Thank you for standing by, and welcome to Rackspace's second quarter, 2026, earnings conference call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, please press star 11 again. I would now like to hand the call over to Sagar Hebbar. Investor Relations. Please go ahead.

Thank you and welcome to Rackspace Technology's second quarter 2026 earnings conference call. I'm Sagar Hebbar, Head of Investor Relations. Joining me today are Gajen Kandiah, our Chief Executive Officer, and Mark Marino, our Chief Financial Officer. As a reminder, certain comments we make on this call will be forward-looking, including without limitation, statements regarding our financial guidance and outlook, our enterprise AI deployment plans, capacity targets and timelines, expected capital expenditures, revenue per megawatt, and margin assumptions, our financing plans, cash flow expectations, our business strategy and product roadmap, as well as shifts in our business mix. These statements involve risks and uncertainties which could cause actual results to differ materially. A discussion of these risks and uncertainties is included in the risk factors and forward-looking statement sections of our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the SEC. Rackspace Technology assumes no obligation to update the information presented on the call except as required by law. Our presentation includes certain non-GAAP financial measures and adjustments to these measures which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures with their most directly compatible GAAP measures in the earnings press release and presentation, both of which are available on our investor relations website. I will now turn the call over to Gajen for an update on the business.

Thank you, Sagar. Good morning, everyone, and thank you for joining us. I want to start by reviewing our progress toward a clear strategic goal, becoming the accountable provider and operator of the full enterprise AI stack from core to cloud to edge. For more than 25 years, enterprises have trusted Rackspace to operate complex, mission-critical infrastructure across private cloud, public cloud, and data centers worldwide. As enterprise AI becomes operational infrastructure, the things that have always mattered most to our customers, governance, security, sovereignty, resilience, and accountability, matter even more. McKinsey and Company estimates that global inferencing workloads will surpass training by the end of 2026 and represent two-thirds of all AI workloads by 2030. Rackspace has tens of thousands of customers across its install base, and many are starting to harness inference to run their businesses more effectively. The questions they are asking are sharpening around sovereign AI estates that run through a model-agnostic, vendor-neutral ecosystem, and we have listened carefully. Every AI interaction, an employee query, an agent evaluating a transaction, a hospital reading clinical data, pushes decision-making towards the edge We don't see cloud versus edge. We see one integrated environment with workloads placed wherever latency, cost, security, and criticality dictate. We believe trust will become one of enterprise AI's most valuable currencies. This is why we have been very deliberate in building the right partnerships. Our managed compute and inference platform, backed by partners including AMD, Dell, Palantir, and Unifor, gives customers a clear path to cost-efficient, controlled enterprise intelligence that scales with them. As we build out our AI infrastructure capabilities, I am excited to welcome Pranav Nambiar as SVP and GM for AI infrastructure. Pranav brings over two decades of experience designing and building complex infrastructure systems with AWS, DigitalOcean, Google, and Microsoft. Most recently, as Senior Vice Thank you. Thank you. This quarter, we entered into partnership with AMD and strengthened our partnership with Palantir as we build out our enterprise AI solutions. AMD brings the accelerated and differentiated computing platform, while Palantir brings platforms that connect AI with enterprise data and operational workflows while embedding security permissions and governance. Rackspace then brings the knowledge, infrastructure, migration, cloud, and managed operational capabilities needed to run those platforms reliably in production across all regulated and non-regulated industries. Our forward deployed engineers work in the customer environment focusing on high value use cases and remaining accountable beyond the initial implementation. The customer retains control of its data and operating context while Rackspace provides governance and accountability across the environment. Under our definitive agreement with AMD, we plan to deploy an initial footprint of 30 megawatts of AMD-based compute across Rackspace data centers in phases from late 2026 through 2028. The architecture incorporates AMD Instinct GPUs and EPYC CPUs, enabling us to match workloads with the appropriate compute while remaining accountable for performance and operations. We believe the combination of more efficient silicon, smaller domain-specific models, and intelligent workload routing can materially improve the economics of enterprise AI, while simultaneously mitigating exposure to a single model, whether it be for bare metal, inference as a service, fully managed enterprise inference, or enterprise AI cloud. The attractive economics of our new growth vector bears repeating with the following illustrative example. The first deployment is expected to be nearly two megawatts, targeted for completion by the end of 2026. Capital expenditures for the first deployment are expected to be approximately 75 million. Our goal is to ramp to cumulative capacity of 15 megawatts by the end of 2027 and a total of 30 megawatts of capacity by the end of 2028. We expect to average 15 to 20 million in revenue per megawatt deployed with some variability based on CPU, GPU, and customer mix. This range translates to We expect EBITDA margins in enterprise AI to be in the 50% plus range. We are evaluating financing for a significant portion of the compute hardware through a combination of OEM financing, equipment financing, and other asset-backed credit facilities with the financing collateralized by the newly acquired hardware. Early demand signals give us reason to be optimistic about the pace of deployment. Given the market's continued demand for high-performance compute and AI infrastructure and the long lead times for the Greenfield and Brownfield data center projects, Rackspace is well positioned as we have the infrastructure, power, cooling, and talent already available to us and have placed our initial order for AMD GPUs and CPUs. Alongside inbound calls, our optimism is also driven by our installed base of enterprise customers interested in adding capacity, as well as co-selling by AMD, Palantir, Unit 4, and our growing base