Rackspace Technology(RXT) - 2022 Q1 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of comprehensive income (loss), cash flows, and stockholders' equity, along with detailed notes explaining the company's accounting policies, financial instruments, and segment performance for the periods ended March 31, 2022 Unaudited Consolidated Balance Sheets Unaudited Consolidated Balance Sheets as of December 31, 2021, and March 31, 2022 | Metric | Dec 31, 2021 (Millions) | Mar 31, 2022 (Millions) | | :-------------------------------- | :---------------------- | :---------------------- | | Cash and cash equivalents | $272.8 | $269.1 | | Accounts receivable, net | $554.3 | $576.1 | | Total current assets | $989.5 | $1,006.1 | | Property, equipment and software, net | $826.7 | $794.7 | | Goodwill, net | $2,706.8 | $2,708.6 | | Intangible assets, net | $1,466.5 | $1,423.6 | | Total assets | $6,328.7 | $6,310.8 | | Total current liabilities | $837.4 | $817.5 | | Total liabilities | $5,001.3 | $4,966.5 | | Total stockholders' equity | $1,327.4 | $1,344.3 | Unaudited Consolidated Statements of Comprehensive Income (Loss) Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Millions) | Three Months Ended Mar 31, 2022 (Millions) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Revenue | $725.9 | $775.5 | 6.8% | | Cost of revenue | $(490.6) | $(549.5) | 12.0% | | Gross profit | $235.3 | $226.0 | (4.0)% | | Income from operations | $24.2 | $20.9 | (13.6)% | | Interest expense | $(52.6) | $(50.1) | (4.8)% | | Loss before income taxes | $(70.9) | $(32.9) | (53.6)% | | Net loss | $(64.0) | $(38.5) | (39.8)% | | Comprehensive income (loss) | $(47.6) | $3.5 | NM | | Net loss per share (Basic and diluted) | $(0.31) | $(0.18) | (41.9)% | Unaudited Consolidated Statements of Cash Flows Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Millions) | Three Months Ended Mar 31, 2022 (Millions) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Net cash provided by operating activities | $103.2 | $64.5 | (37.5)% | | Net cash used in investing activities | $(4.3) | $(25.9) | 502.3% | | Net cash used in financing activities | $(4.5) | $(40.8) | 806.7% | | Increase (decrease) in cash, cash equivalents, and restricted cash | $93.7 | $(3.8) | NM | | Cash, cash equivalents, and restricted cash at end of period | $201.8 | $271.6 | 34.6% | Unaudited Consolidated Statements of Stockholders' Equity Unaudited Consolidated Statements of Stockholders' Equity as of March 31, 2021, and March 31, 2022 | Metric | Balance at Mar 31, 2021 (Millions) | Balance at Mar 31, 2022 (Millions) | | :-------------------------------- | :--------------------------------- | :--------------------------------- | | Common Stock (Amount) | $2.1 | $2.1 | | Additional Paid-In Capital | $2,402.6 | $2,517.5 | | Accumulated Other Comprehensive Income (Loss) | $(2.2) | $48.9 | | Accumulated Deficit | $(1,027.3) | $(1,220.1) | | Treasury Stock, at Cost | $— | $(4.1) | | Total Stockholders' Equity | $1,375.2 | $1,344.3 | - Repurchase of common stock in Q1 2022 amounted to $4.1 million (0.4 million shares)[23] Notes to the Unaudited Consolidated Financial Statements Note 1. Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies - Rackspace Technology, Inc. is a Delaware corporation controlled by investment funds affiliated with Apollo Global Management, Inc., serving as a holding company for Rackspace Technology Global and its subsidiaries[25][26] - On January 18, 2022, the company acquired Just Analytics Pte. Ltd., a cloud-based data, analytics, and AI services provider in the Asia, Pacific, and Japan region, for $7.7 million in cash consideration[28] - The effects of COVID-19 and the Russia-Ukraine conflict have not had a significant impact on operations or financial performance to date, but the company continues to monitor potential future impacts[33][34] - The company early adopted ASU No. 2021-08 (Business Combinations) on January 1, 2022, applying a practical expedient for contract assets and liabilities acquired in business combinations, which did not have a material impact[36] Note 2. Customer Contracts Customer Contracts as of December 31, 2021, and March 31, 2022 | Metric | Dec 31, 2021 (Millions) | Mar 31, 2022 (Millions) | | :-------------------------------- | :---------------------- | :---------------------- | | Accounts receivable, net | $554.3 | $576.1 | | Current portion of contract assets | $15.2 | $15.0 | | Current portion of deferred revenue | $98.6 | $111.0 | | Non-current portion of deferred revenue | $13.6 | $8.6 | | Capitalized costs to obtain a contract | $58.0 | $58.6 | | Capitalized costs to fulfill a contract | $23.5 | $22.0 | - Amortization of capitalized sales commissions was $11.2 million for the three months ended March 31, 2022, up from $10.8 