Rackspace Technology, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Rackspace provides multicloud technology services through Multicloud Services, Apps & Cross Platform, and OpenStack Public Cloud. Management’s growth strategy focuses on the first two segments.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $743.8 million | $656.5 million | $1,469.7 million | $1,309.2 million |
| Gross profit / margin | $235.5 million / 31.7% | $241.9 million / 36.8% | $470.8 million / 32.0% | $491.2 million / 37.5% |
| Operating income | $2.9 million | $22.7 million | $27.1 million | $44.2 million |
| Net loss | $36.6 million | $32.6 million | $100.6 million | $80.8 million |
| Adjusted EBITDA (non-GAAP) | $179.3 million | $187.6 million | $359.5 million | $373.2 million |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $208.9 million | $98.8 million |
| Capital expenditures | Not stated for the quarter | Not stated for the quarter | $140.8 million | $126.2 million |
Q2 diluted loss per share was $0.18 versus $0.20; first-half diluted loss per share was $0.49 in both years. Q2 revenue grew 13.3% year over year, or 11.4% on a constant-currency basis. First-half growth was 12.3%, or 10.7% constant currency. Core revenue (Multicloud Services and Apps & Cross Platform) increased 16.5% in Q2 and 15.7% in the first half on a reported basis.
At June 30, cash and cash equivalents were $214.8 million, with an additional $3.3 million of restricted cash. Current assets were $885.2 million and current liabilities $789.3 million. Total debt carrying value was $3,341.7 million, including $23.0 million current debt; aggregate principal on the term loan and notes was approximately $3.394 billion. The company also reported $140 million outstanding under financing obligations and $584 million under operating and finance leases. The $375 million revolver was undrawn.
Changes versus comparable periods
- Revenue growth was led by Multicloud Services (Q2 +16.6%) and Apps & Cross Platform (+16.1%); OpenStack Public Cloud revenue declined 20.1% as customers churned.
- Gross margin declined 510 basis points in Q2 and 550 basis points in the first half. Management cited higher third-party infrastructure costs and a greater mix of larger, lower-margin contracts. Lower depreciation and data-center costs partly offset the pressure.
- Q2 operating income fell to $2.9 million from $22.7 million, despite revenue growth. First-half net loss widened to $100.6 million from $80.8 million; higher restructuring and refinancing charges contributed.
- Interest expense declined to $50.5 million in Q2 from $68.9 million, and to $103.1 million for the first half from $140.9 million, reflecting refinancing and lower debt costs. First-half results included $37.5 million of debt modification and extinguishment costs and a $19.9 million land-sale gain.
- Operating cash flow more than doubled year over year in the first half, primarily due to higher customer collections and lower interest and employee payments, partly offset by increased operating expense payments, particularly infrastructure costs.
Outlook, risks and unusual items
- Management said available cash, operating cash generation and the revolver were expected to provide sufficient liquidity for at least the next 12 months, while cautioning that future cash flows and borrowing availability are not assured. Debt service is a significant liquidity requirement.
- No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management expects capital-expenditure intensity to decline over the longer term, although first-half capex rose to $140.8 million, partly from renewals of enterprise storage and software-license agreements.
- On July 21, 2021, after quarter-end, the company committed to a workforce restructuring expected to affect approximately 10% of employees; it anticipates backfilling about 85% of those roles in offshore service centers. Estimated costs are $70 million to $80 million over 12–24 months, with most incurred in the next 12 months. It had already recorded $6.4 million of related Q2 costs.
- In February 2021, the company refinanced its prior term loan with a new $2.3 billion term loan due 2028 and issued $550 million of 3.50% secured notes due 2028. The receivables financing facility was repaid and terminated during Q2. The company reported compliance with debt covenants and no revolver borrowings.
- A March 2021 useful-life estimate change reduced depreciation expense by $7.5 million in Q2 and $14.1 million in the first half. This benefited reported results. The UK land sale produced $31.3 million net cash proceeds and a $19.9 million gain.
- COVID-19 had not materially affected results to date, but the company cited continuing uncertainty and possible effects on customers, collections, service delivery and sales cycles. Other exposures include floating-rate debt, foreign exchange and power costs. Management reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth can continue to translate into improved gross margins given rising third-party infrastructure costs and the shift toward larger, lower-margin contracts.
- Whether cash generation and available liquidity remain adequate for debt service, capex and the restructuring, especially after one-time collection and payment timing benefits.
- The actual restructuring costs, timing, workforce reductions and expected savings, including whether offshore backfills and automation deliver the planned benefits.
- Debt terms, variable-rate exposure and covenant headroom. The filing reports $2.294 billion outstanding on the term loan, a $375 million undrawn revolver and $3.50% and 5.375% senior notes of $550 million each.
- How much reported earnings benefit from the revised equipment useful lives, and whether the margin and earnings trend persists excluding the land-sale gain and refinancing charges.