Rackspace beats expectations but its losses pile up amid aggressive AI pivot

Shares of Rackspace Technology Inc. were trading lower after-hours today, despite an encouraging earnings and revenue beat in its second-quarter financial results.

The San Antonio-based company reported earnings before certain costs such as stock compensation of eight cents per share, just ahead of Wall Street’s target of nine cents per share. Revenue for the period came to $670.1 million, up 1% from a year earlier. That was basically flat from a year ago but still better than expected, as Wall Street had expected revenue to decline compared to the year-ago period, with analysts targeting sales of just $646 million.

All told, Rackspace delivered a net loss of $67.5 million in the quarter, compared to a loss of $55 million in the same period one year earlier.

Chief Executive Gajen Kandiah (pictured) told investors that the prospects for the company’s emerging artificial intelligence business are looking bright. “Enterprises in regulated industries are moving AI from experimentation into production, and they are choosing partners who can be accountable for it,” he said in a statement.

Since last year, Rackspace has embarked on an aggressive strategic pivot toward managed enterprise AI infrastructure. But that shift has some significant consequences, with the company laying off hundreds of staff and incurring substantial operating costs.

Last week, the company was slapped with a federal securities fraud lawsuit by investors over allegations that it may have misled them over the costs associated with its emerging AI business, resulting in more than 34% of its value being wiped out in a single day. The class action lawsuit filed in the U.S. District Court in New York alleged that the company made misleading statements about the business costs associated with that pivot.

In the lawsuit, plaintiffs say that executives reassured investors that the company’s annual outlook remained on track, even though the pivot required it to redirect significant funds and change its business model. However, during a “special investor call” last month, the company disclosed that its AI investments would “require a significant re-prioritization of resources.”

As a result, the company reduced its full-year guidance by $150 million, leading to the largest single-day slide by its stock since it returned to the public markets in 2020. In the lawsuit, the plaintiffs allege that Rackspace failed to inform investors that it would be moving resources and capital away from its more profitable private cloud segment into the weaker public cloud business.

The private cloud business continued to be a bright spot for the company despite these challenges. In the second quarter, the unit delivered revenue of $263 million, up 6% on an annual basis. The public cloud segment generated sales of $407 million, down 2% from a year earlier.

Rackspace reiterated its revised guidance today, saying it expects a full-year loss of between 25 and 30 cents per share on revenue of between $2.45 billion and $2.55 billion. Wall Street is targeting a narrower loss of 18 cents per share on sales of $2.5 billion.

Photo: Rackspace