Rackspace Technology, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Rackspace provides multicloud technology services, managed applications, security and data services, and professional services. Its growth strategy centers on Multicloud Services and Apps & Cross Platform; it no longer actively markets OpenStack Public Cloud.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $2,707.1 million | $2,438.1 million |
| Gross profit / margin | $984.4 million / 36.4% | $1,011.2 million / 41.5% |
| Operating income | $24.7 million | $101.6 million |
| Net loss | $245.8 million | $102.3 million |
| Cash from operations | $116.7 million | $292.9 million |
| Capital expenditures | $224.6 million | $209.7 million |
| Adjusted EBITDA (non-GAAP) | $762.8 million | $742.8 million |
- Revenue mix: Multicloud Services generated $2,141.5 million, up 16.9%; Apps & Cross Platform generated $336.6 million, up 5.4%; OpenStack Public Cloud generated $229.0 million, down 20.0%. Core revenue was $2,478.1 million, up 15.2% reported and 15.1% on a constant-currency basis. Management estimated acquisition-adjusted constant-currency total revenue growth of 6.0%, including the effect of Onica.
- Profitability: Cost of revenue rose 20.7%, faster than revenue, primarily reflecting third-party cloud infrastructure costs and larger, lower-margin contracts. The gross margin contracted 5.1 percentage points. Lower SG&A as a share of revenue did not offset the gross-margin decline.
- GAAP and adjusted results: Net loss widened despite higher revenue. Interest expense fell to $268.4 million from $329.9 million, but the company recorded a $71.5 million loss on extinguishment of debt. Adjusted EBITDA rose to $762.8 million and non-GAAP net income was $151.3 million; these non-GAAP measures exclude specified costs and gains and should be considered alongside GAAP results.
- Cash and liquidity: Cash and cash equivalents were $104.7 million at year-end. Operating cash flow fell by $176.2 million year over year, to $116.7 million; reported capital expenditures were $224.6 million. The company said available cash and expected operating resources should cover at least the next 12 months, while noting that future cash generation and financing availability are not assured.
- Debt: Year-end face-value debt was $3,410.6 million: $2,795.6 million under the term loan, $550 million of 5.375% notes due 2028, and $65 million under the receivables facility. The $375 million revolving facility was undrawn. Lease liabilities and financing obligations are additional commitments. The company reported covenant compliance at year-end.
- Operating indicators: Bookings increased 61% to $1,126.1 million and ARR rose to $2,711.1 million from $2,411.6 million. Fourth-quarter Core net revenue retention was 101%; consolidated retention was 100%. Management cautions that these internally calculated measures have limitations and do not assure future revenue.
Material changes and unusual items
- Rackspace completed its IPO in August 2020, issuing 33.5 million shares at $21 per share. Net proceeds after underwriting discounts and offering expenses were $657.8 million. The company used a substantial portion to retire its 8.625% notes; all those notes were repaid by year-end.
- Onica, acquired in November 2019, contributed to 2020 Multicloud Services growth. Rackspace also acquired Bright Skies in November 2020; the acquisition was not material to consolidated results.
- Share-based compensation expense rose to $74.5 million from $30.2 million, including IPO-related awards and $20.2 million of expense after certain performance and market awards became probable of vesting. Management consulting agreements with affiliates of Apollo, Searchlight and ABRY terminated in connection with the IPO.
- In February 2021, after year-end, Rackspace issued $550 million of 3.50% secured notes and refinanced its term loan with a new $2.3 billion facility, both maturing in 2028. The filing estimated 2020 debt-service obligations would have been $167.9 million on an as-adjusted basis after these transactions. The receivables facility required a $15 million repayment after year-end to address a borrowing-base deficit.
- Also after year-end, the company sold undeveloped U.K. land for net proceeds of $32 million, recognizing an approximate $21 million gain.
Outlook, commentary and risks
- No quantified financial guidance is provided in the filing. Management identifies multicloud services, enterprise sales, international expansion, partner relationships and selective acquisitions as growth priorities, and expects longer-term capital intensity to remain near current levels.
- Management said COVID-19 had not materially affected operations or financial performance to date, but the medium- and long-term impact remained uncertain. Risks include weaker customer spending, delayed sales, churn, collections and vendor disruption.
- Key risks include substantial indebtedness and debt-service demands; variable interest rates and the LIBOR transition; margin pressure from third-party infrastructure costs; competition and customer retention; reliance on major cloud partners; cyberattacks, service outages and compliance obligations; and execution and integration risks.
- Goodwill was $2,761.1 million and the Rackspace trade name was valued at $250.0 million at year-end. No impairment was recorded in 2019 or 2020, but both valuations depend on significant assumptions; the auditor identified each impairment assessment as a critical audit matter.
- The auditor issued an unqualified opinion on the financial statements. Disclosure controls were considered effective; a management assessment and auditor attestation of internal control over financial reporting were omitted under the transition rules for newly public companies.
Important facts for investors to verify
- Whether revenue growth translates into improved gross margins and operating cash flow, given the 2020 margin contraction and cash-flow decline.
- How the February 2021 refinancing affects actual interest expense, debt maturities, required amortization and covenant headroom; distinguish face-value debt from lease and financing obligations.
- Whether Bookings and ARR convert to recognized revenue and cash collections, considering their stated calculation limits and customer cancellation risk.
- Whether Multicloud Services growth offsets continued OpenStack Public Cloud decline and any lower-margin contract mix.
- Future COVID-19 effects, receivables collectability, cybersecurity and service-continuity exposures, and the assumptions supporting goodwill and trade-name valuations.