Rackspace Technology, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; it does not provide a clear standalone set of fourth-quarter financial results.
Business context
Rackspace provides multicloud technology services, including managed public and private cloud, applications, security, data services and professional services. It reported three segments in 2022: Multicloud Services, Apps & Cross Platform, and OpenStack Public Cloud. Effective January 1, 2023, it reorganized into Public Cloud and Private Cloud business units, with OpenStack Public Cloud remaining a separate reporting segment.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $3,122.3 million | $3,009.5 million |
| Gross profit / margin | $856.9 million / 27.4% | $936.8 million / 31.1% |
| Operating loss | $679.0 million | $2.5 million |
| Net loss | $804.8 million | $218.3 million |
| Adjusted EBITDA (non-GAAP) | $584.5 million | $725.8 million |
| Cash from operating activities | $246.7 million | $370.8 million |
| Cash used in investing / financing | $97.9 million / $187.0 million | $69.0 million / $132.2 million |
- Revenue grew 3.7% reported and 5.2% on a constant-currency basis. Multicloud Services revenue increased 5.1% to $2,574.9 million; Apps & Cross Platform increased 5.1% to $396.9 million; OpenStack Public Cloud declined 17.7% to $150.5 million.
- Cost of revenue rose 9.3%, faster than revenue, and gross margin contracted 3.7 percentage points. Management attributed the pressure largely to higher third-party cloud infrastructure costs and mix shift toward lower-gross-margin public cloud services.
- Cash and cash equivalents were $228.4 million at year-end, down from $272.8 million. Current assets were $1,073.2 million and current liabilities were $856.5 million.
- Capital expenditures were $141.8 million, or about 5% of revenue, versus $202.9 million in 2021.
- Face-value debt was $3,359.8 million: $2,259.8 million under the term loan, $550 million of 3.50% secured notes and $550 million of 5.375% notes. The term loan rate was 7.38% at year-end; the $375 million revolving facility was undrawn. Balance-sheet debt, net of issuance costs and discount, was $3,318.4 million.
- Management reported compliance with debt covenants and stated that cash and available sources were expected to meet liquidity needs for at least the next 12 months, while cautioning that future operating cash flows and refinancing access are not assured.
Material changes and unusual items
- FY2022 GAAP net loss increased by $586.5 million. Results included $534.5 million of goodwill impairment and $146.1 million of other asset impairment, compared with $52.4 million of goodwill impairment and no asset impairment in 2021.
- Goodwill charges included $405.2 million for Multicloud Services and $129.3 million for Apps & Cross Platform. The company also recorded trade-name and OpenStack-related impairments and a $70.6 million charge after classifying its Windcrest headquarters as held for sale, plus a $4.8 million write-off of the related tax-abatement asset.
- In December 2022, a ransomware incident disrupted the Hosted Exchange service, which represented approximately 1% of annual revenue. Rackspace recorded $5.9 million of incident-related expenses, sunset the on-premises platform and moved many customers to Microsoft 365. It expected further legal and professional-service costs and anticipated insurance coverage for a significant portion of incremental costs.
- Several lawsuits related to the incident were pending. The company was defending them and said it could not yet estimate the probability or range of losses, if any; it did not expect a material adverse financial effect.
- Operating cash flow declined 33%, primarily reflecting higher operating expense payments, especially for third-party infrastructure. Interest expense was $208.5 million, compared with $205.1 million in 2021.
- The company repurchased $31.0 million of stock during 2022; $44.0 million remained under its $75.0 million authorization at year-end.
Outlook, commentary and risks
The filing provides no specific revenue, earnings or cash-flow guidance. Management identified customer acquisition and retention, sales of additional services, execution of its cloud strategy, and talent retention as important performance factors. It expects the shift toward public cloud and other lower-capital-intensity services to continue; those services have lower gross margins but also lower operating and capital expenditure burdens. The 2023 operating-model and segment changes will affect reporting comparability.
Key risks include substantial leverage and variable-rate debt, weaker operating cash flow, competitive and pricing pressure, customer churn, reliance on hyperscaler and other third-party providers, cybersecurity and service availability, and power costs. The company reported approximately $1.616 billion of non-cancelable purchase commitments, primarily for infrastructure, software and data-center needs. Further impairment charges are possible if forecasts, market capitalization or financing assumptions weaken. COVID-19 and the Russia-Ukraine conflict had not materially affected results to date, but their potential effects remained uncertain.
Most important facts for investors to verify
- Whether core revenue growth can continue while third-party infrastructure costs and gross-margin pressure are controlled.
- Whether operating cash flow can support debt service, lease obligations, capital needs and other commitments; review the debt maturities, covenants and refinancing options.
- The status, customer impact, insurance recoveries and potential legal costs of the Hosted Exchange ransomware incident.
- Whether assumptions underlying the 2022 goodwill and asset impairments remain supportable, given limited fair-value cushions in key reporting units.
- How the 2023 Public Cloud and Private Cloud reorganization changes segment performance and disclosure comparability.
Audit and controls: PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2022. The audit identified interim goodwill impairment assessments as a critical audit matter.