Rackspace Technology, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Amounts are in millions of dollars except per-share data and percentages. Rackspace provides multicloud technology services. From January 1, 2023, it reported two segments: Public Cloud and Private Cloud.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Revenue | $775.5 | $758.7 |
| Gross profit / margin | $226.0 / 29.1% | $169.6 / 22.4% |
| Operating income (loss) | $20.9 | $(581.0) |
| Net income (loss) | $(38.5) | $(612.0) |
| GAAP diluted loss per share | $(0.18) | $(2.87) |
| Operating cash flow | $64.5 | $(1.9) |
| Adjusted EBITDA (non-GAAP) | $171.3 | $103.2 |
| Non-GAAP operating profit | $112.1 | $50.5 |
- Revenue fell 2.2% year over year, or 1.1% on a constant-currency basis. Public Cloud revenue grew 6.6% (7.3% constant currency) to $444.6; Private Cloud revenue declined 12.4% (10.8% constant currency) to $314.1.
- Gross margin contracted 6.7 percentage points, primarily as third-party infrastructure costs rose. Cost of revenue increased 7.2% while revenue declined.
- Cash and cash equivalents were $174.3 at March 31, down from $228.4 at year-end 2022. Cash, cash equivalents and restricted cash totaled $177.4. Current assets were $969.6 and current liabilities were $790.7.
- Capital expenditures were $71.5, versus $30.9 in Q1 2022. Cash used in investing activities was $11.7, reflecting cash purchases of property, equipment and software of $12.1; substantial equipment was also acquired through finance leases.
- Aggregate principal debt was $3,331.3; balance-sheet debt carrying value was $3,292.0. The Term Loan Facility had a 7.60% rate. The $375.0 revolving facility was undrawn, with $3.5 of letters of credit issued. The company reported compliance with debt covenants.
Material changes and unusual items
- Rackspace recorded $543.1 of non-cash goodwill impairment, comprising $270.8 following the segment reorganization and $272.3 after a March 31 interim review. The impairment drove the reported operating and net losses and reduced goodwill to $1,614.8 and stockholders’ equity to $24.4. Public Cloud fair value exceeded carrying value by approximately 14% at March 31.
- Segment operating profit decreased to $24.5 for Public Cloud from $34.5, and to $92.9 for Private Cloud from $136.8. Segment margins fell to 5.5% and 29.6%, respectively.
- Interest expense rose to $56.9 from $50.1, primarily due to higher rates on floating-rate debt. Rackspace repurchased $22.7 principal amount of 5.375% Senior Notes for $10.0 including accrued interest, recording a $12.8 gain on extinguishment.
- Operating cash flow swung from $64.5 provided to $1.9 used. Management attributed the reduction mainly to higher operating expense payments and interest, partly offset by stronger collections.
- Capital spending rose largely because customer equipment was purchased for a new customer opportunity that did not materialize as expected; the company said the equipment could be redeployed.
Outlook, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management believes available cash and other sources will meet liquidity needs for at least the next 12 months, but cautions that operating cash generation and future borrowing availability are uncertain.
- Remaining performance obligations were $564.2 at March 31; approximately 57% was expected to be recognized as revenue during the remainder of 2023. This excludes certain usage-based arrangements.
- Rackspace described itself as highly leveraged. It cited debt service, floating-rate exposure, competitive pressures, lower Private Cloud revenue and potential refinancing constraints as relevant concerns. It warned that further deterioration in forecasts, market capitalization or capital costs could cause additional material goodwill impairment.
- The December 2022 ransomware incident disrupted Hosted Exchange services. Rackspace sunset the on-premises platform and transitioned many customers to Microsoft 365. Q1 incident expenses were $3.2; further legal and professional costs may occur. Related lawsuits are being defended, and the company could not estimate their outcome or any loss range, though it did not expect a material adverse effect and maintains cyber insurance subject to limits and deductibles.
- On April 26, 2023, the company amended its credit agreement to replace LIBOR with Term SOFR as the benchmark rate and expected to make a related swap-index change.
Key facts for investors to verify
- Whether revenue and margins stabilize, especially in Private Cloud, and whether Public Cloud growth improves profitability.
- Whether cash generation recovers, capital spending on customer equipment is redeployed, and liquidity remains adequate against debt-service needs.
- Debt principal, variable-rate exposure, refinancing options and compliance with applicable covenants.
- Assumptions underlying the $543.1 goodwill impairment and the risk of further impairment if cash-flow forecasts or market conditions weaken.
- Financial and customer effects of the Hosted Exchange incident, including litigation developments and insurance recoveries.