Rackspace Technology, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Rackspace provides multicloud technology services through Multicloud Services, Apps & Cross Platform, and OpenStack Public Cloud. Management identifies the first two segments together as “Core.” Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $762.5 | $681.7 | $2,232.2 | $1,990.9 |
| Gross profit / margin | $231.7 / 30.4% | $245.8 / 36.1% | $702.5 / 31.5% | $737.0 / 37.0% |
| Operating income (loss) | $(2.9) | $(14.7) | $24.2 | $29.5 |
| Net loss | $(34.8) | $(101.2) | $(135.4) | $(182.0) |
| Adjusted EBITDA | $183.1 | $190.8 | $542.6 | $564.0 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $311.2 | $132.7 |
Q3 revenue increased 11.9% year over year (10.9% constant currency); nine-month revenue increased 12.1% (10.8% constant currency). Core revenue grew 14.7% in Q3, while OpenStack Public Cloud revenue declined 19.9%. For the nine months, Multicloud Services revenue rose 15.3%, Apps & Cross Platform rose 15.3%, and OpenStack Public Cloud fell 20.9%.
Gross margin declined as cost of revenue grew faster than sales, primarily because of higher third-party infrastructure costs and a greater mix of larger, lower-margin contracts. Lower depreciation, personnel, data-center, and license costs partly offset the increase. Interest expense fell to $51.5 million in Q3 and $154.6 million for the nine months, compared with $68.3 million and $209.2 million, respectively, in 2020. The nine-month 2021 results included a $19.9 million gain on land sale and $37.5 million of debt modification and extinguishment costs.
For the nine months, investing cash outflow was $52.2 million, including $87.2 million of purchases of property, equipment, and software and $31.3 million of net land-sale proceeds. Financing cash outflow was $101.6 million. Cash and cash equivalents were $260.0 million at September 30, 2021, up from $104.7 million at December 31, 2020.
At September 30, total debt was $3,337.8 million carrying value ($3,389 million aggregate principal under the main term loan and notes), versus $3,362.7 million carrying value at year-end 2020. The company had $375 million available under its revolving facility, with no borrowings outstanding, and reported covenant compliance. Current liabilities were $846.4 million and current assets $950.2 million.
Material changes and management commentary
- February 2021 refinancing replaced the prior term loan with a $2.3 billion term facility due 2028 and issued $550 million of 3.50% secured notes due 2028. The company also terminated its receivables financing facility.
- Bookings declined to $200.3 million from $314.6 million in Q3 2020, which management attributed to a shift from infrastructure-heavy new-customer acquisition toward growing customer relationships and higher-margin services. ARR increased to $2,901.9 million from $2,576.4 million; the filing cautions that ARR assumes no cancellations and is not a revenue forecast.
- Management said higher customer collections, lower interest payments, and lower employee-related payments contributed to improved nine-month operating cash flow, partly offset by increased operating expense payments, largely for third-party infrastructure.
- A March 2021 useful-life estimate change reduced depreciation expense by $19.4 million for the nine months ended September 30, 2021.
Outlook, risks, and unusual items
- The July 2021 restructuring plan is expected to affect approximately 10% of the workforce, with departures over 12 months. Charges were $40.5 million for the nine months, including $22.5 million of exit and disposal costs; management expects about $30 million of additional expense over the next 12–18 months and estimates gross annual savings of $95–$100 million after implementation.
- Management believes available cash and liquidity sources are sufficient for at least the next 12 months, but cautions that operating cash generation, borrowing availability, refinancing, and future capital needs are not assured. Debt service is a significant liquidity requirement.
- The company remains exposed to floating interest rates, foreign exchange movements, and power costs. It reported $33 million of utility expense for the nine months and uses interest-rate swaps to manage rate exposure. COVID-19 had not materially affected results to date, but future effects remain uncertain.
- The Q3 income-tax benefit included a $13.4 million release of historic tax reserves after a statute of limitations expired. Litigation and other contingencies were described as not material; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth can translate into improved gross margins given rising third-party infrastructure costs and larger, lower-margin contracts.
- Whether bookings, customer retention, and ARR trends support continued Core growth; ARR excludes known or projected cancellations and is not a revenue projection.
- Whether the restructuring delivers its projected $95–$100 million in annual gross savings, and the timing and total cost of implementation.
- Debt maturities, variable-rate exposure, swap terms, covenant headroom, and the company’s ability to sustain cash generation and service its substantial debt and lease obligations.
- How much of the operating cash-flow improvement reflects durable performance versus collection timing and working-capital movements; the filing does not provide quarterly operating cash flow.