Overview

Rackspace Technology is a leading end-to-end, hybrid cloud and AI solutions company. We design, build and operate cloud environments across all major technology platforms for our customers. We partner with customers at every stage of their cloud journey, enabling them to modernize applications, build new products and adopt innovative technologies. Our team of 5,100 highly skilled consultants and engineers provides customers with unbiased expertise and technology solutions delivered over the world’s leading cloud services.

Our goal is to be our customers’ most trusted advisor and services partner in their path to cloud transformation. We empower customers to harness the full benefits of cloud adoption by providing the ability to make informed decisions when choosing the right technologies.

We operate under a two-business unit model - Public Cloud and Private Cloud. Public Cloud is a services-centric, capital-light model providing managed services, Elastic Engineering and professional services for customer environments hosted on public cloud platforms. Private Cloud is a technology-forward, capital-intensive model providing managed services for customer environments hosted in our data centers or owned by customers.

We generate revenue primarily through recurring, consumption-based contracts for our services offerings. We also earn revenue from professional services related to designing and building customer solutions. We sell our services through direct sales teams, third-party channel partners and online orders.

Key Factors Affecting Performance

Several key factors impact our ability to succeed in the competitive cloud services market:

1. Differentiating Our Service Offerings: Our success depends on continuing to differentiate, expand and upgrade our service offerings in line with evolving customer needs, while deepening relationships with leading public cloud providers. Our integrated cloud service portfolio and differentiated customer experience are critical to retaining and growing revenue from existing customers as well as acquiring new ones.

2. Customer Relationships and Retention: Retaining and developing opportunities with existing customers, as well as attracting new customers, is crucial. Providing a unified experience across customers’ cloud and security footprint through offerings like Rackspace Fabric and Rackspace Elastic Engineering helps differentiate us.

3. Business Mix Shift: The revenue mix has shifted from our higher-margin Private Cloud offerings to lower-margin infrastructure resale and services within Public Cloud. Going forward, the focus in Private Cloud will be defending and expanding revenue, while Public Cloud will aim to expand margins by driving cost efficiencies and growing higher-margin services.

Results of Operations

Revenue decreased 7.4% in 2024 to $2,737 million, driven by declines in both the Public Cloud and Private Cloud segments. Public Cloud revenue fell 3.4% due to weaker demand, while Private Cloud revenue dropped 13.2% as customers rolled off legacy offerings.

Cost of revenue decreased 5.4% to $2,204 million, primarily due to an increase in the useful life of certain customer gear assets, which reduced depreciation expense. However, as a percentage of revenue, cost of revenue increased 180 basis points to 80.5% as the revenue decline outpaced the cost reduction.

Gross profit was $533 million in 2024, a 15.2% decrease from 2023. Gross margin declined 180 basis points to 19.5%.

Selling, general and administrative (SG&A) expenses decreased 7.8% to $708 million, driven by lower personnel costs, professional fees, and depreciation and amortization, partially offset by a $12 million expense for exiting a UK office. SG&A as a percentage of revenue remained flat at 25.9%.

We recorded $715 million in non-cash goodwill impairment charges in 2024, driven by revisions to our internal forecasts and cash flow projections. An additional $20 million impairment was recognized for our indefinite-lived intangible asset.

Loss from operations was $909 million in 2024 compared to $899 million in 2023. Non-GAAP Operating Profit, which excludes certain one-time and non-cash items, decreased 32.8% to $106 million.

Interest expense decreased 55.8% to $98 million, primarily due to the accounting treatment of the March 2024 debt refinancing transactions. We recorded a $147 million gain on debt extinguishment related to these transactions.

The income tax benefit increased to $23 million in 2024 from $17 million in 2023, with the effective tax rate rising to 2.6% from 1.9%.

Net loss was $858 million in 2024 compared to $838 million in 2023.

Segment Performance

Public Cloud operating profit decreased 46% in 2024 as segment revenue fell 3% and operating expenses declined only 1%. The segment’s operating margin contracted 210 basis points to 2.6%.

Private Cloud operating profit decreased 14% in 2024 as segment revenue fell 13%, in line with a 13% decline in operating expenses. The segment’s operating margin decreased 30 basis points to 27.9%.

Corporate function expenses, which are not allocated to the segments, decreased 12.9% in 2024 due to lower depreciation and amortization and continued cost management.

