Rackspace's Mixed 2025 Results Fail to Alleviate Deep Financial Distress

What happened

Rackspace Technology reported its fourth quarter and full-year 2025 results, revealing a 0.4% year-over-year revenue decline in Q4 and a 2% drop for the full year, continuing a multi-year trend of shrinkage. Private Cloud revenue fell sharply by 10% in Q4 and 6% annually, eroding its higher-margin segment, while Public Cloud revenue grew 6% in Q4 and 1% for the year, offering only modest relief. CEO Gajen Kandiah framed this as an inflection point, but this optimistic spin clashes with the company's persistent GAAP losses, negative equity exceeding $1 billion, and $2.45 billion debt load detailed in the DeepValue report. Operating cash flow improved to $60 million in Q4 and $151 million for 2025, yet this follows a collapse in 2024 and does not mitigate refinancing risks or cover interest expenses. Overall, Rackspace remains in a precarious state with no clear turnaround evidence, as competitive pressures and balance sheet fragility persist unchanged.

Implication

The continued decline in Private Cloud revenue, down 10% in Q4, signals deepening challenges in Rackspace's higher-margin business, threatening overall profitability and customer retention. Public Cloud growth of 6% in Q4 is modest and faces intense competition from hyperscalers, limiting its potential to drive a meaningful recovery. Improved operating cash flow provides temporary liquidity but is insufficient to address the $2.45 billion debt burden or generate positive free cash flow consistently. Management's inflection point claim lacks financial substantiation, suggesting overstatement of progress amid persistent structural issues. Until multiple quarters of revenue stabilization and deleveraging emerge, equity holders face high risk of further value erosion or creditor takeover in any restructuring.

Thesis delta

The DeepValue master report's strong sell thesis remains unchanged, as the 2025 results do not meet the critical watch items for revenue stabilization or sustained positive free cash flow. The slight uptick in Public Cloud and cash flow could be early indicators but are not yet transformative, failing to alter the high probability of credit stakeholders capturing value in a distress scenario.