Rackspace Technology, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Rackspace provides multicloud technology services through Multicloud Services, Apps & Cross Platform, and OpenStack Public Cloud. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2022 |
|---|---|---|
| Revenue | $725.9 | $775.5 |
| Gross profit / margin | $235.3 / 32.4% | $226.0 / 29.1% |
| Operating income | $24.2 | $20.9 |
| Net loss / diluted loss per share | $(64.0) / $(0.31) | $(38.5) / $(0.18) |
| Operating cash flow | $103.2 | $64.5 |
| Adjusted EBITDA (non-GAAP) | $180.2 | $171.3 |
Revenue increased 6.8% year over year (7.3% in constant currency). GAAP gross margin fell 330 basis points as cost of revenue grew faster than sales, particularly from third-party cloud infrastructure costs. SG&A declined 11% to $205.1, helping reduce the net loss. The prior-year quarter included a $19.9 land-sale gain and $37.0 of debt modification and extinguishment costs; neither recurred in Q1 2022.
Cash and cash equivalents were $269.1 at March 31, 2022, versus $272.8 at year-end 2021; an additional $2.5 was restricted cash. Current assets were $1,006.1 and current liabilities $817.5. Cash used in investing activities was $25.9 and cash used in financing activities was $40.8. Capital expenditures were $30.9, down from $58.9 a year earlier.
Debt carrying value was $3,330.0, while aggregate principal debt was approximately $3,377. The company had $375 of revolving-credit capacity, with no borrowings outstanding, and reported compliance with debt covenants. It reported $103 of financing obligations and $562 of operating and finance lease obligations. Management said cash, operations, and available financing were expected to provide adequate liquidity for at least the next 12 months, while noting significant debt-service needs.
Segment performance and material changes
- Multicloud Services: Revenue rose 10.4% to $640.1 (11.0% constant currency), but segment gross profit declined 4.2% to $188.2 and margin fell from 33.9% to 29.4%. Growth in managed public cloud and VMware services was partly offset by customer cancellations; higher third-party infrastructure costs pressured margin.
- Apps & Cross Platform: Revenue declined 2.6% to $94.8, primarily following the discontinuation of a non-core business line; productivity and collaboration offerings grew. Gross profit was broadly flat at $34.5.
- OpenStack Public Cloud: Revenue fell 17.0% to $40.6 and gross profit fell 30.6% to $12.9, mainly due to customer churn. The company says this is a non-core offering and is focusing investment on its other segments.
- Operating cash flow declined 38% year over year, principally reflecting higher operating expense payments, including third-party infrastructure costs. Higher customer collections and lower employee-related payments partly offset the decline.
- Total reported debt changed little from year-end. Interest expense decreased to $50.1 from $52.6 in the prior-year quarter.
Outlook, management commentary, and risks
On May 10, 2022, after quarter-end, Rackspace disclosed that it was evaluating strategic alternatives following a strategic review, citing the possibility that a sum-of-the-parts valuation could exceed its current enterprise value and the growth profile of Public Cloud. The company cautioned that there is no assurance the review will result in a particular outcome or change in operations.
The July 2021 restructuring plan was expected to generate approximately $95–$100 of gross annual savings versus pre-plan expense levels. Rackspace recorded $3.2 of related transformation charges in Q1 2022 and expected about $3 of additional expenses during the remainder of 2022. It also expected to maintain current capital-expenditure intensity over the longer term; no specific full-year revenue or earnings guidance is provided in the supplied filing text.
Management reported higher-than-historical voluntary employee attrition and ongoing efforts to expand lower-cost-location staffing. It identified competition, customer retention, service differentiation, and the changing mix toward lower-gross-margin public-cloud services as important performance factors. COVID-19 and the Russia-Ukraine conflict had not materially affected results to date, but their future effects were uncertain. The company also cited exposure to floating-rate debt, foreign-exchange movements, and data-center power costs; Q1 foreign-currency transaction losses were approximately $4 and power expense approximately $12.
Rackspace said it was not party to litigation expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Disclosure controls and procedures were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the strategic-alternatives review produces a transaction, divestiture, or other change, and its financial and operational implications.
- Whether Multicloud Services growth can translate into improved gross margin despite third-party infrastructure costs and customer churn.
- Whether operating cash flow recovers and supports debt service, capital spending, and any further share repurchases.
- Debt principal, floating-rate exposure, swap coverage, covenant headroom, and the effect of benchmark-rate changes.
- Progress against the $95–$100 annual restructuring-savings target, including remaining costs and employee attrition.
- Performance obligations were $673.9 at March 31, 2022; 57% was expected to be recognized during the remainder of 2022. Verify conversion into revenue and cash collection.