight quarters as the company recognized that revenue without replacing it.
Uncollected customer bills dropped by $66.4 million from $278.7 million in the second quarter and by $54.2 million from the end of 2025. Shrinking sales explain part of the drop, and the server operator also sells customer invoices to a bank facility to bring in cash faster, which lifted third-quarter operating cash flow.
🔮 Guidance
Raised. The middle of the full-year range moved up $35 million to $2,535 million, or a 5.6% decline from 2025. By our math, that leaves $577.7 million for the fourth quarter, down 15.4% from a year ago vs the 9.3% drop in the third quarter. Across four quarters, the full-year midpoint moved by $0, then -$150 million in July, and now +$35 million.
Cut. Rackspace lowered the middle of its dedicated-hosting forecast by $20 million to $1,005 million, which represents 1.5% growth for the year. By our math, that leaves $247.0 million for the fourth quarter, up 2.7% from an easy comparison a year ago but down 5.0% from the third quarter's $260.0 million.
Raised. The cloud reseller lifted the middle of its Public Cloud outlook by $55 million to $1,530 million, a 9.8% full-year drop. By our math, the plan leaves $330.7 million for the fourth quarter, a 25.2% decline from a year ago as the exit from low-margin infrastructure resale speeds up.
Unchanged. The full-year target stays at $130 million at the middle of the range, up 3.1% from 2025 after management cut it from $160–170 million in July. By our math, that leaves $36.0 million for the fourth quarter, down 12.6% from $41.2 million a year ago,though the implied 6.2% operating margin beats the third quarter's 5.9%.
Unchanged. The full-year plan keeps cash operating profit before interest, taxes and depreciation at $290 million at the middle of the range, up 5.2% from 2025. By our math, that leaves $77.7 million for the fourth quarter, up slightly from $75.2 million in the third quarter but down 3.7% from $80.7 million a year ago.
Unchanged. Management kept the full-year loss target at $0.275 per share at the middle of the range. After losing $0.20 per share over the first nine months, the outlook leaves a loss of $0.05 to $0.10 per share for the fourth quarter, worse than the $0.01 per share loss in the fourth quarter of 2025 due to higher interest and share count.
Unchanged. The forecast for net interest and other financing charges stays at $225 million of expense at the middle of the range. This figure strips out the non-cash accounting benefit from the March 2024 debt restructuring and reflects the cash interest burden on the $3.22 billion debt and lease load.
Unchanged. The Texas group continues to apply a flat 26% structural tax rate to its earnings excluding one-offs across all quarters.
Raised. Management increased the expected full-year diluted share count by 15 million shares at the middle of the range to 270 million, matching the third quarter's 270.5 million count. The outlook still excludes any future shares sold under the $250 million at-the-market stock offering program.
❓ Key Questions
Did Rackspace keep its $50–70 million free cash flow plan?
Management gave a full-year free cash flow target in prior quarters and cut it to $50–70 million in July, but the third-quarter release omitted the metric. With nine-month free cash flow at negative $56.5 million, investors need to know if the target still stands.
Why did Private Cloud margins drop 6.4 percentage points?
Private Cloud revenue grew 4.2%, yet its segment operating margin fell from 26.9% a year ago to 20.5%, and management trimmed the full-year Private Cloud sales target. What portion of that margin drop came from upfront AI data center spending versus customer pricing pressure?
How will Rackspace finance the 2027 AMD chip build-out?
Non-cash leases and supplier accruals funded the jump to $104 million in third-quarter capital spending for the initial 2-megawatt AI deployment. Expanding to 15 megawatts in 2027 requires roughly $500 million more in hardware while total liquidity is down to $170 million.
What were sales bookings and deployed AI megawatts in Q3?
Rackspace stopped reporting annual contract value bookings in 2026, and the release gives no count of active AI megawatts. Without bookings or deployed capacity numbers, outsiders cannot tell if new AI contracts are replacing lost cloud revenue.