Rackspace Technology, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Rackspace provides multicloud technology services through Multicloud Services, Apps & Cross Platform, and OpenStack Public Cloud. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $772.2 | $743.8 | $1,547.7 | $1,469.7 |
| Gross profit / margin | $224.0 / 29.0% | $235.5 / 31.7% | $450.0 / 29.1% | $470.8 / 32.0% |
| Operating income | $4.0 | $2.9 | $24.9 | $27.1 |
| Net loss | $(40.6) | $(36.6) | $(79.1) | $(100.6) |
| Adjusted EBITDA (non-GAAP) | $154.4 | $179.3 | $325.7 | $359.5 |
Q2 revenue rose 3.8% year over year, or 5.2% on a constant-currency basis. Six-month revenue increased 5.3%, or 6.3% constant currency. Higher third-party infrastructure costs contributed to gross margin compression. GAAP diluted loss per share was $0.19 in Q2 and $0.38 for the six-month period, versus $0.18 and $0.49, respectively, in 2021.
For the six months, operating cash flow was $148.5, down from $208.9. Investing cash use was $50.6 and financing cash use was $104.4. Capital expenditures were $68.1, compared with $140.8 in the prior-year period. Cash and cash equivalents were $261.3 at June 30; cash, cash equivalents and restricted cash totaled $263.8 for cash-flow reporting.
Financial position and material changes
- Carrying-value debt was $3,326.1, including $23.0 current debt; aggregate principal debt was approximately $3,371. The $2,271.3 term loan carried a 4.16% rate. The company had no revolver borrowings and $375 of revolver capacity available.
- Total liabilities were $4,909.8 and stockholders’ equity was $1,298.4 at June 30. The company reported compliance with debt covenants.
- Q2 Multicloud Services revenue grew 4.7% (6.2% constant currency), and Apps & Cross Platform grew 8.0% (8.8% constant currency). OpenStack Public Cloud revenue declined 15.9%, primarily due to customer churn.
- Q2 SG&A fell 5.4% year over year, helping lift operating income modestly. For the six months, net loss narrowed, partly reflecting the prior-year refinancing costs and land-sale gain not recurring; operating income was lower than the prior year.
- Cash from operations decreased $60, primarily because of higher operating expense payments, especially third-party infrastructure costs. Lower capital spending reflected the shift toward less capital-intensive services.
Outlook, commentary and risks
- Management stated that current cash and operations should provide sufficient liquidity for at least the next 12 months, while cautioning that cash generation and access to future financing are not assured. Debt service is a significant liquidity need.
- The company is evaluating strategic alternatives after concluding that a sum-of-the-parts valuation could exceed current enterprise value, partly due to Public Cloud’s growth profile. No outcome or change in business is assured.
- The July 2021 restructuring plan is expected to deliver $95–$100 of gross annual savings versus pre-plan expense levels. Approximately $1 of additional expense was expected in the remainder of 2022. Management expects to maintain current capital-expenditure intensity over the longer term; no specific earnings or revenue guidance is provided in the supplied filing text.
- Remaining performance obligations were $700.1 at June 30; 41% was expected to be recognized during the remainder of 2022.
- Key risks include continued gross-margin pressure from third-party cloud infrastructure costs, customer churn, foreign-exchange losses, higher interest rates on floating-rate debt, employee attrition, macroeconomic and geopolitical uncertainty, and potential future goodwill or intangible-asset impairment. Management reported no impairment indicators at June 30, but noted a material charge could arise if conditions deteriorate.
- The company repurchased $31.0 of stock during the six months under a $75.0 authorization, leaving approximately $44.0 available. It acquired Just Analytics for $7.7 net cash consideration; the acquisition was described as not material.
- Management reported no material litigation expected to adversely affect the company and no material changes to previously disclosed risk factors. Disclosure controls were judged effective.
Most important facts for investors to verify
- Whether revenue growth can continue while gross margins and Adjusted EBITDA remain under pressure, particularly in Multicloud Services.
- Cash conversion, working-capital trends, and the ability to fund debt service and operations despite lower operating cash flow.
- Debt principal, floating-rate exposure, interest-rate swap coverage, covenant status, and refinancing needs.
- Developments and potential consequences of the strategic-alternatives review, which has no assured outcome.
- Execution and realized savings from restructuring, plus customer retention and growth trends by segment.
- Non-GAAP reconciliations and adjustment levels when comparing Adjusted EBITDA or other non-GAAP measures with GAAP results.