of FDEs. On the platform side, we continue to see increased traction in our strategic relationship with Palantir, both in pipeline and signed deals. Across these engagements, we are seeing a consistent pattern in the type of problem customers bring us in to help solve. Turning fragmented legacy data environments into unified AI-ready platforms and to do it fast with measurable ROI. Each deployment compounds what we have learned, making the next one faster and more repeatable. We will have more specifics to share as these engagements mature. Finally, our corporate focus continues to reflect where the market is heading and what our customers want. When we announced our One Rackspace initiative, our intent was to redirect the capabilities we have built over time to take advantage of the generational secular market opportunity in front of us. Enterprises are no longer choosing a single public or private environment for all their applications and data. Instead, they're asking for integrated architectures based on their requirements. As we move forward, we intend to communicate with you with that in mind to better represent our strategy and our milestones. Our priority will continue to be disciplined around capital and talent deployment as we move towards higher yielding services and a strong balance sheet. And with that, let me get into our business performance starting with Private Cloud. Second quarter Private Cloud revenue was $263 million ahead of our July 9th guidance. The upside was driven by the timing of revenue recognition for a long-term customer contract. Excluding this impact, revenue would have been in line with our previously guided range. Because this recognition timing pulls forward revenue from future periods, including the second half of 2026, it does not change our full-year guidance. We expect private cloud to grow this year, even as we absorb supply-related timing impacts and strategically pivot the business towards higher margin revenue. We will stay opportunistic about deals that accelerate our strategic pivot as they arise. Our customer wins this quarter reinforce a consistent story. Enterprises in regulated industries are choosing Rackspace to modernize and operate environments where governance, reliability, and compliance are non-negotiable as the foundation for AI adoption. For example, in healthcare, we deepened our relationship with AdventHealth, whose Epic EHR, one of the top five Epic systems in the world, we already host and manage. This quarter, that relationship expanded substantially. We signed a five-year agreement to host and manage infrastructure that lets AdventHealth greatly reduce their on-premises data center footprint and retire a separate disaster recovery co-location contract. This comes alongside a large-scale migration of roughly 366 applications. 2300 virtual machines and 283 database servers onto Rackspace hosted infrastructure with full DR failover. We also added a new non-production EPIC environment to support their IT development pipeline. EPIC managed services is proprietary Rackspace IP, purpose-built for the governance and uptime clinical environments require. This is exactly the foundation regulated healthcare organizations need as they move AI from experimentation into production. In financial services, we strengthened our position in cyber resilience with a top UK banking firm. We signed a multi-year agreement to deploy and manage a first-of-its-kind cyber recovery cloud built on Rubrik alongside managed backup and managed Kubernetes services Supporting their next generation development and test banking platform. This is the first phase of what we expect to be a multi-phase deployment extending into staging and production. Finally, I want to share where our software strategy in private cloud stands as a critical part of Rackspace's ability to stitch the full stack together. We recently completed the production release of RackAI. Our inference and fine-tuning platform that lets customers integrate AI into their workloads and applications through a simple API. Looking ahead, we'll continue building out RAC AI with additional enterprise capabilities, including intelligent model routing and access to customized model harnesses, giving customers more flexibility as they scale their AI initiatives. for our public cloud update. Public cloud revenues were $407 million. Public cloud continues its pivot towards higher value services-led work. We are aligning our capabilities from cloud adoption through AI in production, concentrating investment in the data and AI-led enterprise transformation, AI ops-driven managed services, and forward-deployed engineering talent operating across cloud core and edge. This quarter's wins reinforce our role as a trusted partner in regulated mission-critical environments. In the Americas, we were selected for a competitively bid federal defense engagement, building a multi-cloud management practice with FinOps automation and self-service capabilities. We also expanded a multi-workstream engagement with a major U.S. commercial airline. Modernizing its cloud platform and embedding AI-powered development across its engineering organization to improve observability and systems availability. In EMEA, we deepened our relationship with a UK financial services organization, expanding into a full end-to-end managed services engagement and becoming their strategic partner on a multi-year modernization and AI roadmap. These wins reflect our strength in regulated, data-intensive industries, deploying AI at scale while maintaining reliability, compliance, and operational excellence. We also expanded our public cloud portfolio this quarter with a set of entry-point offerings across clouds. These are the tips of the spear. Structured, often partner-funded engagements that open the door with a customer and expand into larger managed services relationships. Each one drives revenue for Rackspace and consumption for our partners, which is why AWS, Microsoft, and others are funding them. The best example is our optimization and modernization assessment powered by AWS. A fully AWS-funded engagement that turns infrastructure and licensing optimization into a single business case for enterprises carrying heavy licensing obligations. The customer gets a funded roadmap, Rackspace earns the position to execute it, and the workloads land on our partner's platform. In addition, we launched offerings on the same model this quarter across Microsoft Co-Pilot adoption, managed network security, and data readiness. The common thread across this quarter's launches structured, funded engagements that convert enterprise AI ambition into governed, production-ready deployments and a clear path into Rackspace's broader managed services relationship. Our moves this quarter strengthen and expand our role as a trusted partner and operator alongside curated, best-of-breed ecosystem partners Thank you, Gajen.

