Rackspace Technology(US:RXT)2021-05-10 21:01Part I Financial Statements Rackspace Technology reported an 11.2% revenue increase to $725.9 million in Q1 2021, alongside a wider net loss of $64.0 million and improved operating cash flow of $103.2 million, with total assets stable at $6.4 billion Unaudited Consolidated Balance Sheets Total assets slightly increased to $6.42 billion as of March 31, 2021, driven by higher cash, while liabilities marginally rose and stockholders' equity slightly decreased Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2020 | Mar 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $104.7 | $198.4 | | Total current assets | $758.5 | $846.9 | | Goodwill, net | $2,761.1 | $2,763.5 | | Total assets | $6,377.8 | $6,417.9 | | Liabilities & Equity | | | | Total current liabilities | $742.2 | $757.8 | | Debt (non-current) | $3,319.3 | $3,368.7 | | Total liabilities | $4,994.1 | $5,042.7 | | Total stockholders' equity | $1,383.7 | $1,375.2 | Unaudited Consolidated Statements of Comprehensive Loss Revenue grew to $725.9 million in Q1 2021, but gross profit declined to $235.3 million, leading to a wider net loss of $64.0 million primarily due to debt modification costs Statement of Comprehensive Loss Highlights (in millions, except per share data) | Metric | Q1 2020 | Q1 2021 | | :--- | :--- | :--- | | Revenue | $652.7 | $725.9 | | Gross profit | $249.3 | $235.3 | | Income from operations | $21.5 | $24.2 | | Debt modification and extinguishment costs | $0.0 | $(37.0) | | Net loss | $(48.2) | $(64.0) | | Net loss per share (Basic and diluted) | $(0.29) | $(0.31) | Unaudited Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $103.2 million in Q1 2021, while investing activities saw reduced cash usage due to a land sale, and financing activities shifted to a net outflow Consolidated Cash Flow Summary (in millions) | Cash Flow Activity | Q1 2020 | Q1 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $24.8 | $103.2 | | Net cash used in investing activities | $(32.4) | $(4.3) | | Net cash provided by (used in) financing activities | $50.6 | $(4.5) | | Increase in cash, cash equivalents, and restricted cash | $41.4 | $93.7 | Notes to the Unaudited Consolidated Financial Statements Notes detail a $6.6 million depreciation reduction from asset life changes, $37.0 million in debt refinancing costs, and varied segment revenue performance with growth in Multicloud and Apps, offset by OpenStack decline - In March 2021, the company revised the estimated useful lives of certain computer and equipment assets, resulting in a $6.6 million reduction in depreciation expense for Q1 202133 - In February 2021, the company executed a major refinancing, repaying its Prior Term Loan Facility and entering into a new $2.3 billion Term Loan Facility and issuing $550.0 million of 3.50% Senior Secured Notes, resulting in a $37.0 million charge for debt modification and extinguishment costs515968 Revenue by Segment (in millions) | Segment | Q1 2020 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Multicloud Services | $507.9 | $579.6 | +14.1% | | Apps & Cross Platform | $81.5 | $97.3 | +19.4% | | OpenStack Public Cloud | $63.3 | $49.0 | -22.6% | | Total | $652.7 | $725.9 | +11.2% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 11.2% revenue growth to strong core segment performance, despite gross margin compression, while debt refinancing lowered interest costs and key operating metrics showed positive trends Key Operating Metrics Key operating metrics showed positive momentum, with Bookings increasing by 5.6% and Annualized Recurring Revenue (ARR) growing by 10.5% year-over-year Key Operating Metrics (in millions) | Metric | Q1 2020 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Bookings | $230.5 | $243.5 | +5.6% | | Annualized Recurring Revenue (ARR) | $2,482.1 | $2,742.6 | +10.5% | Results of Operations Q1 2021 revenue increased 11.2% driven by core segments, but gross profit declined due to higher costs, and while interest expense decreased post-refinancing, a $37.0 million one-time charge contributed to a higher net loss - Core Revenue (Multicloud Services and Apps & Cross Platform) grew 14.8% year-over-year, while the legacy OpenStack