Rackspace Technology, Inc. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2020.
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ______ to ______.
Commission File Number: 001-39420
RACKSPACE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 81-3369925 | |||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
1 Fanatical Place
City of Windcrest
San Antonio, Texas 78218
(Address of principal executive offices, including zip code)
(210) 312-4000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.01 per share | RXT | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer," "accelerated filer," "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☑ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
On November 6, 2020, 200,293,675 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
RACKSPACE TECHNOLOGY, INC.
TABLE OF CONTENTS
| Part I - Financial Information | ||||||||
| Item 1. | Financial Statements: | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II - Other Information | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (this "Quarterly Report") contains certain information that may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that all statements contained in this report that are not clearly historical in nature, including statements regarding anticipated financial performance, management’s plans and objectives for future operations, business prospects, market conditions, and other matters are forward-looking. Forward-looking statements are contained principally in the sections of this report entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentence, any time we use the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.
Forward-looking information involves risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the effects of the COVID-19 pandemic on our results of operations and business, and the risks and uncertainties disclosed or referenced in Part II Item 1A. of this report under the heading “Risk Factors.” Therefore, caution should be taken not to place undue reliance on any such forward-looking statements. Much of the information in this report that looks toward future performance of the company is based on various factors and important assumptions about future events that may or may not actually occur. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report. We assume no obligation (and specifically disclaim any such obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
“Rackspace,” “Rackspace Technology,” “Fanatical Experience,” “RackConnect,” “Rackspace Service Blocks,” “Rackspace Fabric” and “MyRackspace” are registered or unregistered trademarks of Rackspace US, Inc. in the United States and/or other countries. OpenStack® is a registered trademark of OpenStack, LLC in the United States. Solely for convenience, trademarks, trade names and service marks referred to in this Quarterly Report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, trade names and service marks. Other trademarks, trade names and service marks appearing in this Quarterly Report are the property of their respective holders. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
PART I – FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RACKSPACE TECHNOLOGY, INC.
(formerly known as Rackspace Corp.)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (In millions, except per share data) | December 31, 2019 | September 30, 2020 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 83.8 | $ | 253.2 | |||||||
Accounts receivable, net of allowance for doubtful accounts and accrued customer credits of $17.0 and $16.5, respectively | 350.3 | 430.4 | |||||||||
| Prepaid expenses | 76.2 | 80.4 | |||||||||
| Other current assets | 33.4 | 41.9 | |||||||||
| Total current assets | 543.7 | 805.9 | |||||||||
| Property, equipment and software, net | 727.8 | 892.8 | |||||||||
| Goodwill, net | 2,745.8 | 2,741.0 | |||||||||
| Intangible assets, net | 1,817.4 | 1,684.0 | |||||||||
| Operating right-of-use assets | 308.3 | 162.5 | |||||||||
| Other non-current assets | 129.4 | 136.9 | |||||||||
| Total assets | $ | 6,272.4 | $ | 6,423.1 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | 260.4 | $ | 264.3 | |||||||
| Accrued compensation and benefits | 128.5 | 95.7 | |||||||||
| Deferred revenue | 66.6 | 59.6 | |||||||||
| Debt | 29.0 | 29.0 | |||||||||
| Accrued interest | 36.0 | 43.1 | |||||||||
| Operating lease liabilities | 58.3 | 57.7 | |||||||||
| Financing obligations | 42.9 | 46.3 | |||||||||
| Other current liabilities | 50.2 | 84.4 | |||||||||
| Total current liabilities | 671.9 | 680.1 | |||||||||
| Non-current liabilities: | |||||||||||
| Debt | 3,844.3 | 3,392.2 | |||||||||
| Operating lease liabilities | 256.5 | 108.4 | |||||||||
| Finance lease liabilities | 88.4 | 351.9 | |||||||||
| Financing obligations | 86.4 | 80.0 | |||||||||
| Deferred income taxes | 326.9 | 266.9 | |||||||||
| Other non-current liabilities | 99.2 | 152.0 | |||||||||
| Total liabilities | 5,373.6 | 5,031.5 | |||||||||
| Commitments and Contingencies (Note 8) | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $0.01 par value per share: 5.0 shares authorized; no shares issued or outstanding | — | — | |||||||||
Common stock, $0.01 par value per share: 1,495.0 shares authorized; 165.4 and 200.2 shares issued and outstanding, respectively | 1.6 | 2.0 | |||||||||
| Additional paid-in capital | 1,602.7 | 2,326.6 | |||||||||
| Accumulated other comprehensive income (loss) | 12.0 | (37.5) | |||||||||
| Accumulated deficit | (717.5) | (899.5) | |||||||||
| Total stockholders' equity | 898.8 | 1,391.6 | |||||||||
| Total liabilities and stockholders' equity | $ | 6,272.4 | $ | 6,423.1 | |||||||
See accompanying notes to the unaudited consolidated financial statements.
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RACKSPACE TECHNOLOGY, INC.
