Rackspace (RXT) Q4 2025: Public Cloud Services Up 28% as Platform Engineering Model Gains Traction
Rackspace’s pivot to platform engineering and embedded AI delivery drove a 28% surge in public cloud services revenue, offsetting private cloud softness tied to delayed healthcare ramp. The company’s annual guidance shift spotlights a focus on multi-year enterprise deals, AI-driven managed services, and durable operating leverage. Investors should watch how Rackspace’s execution on regulated workloads and anchor partnerships translates into recurring growth and margin expansion through 2026.
Summary
- AI-Driven Delivery Model: Platform engineering and forward-deployed engineers are reshaping Rackspace’s role in enterprise AI operations.
- Segment Divergence: Public cloud services outpaced expectations, while private cloud revenue lagged on delayed healthcare ramp.
- Annual Guidance Shift: Rackspace moves to annual guidance, emphasizing long-term growth and margin expansion over quarterly volatility.
Performance Analysis
Rackspace’s Q4 2025 results underscored a strategic shift toward higher-value managed services and platform engineering, as public cloud services revenue grew 28% year over year, outpacing expectations and offsetting a shortfall in private cloud. Total GAAP revenue reached $683 million, with public cloud contributing $442 million and private cloud $241 million in the quarter. The public cloud segment’s outperformance was driven by both infrastructure and services, with services growth reflecting momentum in enterprise-grade transformation engagements and managed AI solutions.
Private cloud revenue, at $241 million, missed guidance due to a slower-than-expected ramp of a large healthcare contract, though management emphasized this was a timing issue rather than demand softness. Segment gross margins declined sequentially in both private and public cloud, reflecting less fixed cost absorption and a higher mix of infrastructure revenue. However, the company expanded operating profit margin by 120 basis points sequentially, aided by cost management and operational efficiencies. Cash flow from operations was robust at $60 million for the quarter, supporting total liquidity of $397 million as the company enters 2026.
- Public Cloud Services Acceleration: 28% YoY growth in services revenue demonstrates traction in managed AI and modernization offerings.
- Private Cloud Drag: Delayed healthcare contract ramp pulled private cloud revenue below target, but pipeline remains active with multi-year deals.
- Margin Dynamics: Operating profit margin expanded sequentially, even as gross margins compressed due to segment mix and ramp timing.
Rackspace’s portfolio mix is tilting toward services-led, recurring revenue streams, positioning the company for more stable and predictable growth as AI workloads scale across regulated and hybrid environments.
Executive Commentary
"Put simply, Rackspace is the infrastructure and operations backbone for enterprise AI, the layer that makes AI governable, scalable, and real inside the environments that matter most... The opportunity in front of us is not primarily a strategy challenge. It is an execution challenge. I'm confident we now have the team to deliver it."
Gajen Kandia, Chief Executive Officer
"Three things stand out in the quarter. First, we beat revenue guidance, driven by public cloud outperformance. Second, non-GAAP operating profit came in at $41 million, above the high end of our range, with margins up 120 basis points sequentially. Third, we ended the year with $397 million in total liquidity and $60 million in cash flow from operations for the quarter, a strong foundation heading into 2026."
Mark Marino, Chief Financial Officer
Strategic Positioning
1. Platform Engineering Model
Rackspace is redefining its delivery approach, embedding forward-deployed engineers directly into customer environments, particularly within regulated industries and on platforms like Palantir’s Foundry and AIP. This “platform engineering” model is designed to deliver AI not as a standalone product but as an integrated, governed, and scalable solution inside core enterprise systems. The company aims to scale from 30 to over 250 Palantir-trained engineers in the next year, deepening its role in operationalizing AI.
2. Private Cloud Renaissance
Demand for private and hybrid cloud is accelerating as enterprises seek control over performance, cost, and data residency, especially for AI-infused, regulated workloads. Rackspace’s private cloud serves as the profit engine and foundation for these environments, with new multi-year deals in healthcare and financial services. While Q4 revenue was impacted by deployment timing, the pipeline is healthy, and each new use case is expected to drive incremental infrastructure consumption.
3. Anchor Ecosystem Partnerships
The company is curating a set of anchor partnerships—VMware for unified infrastructure, Rubrik for cyber resilience, and Palantir for data and AI platform layers— to create a modular, extensible ecosystem. This approach allows customers to leverage existing investments and adopt new capabilities without wholesale replacement, driving deeper engagement and incremental revenue across both private and public cloud.