Public Cloud segment declined by 22.6%148 - Gross margin compressed by 580 basis points to 32.4% from 38.2% in the prior year, driven by a 1,340 basis point increase in usage charges for third-party infrastructure as a percentage of revenue153154 - Interest expense decreased by $19.4 million due to debt refinancing, but the company incurred a one-time $37.0 million cost for debt modification and extinguishment164165 Non-GAAP Financial Measures Non-GAAP performance showed underlying profitability with Adjusted EBITDA at $180.2 million, while Non-GAAP Net Income significantly increased to $49.1 million and Non-GAAP EPS rose to $0.23 due to lower interest expenses Reconciliation to Adjusted EBITDA and Non-GAAP Net Income (in millions) | Metric | Q1 2020 | Q1 2021 | | :--- | :--- | :--- | | Net loss | $(48.2) | $(64.0) | | Adjustments | $75.2 | $113.1 | | Non-GAAP Net Income | $27.0 | $49.1 | | Interest expense & taxes (adjusted) | $81.5 | $70.6 | | Depreciation (adjusted) | $77.1 | $61.3 | | Adjusted EBITDA | $185.6 | $180.2 | Non-GAAP Earnings Per Share (EPS) | Metric | Q1 2020 | Q1 2021 | | :--- | :--- | :--- | | Non-GAAP Net Income | $27.0M | $49.1M | | Non-GAAP weighted average shares - Diluted | 166.3M | 211.1M | | Non-GAAP EPS | $0.16 | $0.23 | Liquidity and Capital Resources As of March 31, 2021, the company maintained strong liquidity with $198 million in cash and a $375 million undrawn credit facility, benefiting from debt refinancing and reduced capital expenditures - The company held $198 million in cash and cash equivalents and had access to a $375 million undrawn Revolving Credit Facility as of March 31, 2021186188 - Total capital expenditures decreased by 21.9% year-over-year to $58.9 million, representing 8% of revenue in Q1 2021 compared to 12% in Q1 2020126209 - Cash flow from operations increased significantly to $103.2 million from $24.8 million YoY, driven by higher cash collections and timing of employee-related payments210212 Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from interest rate fluctuations on its $2.3 billion variable-rate debt through swaps, foreign currency exposure with hedging, and power price changes via fixed-price contracts - The company is exposed to interest rate risk on its $2.3 billion Term Loan Facility and $50 million Receivables Financing Facility, where a 0.125% change in interest rates would result in a $3 million change in annual interest expense219 - To manage interest rate risk, the company has entered into interest rate swap agreements with a total notional value of $1.35 billion, effectively fixing the rate on a significant portion of its variable-rate debt220221 - The company has exposure to foreign currency risk, particularly the British pound sterling, Euro, and Mexican peso, and uses forward contracts to hedge some of this exposure223227 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal controls over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report231 - No changes in internal control over financial reporting occurred during the first quarter of 2021 that have materially affected, or are reasonably likely to materially affect, these controls232 Part II Legal Proceedings The company is not involved in any litigation expected to materially adversely affect its business, financial position, or results of operations - The company states it is not party to any litigation that would be reasonably expected to have a material and adverse effect on its business237 Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes have occurred from the risk factors previously disclosed in the Annual Report on Form 10-K239 Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable as there were no unregistered sales of equity securities or use of proceeds to report for the period - The company reports no unregistered sales of equity securities and no use of proceeds during the period240241 Exhibits This section lists exhibits filed with the Form 10-Q, including new debt indentures, credit agreement amendments, and officer certifications - Key exhibits filed include the Indenture for the 3.50% Senior Secured Notes and an agreement related to the new Term Loan Facility, both dated February 9, 2021249