0001810019-26-000044
SEC filingRevenue grew 1.9% YoY to $678M, but gross margin fell to 17.6%; net income swung to $8.3M driven by a $55.8M gain on debt extinguishment.
For the three months ended March 31, 2026, Rackspace Technology reported total revenue of $678.1 million, a 1.9% increase from $665.4 million in the prior-year period. On a constant currency basis, revenue grew 1.0%. The growth was entirely attributable to the Public Cloud segment (+6.7% actual, +6.1% constant currency), partially offset by a 6.0% decline in Private Cloud revenue (-7.5% constant currency).
Gross profit decreased 6.1% to $119.1 million, and gross margin declined 150 basis points to 17.6%. The margin compression resulted from a 3.8% increase in cost of revenue, driven by higher third-party infrastructure charges and depreciation, which outpaced revenue growth. Selling, general and administrative expenses decreased $28 million (17.2%) to $136.9 million, primarily due to lower personnel costs, a gain on disposal of non-core assets, and reduced amortization. As a result, operating loss improved from ($38.4) million to ($17.8) million.
Other income and expense swung sharply due to a $55.8 million gain on debt extinguishment from repurchasing $96 million aggregate principal of notes. Interest expense increased 35.1% to $26.2 million due to the maturity of an interest rate swap and higher borrowings on the revolving credit facility. The effective tax rate improved from (12.9)% to (1.5)%, but a $0.1 million benefit was recorded compared to an $8.2 million expense in the prior year. Net income was $8.3 million, a $79.8 million improvement over the net loss of $71.5 million in the prior period.
Public Cloud segment revenue grew 6.7% to $443.4 million, driven by higher services revenue and increased infrastructure volumes. Segment operating profit increased 19.7% to $20.7 million, and operating margin improved 50 bps to 4.7% as revenue growth outpaced a 6% increase in operating expenses. Private Cloud segment revenue declined 6.0% to $234.7 million, reflecting customer transitions off legacy platforms, partially countered by new bookings. Segment operating profit decreased 5.1% to $57.9 million, but margin improved 30 bps to 24.7% as cost reductions (6% decrease) roughly matched the revenue decline. Corporate function expenses decreased 9.1% due to cost management efforts.
The business mix continues to shift toward Public Cloud, which carries lower margins but requires less capital. Management noted a workload-centric approach will allow both segments to benefit, with a focus on defending and expanding Private Cloud through new solutions and improving Public Cloud margins via cost efficiencies and higher-margin services.
The MD&A does not provide explicit forward guidance. However, the company highlighted strategic priorities: differentiating service offerings through multi-cloud partnerships (AWS, Azure, Google Cloud, Oracle, SAP, VMware), retaining customers via integrated portfolios like Rackspace Fabric and Elastic Engineering, and improving revenue mix toward higher-margin services. Key risks include evolving technologies, regulatory uncertainties such as international trade policies and tariffs, and a competitive market. On liquidity, management expressed confidence in internally-generated cash flows and available credit ($202 million undrawn revolver as of March 31, 2026) to meet obligations over the next twelve months.
As of March 31, 2026, Rackspace Technology reported cash and cash equivalents of $93.6 million, down from $105.8 million at December 31, 2025. Total assets stood at $2.7654 billion, while total liabilities were $3.9821 billion, resulting in a stockholders' deficit of $1.2167 billion (worsened from $1.2195 billion deficit at year-end 2025). The company's debt position includes $2.7085 billion in total debt (net of unamortized issuance costs, premium, and discount), with $2.4776 billion in principal outstanding. Current debt is $26.6 million, with non-current debt of $2.6819 billion. The company maintains a $375.0 million revolving credit facility, of which $150.0 million was drawn as of March 31, 2026, leaving $201.5 million of available commitments. The company is highly leveraged but believes its sources will provide sufficient liquidity over the next twelve months.
The Notes disclose $575.5 million in remaining performance obligations (RPO) as of March 31, 2026, representing the aggregate transaction price allocated to contracts not yet fulfilled. Approximately 39% ($224.4 million) is expected to be recognized as revenue during the remainder of 2026, with the balance thereafter. This excludes variable consideration from usage-based arrangements. The company also has $130.4 million in current deferred revenue and $2.3 million in non-current deferred revenue. Additionally, the company has $23.5 million in letters of credit issued under the revolving credit facility. No other material purchase commitments or contractual obligations are explicitly detailed in the Notes.
No share buybacks or dividends were reported in the Notes. Capital expenditures (purchases of property, equipment and software) totaled $14.5 million for Q1 2026, representing 2.1% of revenue. Debt activity included $125.0 million in borrowings under the revolving credit facility and $104.5 million in repayments, resulting in a net debt decrease of $11.6 million in principal. The company also repurchased $68.3 million principal amount of 3.50% FLSO Senior Secured Notes for $34.5 million, $1.3 million of 3.50% Senior Secured Notes for $0.6 million, and $26.9 million of 5.375% Senior Notes for $11.3 million, generating a total gain on debt extinguishment of $55.8 million. Subsequent to quarter end, an additional $11.2 million of notes were repurchased for $4.8 million.
The company operates two reportable segments: Public Cloud and Private Cloud. For Q1 2026, Public Cloud generated $443.4 million in revenue (up 6.7% YoY from $415.6 million) and segment operating profit of $20.7 million (4.7% margin). Private Cloud generated $234.7 million in revenue (down 6.0% YoY from $249.8 million) and segment operating profit of $57.9 million (24.7% margin). Total consolidated segment operating profit was $78.6 million. Corporate functions, share-based compensation, transaction-related adjustments, restructuring, and amortization of intangible assets are excluded from segment results. No geographic revenue breakdown is provided in the Notes.
Operating cash flow (CFO) of $5.1M in Q1 2026 was significantly lower than the prior year's $12.6M, despite net income improving from a loss of $71.5M to income of $8.3M. The divergence is largely due to a $55.8M gain on debt extinguishment (non-cash) and unfavorable working capital swings, particularly a $34.5M increase in prepaid expenses and other current assets and a $23.3M increase in accounts payable/accrued liabilities. Capex intensity rose sharply, with purchases of property, equipment and software increasing from $8.3M to $14.5M. Free cash flow (CFO minus capex) was negative $9.4M in Q1 2026 versus positive $4.3M in Q1 2025. No share repurchases or dividends were paid, and financing activities were dominated by net debt proceeds ($20.5M net borrowing) offset by lease and financing obligation payments. The company ended the period with $96.0M in cash, cash equivalents, and restricted cash, down from $108.0M at the start of the quarter.