Rackspace Technology, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context and reporting period
Rackspace provides multicloud technology services. Effective January 1, 2023, it reorganized into two reportable segments: Public Cloud, a capital-light services and resale business, and Private Cloud, a more capital-intensive managed-services business. Comparative segment results were recast.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $746.3 | $772.2 | $1,505.0 | $1,547.7 |
| Gross profit / margin | $153.1 / 20.5% | $224.0 / 29.0% | $322.7 / 21.4% | $450.0 / 29.1% |
| Operating income (loss) | $(63.8) | $4.0 | $(644.8) | $24.9 |
| Net income (loss) | $(27.2) | $(40.6) | $(639.2) | $(79.1) |
| Adjusted EBITDA (non-GAAP) | $93.5 | $154.4 | $196.7 | $325.7 |
- Q2 revenue declined 3.4% year over year (3.2% constant currency). Public Cloud revenue rose 3% to $434.9; Private Cloud fell 11% to $311.4. For the first half, Public Cloud grew 5% and Private Cloud declined 12%.
- Q2 cost of revenue increased 8% to $593.2, outpacing revenue and reducing gross margin by 850 basis points. Management cited higher third-party infrastructure usage charges, data-center and license costs.
- Q2 GAAP net loss narrowed versus prior year, but operating results weakened. A $94.9 gain on debt extinguishment from discounted note repurchases substantially supported the quarterly result. First-half loss includes a $543.1 non-cash goodwill impairment charge; first-half non-GAAP operating profit was $89.5 versus $210.6.
- Cash from operations was $35.9 for the first half, versus $148.5 in 2022. Cash used in investing was $34.9 and financing was $70.8. Capital expenditures were $116.2 versus $68.1, including customer equipment originally intended for a new customer that did not materialize as expected; the company says the equipment can be redeployed.
- At June 30, cash and cash equivalents were $159.9 (plus $3.1 restricted cash). Current assets were $913.5 and current liabilities $776.3. Stockholders’ equity was $31.9, down from $629.5 at year-end 2022.
- Debt principal under the term loan and notes was approximately $3.184 billion, plus $50 million drawn on the revolver. The term loan rate was 8.00%; the $375 million revolver had $325 million of commitments available. The company reported compliance with debt covenants. Lease obligations totaled $556 million and financing obligations $65.7 million.
Material changes, outlook, risks and unusual items
- Segment operating margins declined: Public Cloud was 3.9% in Q2 versus 7.1%; Private Cloud was 27.9% versus 37.9%. Management attributed margin pressure to infrastructure and data-center costs, alongside Private Cloud revenue contraction.
- Goodwill impairment followed a segment reorganization, lower market capitalization, and revised forecasts, including slower-than-anticipated booking conversion. At June 30, management reported no new impairment indicators, but cautioned that weaker cash flows, further stock-price declines or higher capital costs could lead to additional material impairment.
- The company repurchased $164.8 million principal amount of 5.375% notes for $56.8 million during the first half, recognizing a $107.7 million gain. After quarter-end through August 9, it repurchased another $57.1 million principal for $20.3 million. These transactions reduce debt but use cash.
- Rackspace says current cash and expected sources are sufficient for at least the next 12 months, while warning that operating cash generation and future access to borrowing are not assured. No specific financial guidance or quantified outlook is provided in the supplied filing text.
- The December 2022 Hosted Exchange ransomware incident led to Q2 expenses of $1.7 million and first-half expenses of $4.9 million. Related lawsuits are being defended; the company cannot yet estimate the probability or range of losses, and insurance is subject to deductibles and limits. It expects further legal and professional costs.
- A UK office closure resulted in $12.1 million of Q2 expense. Interest expense rose 13% in Q2 to $57.3 million, primarily due to higher rates on floating-rate debt. The company transitioned affected LIBOR debt and its swap to SOFR during the quarter.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated that previously disclosed risk factors had no material changes.
Investor facts to verify
- Whether Private Cloud declines and segment margin compression persist, and whether Public Cloud growth can improve profitability.
- Operating cash flow, capital spending and liquidity against substantial debt service needs; also monitor revolver availability and covenant headroom.
- Progress and cash cost of note repurchases, including the post-quarter transactions, and the effect of higher floating rates on interest expense.
- Goodwill impairment assumptions and potential for further charges, particularly if forecasts, market capitalization or discount rates worsen.
- Developments in Hosted Exchange litigation, remediation and insurance recoveries, and any resulting costs or customer-retention effects.