million in the prior year[42] - As of March 31, 2022, the aggregate amount of transaction price allocated to remaining performance obligations was $673.9 million, with 57% expected to be recognized as revenue during the remainder of 2022[43] Note 3. Net Loss Per Share Net Loss Per Share for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Millions, except per share) | Three Months Ended Mar 31, 2022 (Millions, except per share) | | :-------------------------------- | :----------------------------------------------------------- | :----------------------------------------------------------- | | Net loss attributable to common stockholders | $(64.0) | $(38.5) | | Weighted average shares outstanding | 204.6 | 211.4 | | Net loss per share (Basic and diluted) | $(0.31) | $(0.18) | - Potential common share equivalents (21.7 million in 2021 and 24.8 million in 2022) were excluded from diluted EPS computation as their inclusion would have been anti-dilutive due to the net loss position[45] Note 4. Property, Equipment and Software, net Property, Equipment and Software, net as of December 31, 2021, and March 31, 2022 | Metric | Dec 31, 2021 (Millions) | Mar 31, 2022 (Millions) | | :-------------------------------- | :---------------------- | :---------------------- | | Property, equipment and software, at cost | $2,228.1 | $2,210.0 | | Less: Accumulated depreciation | $(1,413.4) | $(1,427.2) | | Property, equipment and software, net | $826.7 | $794.7 | - A gain on sale of land of $19.9 million was recorded in the three months ended March 31, 2021, from the sale of undeveloped land in the United Kingdom[46] Note 5. Goodwill and Intangible Assets Goodwill and Intangible Assets as of December 31, 2021, and March 31, 2022 | Metric | Dec 31, 2021 (Millions) | Mar 31, 2022 (Millions) | | :-------------------------------- | :---------------------- | :---------------------- | | Total Consolidated Goodwill | $2,706.8 | $2,708.6 | | Total definite-lived intangible assets | $1,216.5 | $1,173.6 | | Trade name (indefinite-lived) | $250.0 | $250.0 | | Total intangible assets other than goodwill | $1,466.5 | $1,423.6 | - Goodwill increased by $5.9 million due to the acquisition of Just Analytics, allocated to the Apps & Cross Platform segment[48] Note 6. Debt Debt Instruments as of March 31, 2022 | Debt Instrument | Maturity Date | Interest Rate (Mar 31, 2022) | Amount (Mar 31, 2022, Millions) | | :-------------------------------- | :------------ | :--------------------------- | :------------------------------ | | Term Loan Facility | Feb 15, 2028 | 3.50% | $2,277.0 | | 3.50% Senior Secured Notes | Feb 15, 2028 | 3.50% | $550.0 | | 5.375% Senior Notes | Dec 1, 2028 | 5.375% | $550.0 | | Total debt | | | $3,330.0 | - The February 2021 Refinancing Transaction resulted in a $37.0 million expense for debt modification and extinguishment costs in Q1 2021[69] - The company was in compliance with all covenants under the Senior Facilities and the 3.50% and 5.375% Notes Indentures as of March 31, 2022[58][63][68] Note 7. Commitments and Contingencies - The company is not a party to any litigation that, if determined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business, financial position, or results of operations[73] - Accruals for loss contingencies are recorded when a loss is considered probable and reasonably estimable[72] Note 8. July 2021 Restructuring Plan - The July 2021 Restructuring Plan involved the termination of approximately 10% of the workforce, with most employees exited by March 31, 2022[75] July 2021 Restructuring Plan Liabilities as of December 31, 2021, and March 31, 2022 | Metric | Dec 31, 2021 (Millions) | Mar 31, 2022 (Millions) | | :-------------------------------- | :---------------------- | :---------------------- | | Employee Related Liability | $7.1 | $3.2 | | Other Liability | $0.6 | $0.6 | | Total Liability | $7.7 | $3.8 | | Total cumulative costs incurred | | $19.8 | Note 9. Share Repurchase Program - On March 3, 2022, the board authorized a program to repurchase up to $75.0 million of common stock, expiring September 30, 2023[79] - During Q1 2022, the company repurchased $4.1 million (0.4 million shares) of common stock under this program[79] - Approximately $70.9 million remained available for additional purchases as of March 31, 2022[79] Note 10. Share-Based Compensation - During Q1 2022, 7.8 million restricted stock units (RSUs) were granted with a weighted-average grant date fair value of $11.04[81] - Additionally, 1.2 million performance stock units (PSUs) were granted in Q1 2022 with a weighted-average grant date fair value of $11.70, vesting based on Total Shareholder Return (TSR) relative to a comparator group[82] Pre-tax Share-Based Compensation Expense for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Millions) | Three