Non-GAAP Measures

We use several non-GAAP financial measures to assess our performance:

• Constant Currency Revenue: Compares revenue between periods using consistent exchange rates to exclude the effect of foreign currency fluctuations.
• Non-GAAP Gross Profit: Gross profit adjusted to exclude share-based compensation, purchase accounting impacts, and certain business transformation costs.
• Non-GAAP Net Income (Loss): Net income (loss) adjusted to exclude non-cash and non-recurring items like share-based compensation, transaction costs, restructuring expenses, and asset impairments.
• Non-GAAP Operating Profit: Loss from operations adjusted to exclude the same items as Non-GAAP Net Income (Loss).
• Adjusted EBITDA: Net income (loss) adjusted to exclude various non-cash and non-recurring items, as well as interest, taxes, depreciation and amortization.
• Non-GAAP Earnings (Loss) Per Share: Non-GAAP Net Income (Loss) divided by the diluted weighted average shares outstanding, further adjusted for the impact of securities that would be dilutive to Non-GAAP EPS.

These non-GAAP measures provide a basis for evaluating our underlying financial performance and trends. However, they are not a substitute for, and should not be considered superior to, GAAP financial measures.

Liquidity and Capital Resources

We primarily finance our operations and capital expenditures with cash from operations, hardware leases, and borrowings under our $375 million New Revolving Credit Facility, of which none was drawn as of December 31, 2024.

As of December 31, 2024, we had $144 million in cash and cash equivalents, as well as $56 million in outstanding financing obligations and $480 million in operating and finance lease liabilities. We also had $2,449 million in aggregate principal amount outstanding under various debt instruments.

In March 2024, we completed a series of debt refinancing transactions that substantially impacted our existing debt, including the Senior Facilities, 3.50% Senior Secured Notes, and 5.375% Senior Notes. We entered into new debt instruments such as the FLSO Term Loan Facility, FLFO Term Loan Facility, and 3.50% FLSO Senior Secured Notes.

Net cash provided by operating activities decreased 89% in 2024 to $40 million, primarily due to $209 million in proceeds received in 2023 from the sale of receivables, higher operating expenses, and fees related to the debt refinancing.

Net cash used in investing activities decreased 10% to $87 million in 2024, driven by $17 million in net proceeds from the sale of our corporate headquarters, partially offset by higher capital expenditures.

Net cash used in financing activities decreased 99% to $3 million in 2024, reflecting lower debt repayments and finance lease principal payments, partially offset by debt extinguishment costs.

Critical Accounting Estimates

Our critical accounting estimates include:

Revenue Recognition: We recognize revenue daily as services are provided, with variable consideration components like usage fees and service level guarantees accounted for as earned. Judgment is required to determine whether services are distinct performance obligations.

Valuation of Accounts Receivable: We record an allowance for credit losses on trade receivables based on historical write-offs and an assessment of customer creditworthiness and risks.

Long-Lived Assets: We review property, equipment, software, and definite-lived intangible assets for impairment when events indicate the carrying amount may not be recoverable. Estimates of future cash flows and fair values are used in the impairment analysis.

Goodwill and Indefinite-Lived Intangibles: We test goodwill and our Rackspace trade name for impairment annually or when events indicate potential impairment. Fair values of reporting units and the trade name are estimated using discounted cash flow and relief-from-royalty methods, which require significant judgments.

Contingencies: We accrue for contingent obligations when probable and reasonably estimable, with estimates subject to change as facts become known.

Share-Based Compensation: We measure share-based awards at fair value on the grant date and recognize expense over the requisite service period. Determining fair value for awards with performance conditions requires judgment.

Income Taxes: We make significant judgments in evaluating our tax positions and determining our provision for income taxes. Deferred tax assets and liabilities are assessed for realizability.

These critical estimates require substantial management judgment and could have a material impact on our financial statements if different assumptions were used.

Conclusion

Rackspace Technology faced challenges in 2024, with revenue declining in both the Public Cloud and Private Cloud segments. While cost management efforts helped mitigate the impact, the company recorded significant goodwill and intangible asset impairments that contributed to a $858 million net loss.

The shift in business mix toward lower-margin Public Cloud offerings presents an ongoing challenge that the company is working to address. Retaining and growing relationships with existing customers, as well as attracting new ones, will be crucial to improving financial performance.

Looking ahead, Rackspace will need to continue differentiating its service offerings, optimizing its cost structure, and executing on its strategic initiatives to navigate the competitive cloud services landscape. Careful management of the critical accounting estimates discussed will also be important in providing an accurate representation of the company’s financial position and results.