4. Services-Led Public Cloud Strategy
Rackspace’s public cloud focus is shifting to higher-margin managed services, including AI operations, site reliability engineering, and modernization. The company is proactively reducing exposure to lower-margin infrastructure resale, and excluding a large government contract transition, expects mid to high teens growth in public cloud services for 2026.
Key Considerations
Rackspace’s Q4 and full-year performance signals a company in the midst of a structural transformation, prioritizing recurring, services-led revenue and a platform engineering model over legacy infrastructure resale. The following considerations are central for investors tracking the company’s multi-year trajectory:
Key Considerations:
- AI-Embedded Delivery: Forward-deployed engineers and platform partnerships are key to Rackspace’s differentiated position in regulated, data-sensitive AI workloads.
- Segment Volatility: Private cloud revenue is sensitive to deployment timing, but management expects improved predictability as healthcare and financial services deals ramp.
- Margin Expansion: Cost discipline and operational leverage are driving sequential operating margin gains, with further expansion targeted as services mix rises.
- Annual Guidance Philosophy: The move to annual guidance reflects a focus on durable growth and margin, not quarter-to-quarter variability tied to complex migration schedules.
- Pipeline Quality: Early pipeline activity in both private and public cloud segments is centered on large, multi-year, high-value engagements, supporting the platform-led growth thesis.
Risks
Execution risk remains elevated as Rackspace transitions to a platform engineering model and ramps large, complex enterprise deals, particularly in regulated industries with long deployment cycles. Margin pressure from segment mix and delayed contract ramps could persist if migration milestones slip. Competitive intensity from hyperscalers and global system integrators, as well as customer hesitancy on AI adoption timelines, are ongoing headwinds that could impact both growth and profitability.
Forward Outlook
For 2026, Rackspace guided to:
- Full-year GAAP revenue of $2.6 to $2.7 billion, down 1% YoY at the midpoint
- Private cloud revenue up 6% YoY at the midpoint, with ramp weighted to healthcare and regulated deployments
- Public cloud revenue down 6% YoY at the midpoint, but with mid to high teens growth in services revenue excluding a large government contract transition
- Non-GAAP operating profit of $160 to $170 million, up 31% at the midpoint
- Free cash flow of $90 to $110 million
Management emphasized that annual guidance better reflects the underlying trajectory, given quarterly variability tied to large deal implementations and migration schedules. Key drivers for 2026 include:
- Healthcare and financial services deployments moving into production
- Scaling of AI platform engineering engagements and anchor partnerships
- Continued cost optimization and services mix shift
Takeaways
Rackspace’s Q4 results and 2026 outlook highlight a company leaning into its infrastructure and operational strengths, with a clear pivot to platform engineering and embedded AI delivery. The shift to annual guidance and focus on durable, high-value engagements reflect a maturing business model—one that is less about infrastructure resale and more about managed, governed, and recurring services at the intersection of AI, cloud, and compliance.
- Structural Shift: Platform engineering and anchor partnerships are positioning Rackspace as a critical layer for enterprise AI, especially in regulated environments.
- Margin and Growth Levers: Operating leverage and services-led growth are expected to drive margin expansion and recurring revenue, but depend on timely execution of large, complex deals.
- Investor Watchpoint: Track the ramp of major healthcare and financial services contracts, the scaling of Palantir-related platform engineering, and the mix shift toward higher-margin managed services as key proof points for the transformation thesis.
Conclusion
Rackspace ended 2025 with clear momentum in public cloud services and a sharpened strategic focus on platform engineering and AI operationalization. The company’s ability to execute on complex, regulated workloads and scale its anchor partnerships will determine the durability of its growth and margin story through 2026 and beyond.
Industry Read-Through
Rackspace’s results reinforce the accelerating demand for hybrid and private cloud solutions as enterprises operationalize AI in regulated, data-sensitive environments. The move toward platform engineering and embedded delivery models is likely to ripple across the managed cloud and IT services landscape, pressuring legacy infrastructure resellers and favoring providers with deep operational and compliance expertise. The company’s partnership-driven ecosystem approach, particularly with Palantir, VMware, and Rubrik, signals a broader industry trend toward curated, modular stacks designed for AI governance and resilience. Investors should watch for similar pivots among other managed service providers as AI moves from experimentation to production at scale.