Months Ended Mar 31, 2022 (Millions) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Pre-tax share-based compensation expense | $17.2 | $17.0 | - As of March 31, 2022, total unrecognized compensation cost related to stock options, RSUs, PSUs, and ESPP was $182.2 million[83] Note 11. Taxes - The income tax provision increased to a $5.6 million expense in Q1 2022 from a $6.9 million benefit in Q1 2021[15][159] - The effective tax rate decreased from 9.7% in Q1 2021 to (17.2)% in Q1 2022, primarily due to the geographic distribution of earnings, GILTI provisions, share-based compensation, and non-deductible executive compensation[84][159] Note 12. Derivatives - The company uses interest rate swap agreements to manage exposure to interest rate risk on its floating-rate Term Loan Facility, holding them for economic hedging purposes[86][87] Interest Rate Swap Agreements as of March 31, 2022 | Transaction Date | Effective Date | Notional Amount (Mar 31, 2022, Millions) | Fixed Rate Paid | Maturity Date | | :-------------------------------- | :------------- | :--------------------------------------- | :-------------- | :------------ | | February 2021 | Feb 9, 2021 | $1,350.0 | 2.3820% | Feb 9, 2026 | - The fair value of derivatives on the Consolidated Balance Sheets as of March 31, 2022, showed a net asset position of $8.7 million[98] - Approximately $7.9 million of cash flow hedge losses included in accumulated other comprehensive income (loss) are expected to be reclassified as an increase to interest expense over the next 12 months[100] Note 13. Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) as of December 31, 2021, and March 31, 2022 | Metric | Dec 31, 2021 (Millions) | Mar 31, 2022 (Millions) | | :-------------------------------- | :---------------------- | :---------------------- | | Accumulated Foreign Currency Translation Adjustments | $17.2 | $12.6 | | Accumulated Gain (Loss) on Derivative Contracts | $(10.3) | $36.3 | | Total Accumulated Other Comprehensive Income (Loss) | $6.9 | $48.9 | - Unrealized gain on derivative contracts, net of tax, was $42.3 million for the three months ended March 31, 2022[104] Note 14. Related Party Transactions - Affiliates of ABRY Partners hold $54.5 million (2.4%) of the Term Loan Facility as of March 31, 2022[105] - Apollo Global Securities, LLC, an affiliate of Apollo, received $0.6 million for 3.50% Senior Secured Notes and $2.3 million in arranger fees for the Term Loan Facility in Q1 2021[106] - 2,665,935 shares of common stock were issued to DPH 123, LLC (an ABRY affiliate) in February 2021, related to the Datapipe acquisition[107] Note 15. Segment Reporting Segment Revenue for Q1 2021 and Q1 2022 | Segment | Revenue (Q1 2021, Millions) | Revenue (Q1 2022, Millions) | YoY Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :------------- | | Multicloud Services | $579.6 | $640.1 | 10.4% | | Apps & Cross Platform | $97.3 | $94.8 | (2.6)% | | OpenStack Public Cloud | $49.0 | $40.6 | (17.0)% | | Total consolidated revenue | $725.9 | $775.5 | 6.8% | Segment Gross Profit for Q1 2021 and Q1 2022 | Segment | Gross Profit (Q1 2021, Millions) | Gross Profit (Q1 2022, Millions) | YoY Change (%) | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------- | | Multicloud Services | $196.4 | $188.2 | (4.2)% | | Apps & Cross Platform | $34.9 | $34.5 | (1.1)% | | OpenStack Public Cloud | $18.6 | $12.9 | (30.6)% | | Total consolidated segment gross profit | $249.9 | $235.6 | (5.7)% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, and cash flows, including an overview of the business, key factors affecting performance, detailed analysis of revenue and expenses, non-GAAP financial measures, and liquidity and capital resources Overview - Rackspace Technology is a leading end-to-end multicloud technology services company, operating through Multicloud Services, Apps & Cross Platform (growth focus), and OpenStack Public Cloud (serving existing customers)[118][119] - The company is evaluating strategic alternatives for its businesses, particularly Public Cloud, based on a 'sum of the parts' valuation potentially greater than its current enterprise value[121] - The July 2021 Restructuring Plan, which impacted approximately 10% of the workforce, incurred $3.2 million in Q1 2022 for offshore build-out costs and is expected to generate $95-100 million in gross annual savings[120] - COVID-19 and the Russia-Ukraine conflict have not materially affected operations or financial performance to date, but the company continues to monitor the evolving situations[122][123] Key Factors Affecting Our Performance - Success depends on differentiating service offerings, expanding relationships with major public cloud providers (AWS, Microsoft Azure, Google