Rackspace Technology, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Rackspace provides hybrid, multicloud and AI-related services through Public Cloud and Private Cloud segments. The filing is unaudited.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $690.8 million | $758.7 million |
| Gross profit / margin | $132.8 million / 19.2% | $169.6 million / 22.4% |
| Operating loss | $652.8 million | $581.0 million |
| Net loss | $640.6 million | $612.0 million |
| GAAP diluted loss per share | $2.91 | $2.87 |
| Adjusted EBITDA | $52.4 million | $103.2 million |
| Non-GAAP operating profit | $16.2 million | $50.5 million |
| Operating cash flow | $(90.3) million | $(1.9) million |
| Capital expenditures | $45.6 million | $71.5 million |
Revenue declined 8.9% year over year (9.3% on a constant-currency basis). Public Cloud revenue fell 4.7% to $422.4 million; Private Cloud fell 14.9% to $268.4 million. Segment operating profit was $9.3 million for Public Cloud (2.2% margin) and $71.7 million for Private Cloud (26.7% margin), down from $23.4 million (5.3%) and $94.0 million (29.8%), respectively.
Cash and cash equivalents were $282.6 million at March 31, 2024, plus $2.9 million of restricted cash. Aggregate debt principal was $2.598 billion; balance-sheet debt was $2.995 billion, including a debt accounting premium. The company had $375 million of revolving credit commitments, no borrowings outstanding, and $3.5 million of letters of credit. Stockholders’ deficit was $787.2 million. The company reports it was in compliance with debt covenants at quarter-end.
Material changes and unusual items
- In March 2024, the company completed substantial debt exchanges and refinancing. It recorded a $56.7 million gain on debt modification and extinguishment and paid $28.4 million in related third-party fees. Further note exchanges were completed in April 2024.
- The refinancing was accounted for as a troubled debt restructuring. It generated $531.5 million of cancellation-of-indebtedness income for U.S. tax purposes; the company estimates this will be excluded from taxable income due to insolvency, subject to tax-attribute reduction and final tax determinations.
- Q1 included $573.2 million of non-cash goodwill impairment—$385.4 million in Public Cloud and $187.8 million in Private Cloud—and a $20.0 million trade-name impairment. Goodwill fell from $1.452 billion at year-end to $877.7 million. Management warns further impairment could result if forecasts, market capitalization or discount-rate assumptions worsen.
- A change in estimated useful lives for certain computer equipment reduced Q1 depreciation expense by $12.2 million compared with prior estimates.
- The sale of the former headquarters generated $16.9 million in net proceeds and incurred a $9.0 million early termination fee. Q1 operating cash use also reflected a $45 million vendor prepayment and refinancing fees.
Management commentary, outlook and risks
Management attributed Public Cloud weakness to customer spending restraint, optimization and cyclical IT-services pressures; Private Cloud weakness reflected customer transitions from older offerings and expected declines in legacy OpenStack. Cost reductions, including lower headcount, partially offset revenue pressure, but gross margin and segment operating profitability declined. Management described Public Cloud as lower-margin but less capital-intensive, and Private Cloud as higher-margin but more capital-intensive.
Management believes cash and other available sources will provide sufficient liquidity for at least the next 12 months, while cautioning that operating cash generation or future borrowing availability may be insufficient. The company is highly leveraged: its new floating-rate facilities carry stated rates of 8.18% for the FLSO term loan and 11.68% for the FLFO term loan at quarter-end. A $1.35 billion interest-rate swap is outstanding through February 2026. No specific earnings or revenue guidance is provided in the supplied filing text.
Other risks include continued revenue and margin pressure, debt service and refinancing capacity, sensitivity of impairment valuations to forecasts and discount rates, floating interest rates, foreign exchange and data-center power costs. The company states that no material changes were made to previously disclosed risk factors and that it was not party to litigation expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether customer demand stabilizes and Private Cloud declines moderate, and whether Public Cloud revenue and margins recover.
- Cash generation and liquidity after the refinancing, vendor prepayments, fees and ongoing debt service; confirm actual revolver availability and covenant headroom.
- The terms, carrying values, interest costs and subsequent-quarter effects of the March refinancing and April note exchanges.
- Whether goodwill and trade-name valuation assumptions remain supportable and whether further impairments are recorded.
- The final tax treatment and tax-attribute reduction arising from the refinancing-related cancellation of indebtedness.
- The ongoing effects of the longer equipment useful-life estimate on depreciation, earnings and capital needs.