Rackspace Technology, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless stated otherwise, amounts are U.S. dollars. Rackspace provides multicloud technology services through Multicloud Services, Apps & Cross Platform, and OpenStack Public Cloud.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $787.6 million | $762.5 million | $2,335.3 million | $2,232.2 million |
| Gross profit / margin | $207.1 million / 26.3% | $231.7 million / 30.4% | $657.1 million / 28.1% | $702.5 million / 31.5% |
| Operating income (loss) | $(476.7) million | $(2.9) million | $(451.8) million | $24.2 million |
| Net income (loss) | $(511.7) million | $(34.8) million | $(590.8) million | $(135.4) million |
| Adjusted EBITDA (non-GAAP) | $134.1 million | $183.1 million | $459.8 million | $542.6 million |
- Q3 revenue grew 3.3% reported and 5.3% at constant currency; nine-month revenue grew 4.6% and 5.9%, respectively. Growth came from Multicloud Services and Apps & Cross Platform, partly offset by OpenStack Public Cloud declines.
- Gross margin fell year over year as third-party infrastructure costs rose faster than revenue. Management cited changing service mix toward public-cloud offerings, which carry lower gross margins, as a key cost pressure.
- Q3 GAAP loss included non-cash impairment charges of $405.2 million for Multicloud Services goodwill and $58.7 million for other assets. The nine-month total impairment expense was $463.9 million. The goodwill test reflected lower forecasts, including slower-than-expected product-mix shifts and macroeconomic concerns.
- Operating cash flow was $219.2 million for the first nine months, down from $311.2 million. Investing cash use was $83.5 million and financing cash use was $148.8 million. Capital expenditures were $99.0 million, versus $175.7 million.
- At September 30, cash and cash equivalents were $249.1 million. Total assets were $5.69 billion and stockholders’ equity was $815.6 million.
- Debt carrying value was $3.322 billion; aggregate principal outstanding under the term loan and notes was $3.366 billion. The term loan rate was 5.62%. The $375 million revolving facility was undrawn, and the company reported covenant compliance.
Material changes and segment trends
- Multicloud Services revenue rose 3.9% in Q3 and 6.3% for the nine-month period; gross profit declined 16.6% and 10.0%, respectively. Management attributed margin pressure chiefly to higher third-party infrastructure expense.
- Apps & Cross Platform revenue grew 9.4% in Q3 and 4.8% year to date. Gross profit increased 3.0% and 4.1%, respectively.
- OpenStack Public Cloud revenue declined 18.4% in Q3 and 17.1% year to date, primarily due to customer churn. Rackspace describes the offering as non-core and continues to serve its existing customers.
- SG&A declined 6% in Q3 and 8% year to date, mainly due to cost reductions and lower restructuring-related expense. This did not offset weaker gross profit and the impairment charges.
- The company repurchased $31 million of stock, or 3.1 million shares, during the first nine months; no repurchases occurred in Q3. $44 million remained under the $75 million authorization.
Outlook, risks, and unusual items
- Management stated that available cash and current operations should provide sufficient liquidity for at least the next 12 months, while cautioning that cash generation, borrowing availability, economic conditions, and refinancing access are not assured.
- No specific revenue, earnings, or cash-flow guidance is provided in the filing text. Management said it expects current capital-expenditure intensity levels to continue over the longer term.
- Risks discussed include competition and customer retention, customer churn, inflation and supply-chain disruption, foreign-currency movements, higher interest rates on floating-rate debt, and power costs. The company reported $16 million of foreign-currency transaction losses for the nine months.
- Further impairment remains possible if forecasts are not achieved, market capitalization falls further, or the cost of capital rises. A 50-basis-point increase in the discount-rate assumption would reduce estimated fair value of the Multicloud Services and Apps & Cross Platform reporting units by approximately $235 million and $33 million, respectively.
- In October 2022, Rackspace announced plans to sell its Windcrest, Texas headquarters and move to leased San Antonio office space. It expects the sale price may be below the property’s carrying value, potentially resulting in a material impairment or sale loss.
- The filing says ordinary-course legal contingencies are not expected to have a material adverse effect. It reports no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth in the core segments can translate into improved gross margins as third-party infrastructure costs and service mix evolve.
- Whether operating cash flow can sustain debt service and investment needs, particularly given the decline from the prior-year period.
- Debt exposure to interest rates, upcoming maturities, refinancing conditions, and continued compliance with financing covenants.
- The assumptions behind the goodwill and asset valuations, and whether further impairments or headquarters-related losses will be recorded.
- Customer retention and churn trends, especially in OpenStack Public Cloud, and the pace of growth in managed public-cloud services.
Adjusted EBITDA and other non-GAAP measures are management-defined and should be considered alongside GAAP results, not as substitutes for them.