Rackspace Technology, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company provides multicloud and other managed technology services. It completed its IPO on August 7, 2020, issuing 33.5 million shares at $21 per share.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $681.7m | $601.7m | $1,990.9m | $1,811.0m |
| Gross profit | $245.8m | $253.8m | $737.0m | $756.8m |
| Gross margin | 36.1% | 42.2% | 37.0% | 41.8% |
| Operating income (loss) | $(14.7)m | $32.1m | $29.5m | $79.0m |
| Net loss | $(101.2)m | $(60.5)m | $(182.0)m | $(55.5)m |
| GAAP diluted loss per share | $(0.54) | $(0.37) | $(1.05) | $(0.34) |
| Adjusted EBITDA (non-GAAP) | $190.8m | $186.9m | $564.0m | $555.2m |
Q3 revenue increased 13.3% year over year (12.6% constant currency); management estimated 6.6% constant-currency growth excluding the Onica acquisition’s effect. Multicloud Services revenue rose 20.4% to $542.1m, Apps & Cross Platform rose 3.4% to $83.9m, and OpenStack Public Cloud fell 20.8% to $55.7m. Nine-month revenue increased 9.9% (10.0% constant currency); comparable constant-currency growth excluding Onica was estimated at 4.5%.
Margins weakened as cost of revenue grew faster than sales, particularly from third-party infrastructure charges and larger contracts with higher infrastructure content and lower margins. Q3 SG&A rose 17.5% to $260.5m, including higher share-based compensation and IPO-related costs. Q3 net loss included a $37.0m loss on extinguishment of debt and $40.2m of share-based compensation expense, including $20.2m associated with awards becoming probable of vesting after the IPO.
Cash flow, debt and liquidity
- For the first nine months of 2020, operating cash flow was $132.7m, versus $191.7m in 2019; investing cash outflow was $92.2m versus $132.3m; financing cash inflow was $128.5m versus a $123.6m outflow.
- Cash and cash equivalents were $253.2m at September 30, 2020, compared with $83.8m at December 31, 2019. Cash-flow-statement cash, including restricted cash, was $256.5m.
- Debt carrying value was $3,421.2m, including $2,759.2m under the term loan, $597.0m of senior notes and $65.0m under receivables financing. Principal outstanding under the term loan and notes totaled $3,408.1m; the notes carry an 8.625% coupon and the term loan rate was 4.00%.
- The company repurchased $515m principal of senior notes for $557.2m, recording a $37.0m extinguishment loss. It planned to redeem a further $86m principal on November 16, 2020 at 104.313% plus accrued interest. The $375m revolving facility had no borrowings outstanding; $65m of the $68m available receivables-facility capacity was drawn.
- The IPO generated $657.8m net proceeds after underwriting discounts and offering costs. Management said available resources were expected to provide sufficient liquidity for at least the next 12 months, while cautioning that cash generation and future borrowing availability were not assured. The company reported compliance with debt covenants.
Outlook, commentary and risks
- No specific revenue, earnings or cash-flow guidance was provided in the supplied filing text. Remaining performance obligations were $876.6m at September 30; 19% was expected to be recognized in 2020, with the balance thereafter.
- Management reported that COVID-19 had not materially affected results or financial condition to date, but warned that prolonged disruption could affect customers, sales cycles, collections and cash flows. The longer-term impact remained uncertain.
- Bookings increased to $314.6m from $192.1m, and ARR rose to $2,576.4m from $2,346.2m year over year. Quarterly net revenue retention was 100% (99% prior year). These are management-defined operating metrics and are not forecasts of recognized revenue.
- OpenStack Public Cloud is a run-off offering; revenue declines reflect customer churn. The company described ongoing competition, execution and customer-retention challenges, exposure to variable interest rates, foreign exchange and power costs, and potential intellectual-property claims. It stated that no material changes had occurred to previously disclosed risk factors.
- In June 2020, lease modifications reclassified certain data-center leases from operating to finance leases, increasing reported property and equipment and finance lease liabilities. The company also noted that IPO-related share compensation and costs, and the debt repurchase premium, affected comparability.
Investor verification priorities
- Assess whether revenue growth translates into improved gross margins and operating performance, given higher third-party infrastructure costs.
- Review cash conversion, capital spending and working-capital needs alongside substantial debt service and lease commitments.
- Confirm completion and funding of the planned $86m senior-note redemption, and track remaining debt, interest costs and covenant headroom.
- Distinguish GAAP losses from management’s non-GAAP adjusted measures and examine the size and recurrence of excluded costs.
- Monitor customer retention, bookings and ARR definitions, particularly their limitations regarding cancellations and future recognized revenue.