In the second quarter, total company GAAP revenue was $670 million, up 1% year-over-year, with the beat versus expectations primarily driven by the aforementioned timing impact within the private cloud segment. Non-GAAP gross margin was 18.6% of GAAP revenue, down 120 basis points year-over-year. Non-GAAP operating profit was $27 million. Thank you for joining us. including the undrawn portion of our revolving credit facility. During the quarter, we opportunistically repurchased $11.2 million in aggregate principal of our senior notes pursuant to a previously established 10 plan. This reduces our go-forward interest expense and further strengthens our capital structure. We remain focused on deliberate, steady deleveraging while continuing to fund strategic growth priorities. First half free cash flow reflected known seasonal cash uses, including annual incentive compensation payouts, strategic vendor prepayments, and debt repurchases. We expect free cash flow generation to accelerate through the second half, strengthening liquidity as the year progresses. Turning to segment results. Private cloud GAAP revenue was $263 million, up 5% year-over-year, and ahead of the $242 to $246 million outlook we shared on July 9th. The upside reflects a benefit from an embedded lease treated similarly to a hardware sale under a customer's managed hosting contract, a timing item tied to a long-term contract rather than a change in underlying volume. Non-GAAP gross margin was 32.3%, down 460 basis points year-over-year, driven by the same revenue item noted above, along with the slightly higher customer licenses and data center costs. Non-GAAP segment operating margin was 21.8%, down approximately 280 basis points year-over-year. In public cloud, GAAP revenue was $407 million, down 2% year-over-year, reflecting lower infrastructure and services revenue. This was modestly ahead of the $399 to $403 million outlook we provided on July 9th due to higher reported consumption from hyperscaler partners than anticipated. Non-GAAP gross margin was 9.7%, up approximately 10 basis points year over year on savings from workforce reductions. Non-GAAP segment operating margin was 4.7%, up 80 basis points year over year on improved operating expense efficiency. Turning to guidance. Consistent with our July 9th call, we expect full-year GAAP revenue of $2.45 billion to $2.55 billion, a decline of 7% year over year at the midpoint. The vast majority of that change reflects our strategic decision to exit low-margin public cloud revenue over time. From a segment perspective, we expect private cloud revenue of 1.0 billion to 1.05 billion, up 4% year-over-year at the midpoint, and public cloud revenue of 1.45 billion to 1.5 billion, down 13% year-over-year at the midpoint. We expect total non-GAAP operating profit at $125 million to $135 million, up 3% at the midpoint. Adjusted EBITDA is expected to be $285 million to $295 million, up 5% at the midpoint, with non-GAAP loss per share of $0.25 to $0.30. Our non-GAAP tax rate is expected to be 26%, while non-GAAP other expenses will be in the $220 to $230 million range. Non-GAAP share count is expected to be between 250 and 260 million shares, excluding any dilution from the ATM program, as future issuance under the program will depend on prevailing share price and market conditions. Importantly, in the second half of 2026, we expect strong free cash flow and expect $50 million to $70 million in positive free cash flow for the full year. With that, I will now turn it back over to Gajen for final remarks.

For all businesses, especially those in regulated industries, the generational shift to the era of AI is imperative and no different than the shift to client-server networks in the 90s, the internet in the early 2000s, and mobile in the 2010s. Over 25 years, Rackspace has earned the trust of tens of thousands of customers as the accountable operator guiding their business through these infrastructure transitions. With the introduction of Rackspace's managed compute and inference platform, we will continue to be that accountable partner, provider, and operator of a secure, reliable, flexible, and controlled full enterprise AI stack. That is Rackspace. Thank you to our customers, partners, and every Racker.