Cloud, Oracle, SAP, VMware), and delivering a 'Fanatical Customer Experience'[125] - Customer retention and acquisition are critical, driven by an integrated cloud service portfolio and differentiated technology like Rackspace Fabric and Elastic Engineering[126] - The business mix is shifting from high capital intensity (managed hosting) to low capital intensity (managed public cloud services), resulting in lower gross margins but also lower operating expenses and capital expenditures, maintaining similar operating margins[127][128] - Capital expenditures decreased from 8% of revenue in Q1 2021 to 4% in Q1 2022, reflecting the shift to lower capital intensity service offerings[129] - The company is addressing higher voluntary attrition by accelerating best-shoring efforts and expanding its recruiting pool to attract and retain qualified employees[130] Key Components of Statement of Operations - Revenue is primarily generated from fixed-term contracts (12-36 months) with monthly recurring fees and usage-based services, recognized daily[132] - Cost of revenue includes third-party infrastructure charges, personnel costs, depreciation, data center rent, and software licenses, driven by service demand and mix[133] - Selling, general and administrative expenses (SG&A) consist of personnel costs (sales, executive, corporate support), R&D, facilities, advisory fees, marketing, and amortization of intangible assets, also including transaction and transformation costs[134][135] - Income tax benefit/provision and deferred tax assets/liabilities are based on management's assessment of estimated current and future taxes, subject to tax laws and audits[136] Results of Operations Results of Operations for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Millions) | Three Months Ended Mar 31, 2022 (Millions) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Revenue | $725.9 | $775.5 | 6.8% | | Cost of revenue | $(490.6) | $(549.5) | 12.0% | | Gross profit | $235.3 | $226.0 | (4.0)% | | Selling, general and administrative expenses | $(231.0) | $(205.1) | (11.2)% | | Income from operations | $24.2 | $20.9 | (13.6)% | | Net loss | $(64.0) | $(38.5) | (39.8)% | Segment Revenue for Q1 2021 and Q1 2022 with Constant Currency Change | Segment | Revenue (Q1 2021, Millions) | Revenue (Q1 2022, Millions) | Constant Currency Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------------------------- | | Multicloud Services | $579.6 | $640.1 | 11.0% | | Apps & Cross Platform | $97.3 | $94.8 | (2.4)% | | OpenStack Public Cloud | $49.0 | $40.6 | (16.6)% | | Total | $725.9 | $775.5 | 7.3% | - Cost of revenue increased primarily due to higher usage charges for third-party infrastructure, partially offset by personnel cost savings from shifting roles to lower-cost locations and data center expense reductions[145] - Selling, general and administrative expenses decreased due to personnel cost savings from business optimization initiatives, reductions in other business optimization and integration costs, and lower amortization expense[156] Non-GAAP Financial Measures - The company uses non-GAAP financial measures (constant currency revenue, Non-GAAP Gross Profit, Non-GAAP Net Income (Loss), Non-GAAP Operating Profit, Adjusted EBITDA, and Non-GAAP EPS) to monitor and manage underlying financial performance, excluding certain non-recurring or non-core items[162][167] Non-GAAP Financial Measures for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Millions) | Three Months Ended Mar 31, 2022 (Millions) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Non-GAAP Gross Profit | $249.9 | $235.6 | | Non-GAAP Net Income | $49.1 | $45.9 | | Non-GAAP Operating Profit | $118.9 | $112.1 | | Adjusted EBITDA | $180.2 | $171.3 | Non-GAAP EPS for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Per Share) | Three Months Ended Mar 31, 2022 (Per Share) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | | Non-GAAP EPS | $0.23 | $0.22 | Liquidity and Capital Resources - The company primarily finances operations and capital expenditures with internally-generated cash and hardware leases, with $375 million available under the Revolving Credit Facility (undrawn as of March 31, 2022)[184] - As of March 31, 2022, cash and cash equivalents totaled $269 million, with $115 million held by foreign entities[188] - Total aggregate principal amount outstanding under the Term Loan Facility, 5.375% Senior Notes, and 3.50% Senior Secured Notes was $3,377 million as of March 31, 2022[191] Capital Expenditures and Cash Flows for the three months ended March 31, 2021, and March 31, 2022 | Metric | Three Months Ended Mar 31, 2021 (Millions) | Three Months Ended Mar 31, 2022 (Millions) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total capital expenditures | $58.9 | $30.9 | | Cash provided by operating activities | $103.2 | $64.5 | | Cash used in investing activities | $(4.3) | $(25.9) | | Cash used in financing activities | $(4.5) | $(40.8) | - The decrease in capital expenditures is due to the continued mix shift towards lower capital intensity service offerings and the shift of internal software development work to lower-cost geographies[207] - Net cash provided by operating activities decreased by $39 million (38%) in Q1 2022, primarily due to increased operating expense payments, partially offset by higher cash collections and reduced employee-related payments[210] Critical Accounting Policies and Estimates - The company's critical accounting policies and estimates have not changed materially from those described in its Annual Report[216] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to various market risks, including interest rate risk on its floating-rate debt, foreign currency translation and transaction risk, and the impact of power price fluctuations on its data center operations - The company is exposed to interest rate risk on its $2,277 million floating-rate Term Loan Facility; a 0.125% change in blended interest rates would result in a $3 million change in annual interest expense[218] - Interest rate swap agreements are used to manage LIBOR fluctuations, with one remaining swap of $1,350 million notional amount (pay-fixed 2.3820%, matures February 9, 2026)[219][220] - Foreign currency translation risk arises from converting foreign subsidiaries' results to USD, and transaction risk from intercompany receivables; $4 million in foreign currency transaction losses were recognized in Q1 2022[221] - As a large power consumer, the company expensed approximately $12 million for utilities in Q1 2022 (2% of revenue) and uses fixed-price power contracts for some data centers to mitigate price volatility[223] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting, concluding that controls were effective with no material changes during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[225] - There were no material changes in the company's internal controls over financial reporting during the most recent fiscal quarter[226] - Management acknowledges the inherent limitations of internal control systems, which can only provide reasonable, not absolute, assurance against error and fraud[227] Part II - Other Information Item 1. Legal Proceedings This section states that the company is involved in various legal proceedings and claims in the ordinary course of business, including intellectual property claims, but none are expected to have a material adverse effect on its financial position or operations - The company is not party to any litigation that, if determined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business, financial position, or results of operations[232] - Accruals for loss contingencies are recorded when losses are considered probable and can be reasonably estimated[230] Item 1A. Risk Factors This section refers to the Annual Report for a comprehensive list of risk factors, stating that there have been no material changes from previously disclosed risks - There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K[234] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on the company's share repurchase program during March 2022, including the number of shares purchased and the remaining authorization Share Repurchase Program Activity for March 2022 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------- | :------------------------------- | :--------------------------- | | March 1, 2022 - March 31, 2022 | 373,036 | $10.91 | - Approximately $70.9 million of the $75.0 million authorized share repurchase program remained available as of March 31, 2022[235] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[237] Item 4. Mine Safety Disclosures This section indicates that the disclosure requirements for mine safety are not applicable to the company - This item is not applicable to the company[239] Item 5. Other Information This section states that there is no other information to report under this item - No other information is reported under this item[241] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report, including various agreements, certifications, and XBRL documents - Key exhibits include the Fourth Amendment to Employment Agreement (10.1), Form of Performance Stock Unit Agreement (10.2), CEO/CFO Certifications (31.1, 31.2, 32.1, 32.2), and Inline XBRL Instance Document (101.INS) and related taxonomy documents[243] Signatures This section contains the official signatures authorizing the filing of the Quarterly Report - The report was signed by Amar Maletira, President and Chief Financial Officer, on May 10, 2022[247]