With that, back to Sagar. Thank you, Gajen. We will now go ahead and open the line for any questions. If you have any follow-up questions after today's call, please reach out directly at irrackspace.com. Operator, please go ahead and open the line for Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bradley Clark of BMO. Please go ahead, Bradley.

Hi. Thanks for taking my question. I want to ask about the Palantir business. It seems like the partnership has been off to a strong start and just wondering if you could comment on, you know, your vision of how this partnership evolved over time and, you know, where you see it specifically adding to Rackspace's growth profile over the next several years.

Thank you. This is Gajen. I appreciate the question. Yes. So the, you know, the volunteer partnership over the last four to five months has truly gained traction, especially as I think customers have started or enterprise customers have started to understand the importance of what I would call sort of institutional sovereignty in terms of, you know, where models run, where Thank you for joining us today. to agent camp to then the first production use case and then from there, so on and so forth from there. A few things that have stood out to me at least, right, is that with our volunteer engagements from the early days as well as what we're doing now, we land small and then scale fast, right? So the boot camps and the agent camps give us a sort of a good basis of understanding for what our customers want to do. And then once you get that first production use case in, you're able to scale from there. And the Palantir platform allows us the ability to do that very quickly. So that's been one sort of thing that I really appreciated about the Palantir partnership. Second one is that the type of opportunities we're seeing are cutting across industries, right? So the renewable energy, packaging, special chemicals, and healthcare as some of the early wins that we are seeing. And all of these, if you kind of apply the start small and scale fast, we are seeing sort of that trajectory within them. So that gave us really the, both of us, Palantir and Rackspace, the opportunity to come together and say, you know, if we really structure this and apply it, Thank you. Thank you. Once again, to ask a question, please press star 1-1 on your telephone.

Our next question comes from the line of David Page of RBC Capital Markets. Please go ahead, David.

Hi, good morning. Thank you for taking my question. Maybe just a little bit of follow-up to that last question. It sounds like you're in a good position to have and continue to win regulated industry business. I was just curious if you could flush out some of the demand that you're seeing from Both existing customers and potentially new customers out in 2027. Just how do you see the customer base evolving and what's the current demand competitive environment for these regulated AI production environments that you seem to be the leader in? Thank you.

Thank you. Thank you, David, for that question. Great question. Look, I think Coming into this, the orientation was really all about our enterprise customers and sort of the regulated markets in which we operate. As we have expanded the partner footprint out of the foundational partner footprint with AMD, Palantir, Unifor, and others, what we are seeing is that there is definitely a partner motion that is also adding to what we're doing in terms of both the The opportunities that we're seeing as well as the type of work that we're able to do. The third piece I would say that gives us sort of, actually gives me significant confidence around the strategy is this, I wouldn't call it evolution anymore. I think this is an emerging trend around sovereign AI and the concept of sovereignty going beyond sort of, you know, country boundaries down to enterprise boundaries and therefore needing Modularity around the types of models you use, the type of compute you use, the orchestration that's required to do that, and the different types of inference that is starting to emerge. For instance, we do context-aware inference to be able to go from model to model without losing the context of a particular request or an agent requirement. and all of that ultimately, David, needs to land somewhere that is safe, secure, governed. And I think that's what gives us this extreme confidence in terms of the focus and the strategic pivot that we have made. And I'm seeing that market really emerge very quickly. And you're just seeing recently, I think even Palantir, Nvidia and others are starting to really talk about this space emerging very quickly. So to me, Regulated was where we started, but it feels to me like almost all enterprises are going to look for some form of regulated approach, not necessarily regulated in terms of the governance, but the approach needs to provide a high degree of confidence in terms of the data, where it resides, how it gets processed, and how it gets applied. And I think that puts us in a very, very strong position.

Great, thank you. That's very helpful. If I could stick one more in. You mentioned balancing growth investing and debt repayment, cash flow generation. So I was wondering if you could just provide a little bit more color on how you see that balance evolving over the next 12 to 18 months, I think.

Yeah. Hey, this is Mark. Good question, right? So it's something we're obviously thinking about, you know, quite high on our list, right? You know, with the GPU investment itself, with AMD, I mean, obviously we expect a lot of that financing to come via hardware-backed or asset-backed facilities, right? So not necessarily impacting our sort of cash, you know, preserving the liquidity we have to sort of run the business. But, you know, I think we're being judicious about Thank you for joining us. Thank you. As there are no further questions in queue, that does conclude the Q&A session and our conference for today. Thank you for participating.

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