(formerly known as Rackspace Corp.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except per share data) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Revenue | $ | 601.7 | $ | 681.7 | $ | 1,811.0 | $ | 1,990.9 | |||||||||||||||
| Cost of revenue | (347.9) | (435.9) | (1,054.2) | (1,253.9) | |||||||||||||||||||
| Gross profit | 253.8 | 245.8 | 756.8 | 737.0 | |||||||||||||||||||
| Selling, general and administrative expenses | (221.7) | (260.5) | (679.9) | (707.5) | |||||||||||||||||||
| Gain on sale | — | — | 2.1 | — | |||||||||||||||||||
| Income (loss) from operations | 32.1 | (14.7) | 79.0 | 29.5 | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (80.9) | (68.3) | (270.7) | (209.2) | |||||||||||||||||||
| Gain (loss) on investments, net | (22.0) | — | 121.4 | 0.9 | |||||||||||||||||||
| Gain (loss) on extinguishment of debt | — | (37.0) | 9.5 | (37.0) | |||||||||||||||||||
| Other income (expense), net | 1.1 | 0.7 | (1.2) | 0.4 | |||||||||||||||||||
| Total other income (expense) | (101.8) | (104.6) | (141.0) | (244.9) | |||||||||||||||||||
| Loss before income taxes | (69.7) | (119.3) | (62.0) | (215.4) | |||||||||||||||||||
| Benefit for income taxes | 9.2 | 18.1 | 6.5 | 33.4 | |||||||||||||||||||
| Net loss | $ | (60.5) | $ | (101.2) | $ | (55.5) | $ | (182.0) | |||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustments | $ | (10.8) | $ | 11.7 | $ | (8.3) | $ | (7.8) | |||||||||||||||
| Unrealized gains (losses) on derivative contracts | — | 1.3 | — | (46.2) | |||||||||||||||||||
| Amount reclassified from accumulated other comprehensive income (loss) to earnings | — | 3.2 | — | 4.5 | |||||||||||||||||||
| Other comprehensive income (loss) | (10.8) | 16.2 | (8.3) | (49.5) | |||||||||||||||||||
| Comprehensive loss | $ | (71.3) | $ | (85.0) | $ | (63.8) | $ | (231.5) | |||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic and diluted | $ | (0.37) | $ | (0.54) | $ | (0.34) | $ | (1.05) | |||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Basic and diluted | 165.2 | 186.7 | 165.2 | 172.6 | |||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
- 4 -
RACKSPACE TECHNOLOGY, INC.
(formerly known as Rackspace Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| (In millions) | 2019 | 2020 | |||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net loss | $ | (55.5) | $ | (182.0) | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 372.3 | 355.1 | |||||||||
| Amortization of operating right-of-use assets | 52.4 | 50.7 | |||||||||
| Deferred income taxes | (10.3) | (40.2) | |||||||||
| Share-based compensation expense | 22.8 | 56.8 | |||||||||
| Gain on sale | (2.1) | — | |||||||||
| (Gain) loss on extinguishment of debt | (9.5) | 37.0 | |||||||||
| Unrealized (gain) loss on derivative contracts | 56.7 | (2.6) | |||||||||
| Gain on investments, net | (121.4) | (0.9) | |||||||||
| Provision for bad debts and accrued customer credits | 14.7 | 11.0 | |||||||||
| Amortization of debt issuance costs and debt discount | 13.7 | 13.9 | |||||||||
| Other operating activities | 0.9 | (2.5) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (61.9) | (92.7) | |||||||||
| Prepaid expenses and other current assets | (17.0) | (13.7) | |||||||||
| Accounts payable, accrued expenses, and other current liabilities | (4.5) | (10.4) | |||||||||
| Deferred revenue | (5.8) | (7.2) | |||||||||
| Operating lease liabilities | (54.3) | (43.4) | |||||||||
| Other non-current assets and liabilities | 0.5 | 3.8 | |||||||||
| Net cash provided by operating activities | 191.7 | 132.7 | |||||||||
| Cash Flows From Investing Activities | |||||||||||
| Purchases of property, equipment and software | (153.7) | (97.6) | |||||||||
| Proceeds from sale | 16.8 | — | |||||||||
| Other investing activities | 4.6 | 5.4 | |||||||||
| Net cash used in investing activities | (132.3) | (92.2) | |||||||||
| Cash Flows From Financing Activities | |||||||||||
| Proceeds from issuance of common stock upon initial public offering, net of offering costs | — | 659.1 | |||||||||
| Proceeds from employee stock plans | — | 11.3 | |||||||||
| Shares of common stock withheld for employee taxes | (1.0) | (2.0) | |||||||||
| Repurchase of common stock | (2.2) | — | |||||||||
| Cash settlement of share-based awards | (1.5) | — | |||||||||
| Proceeds from borrowings under long-term debt arrangements | — | 310.0 | |||||||||
| Payments on long-term debt | (84.7) | (811.3) | |||||||||
| Payments for debt issuance costs | — | (1.4) | |||||||||
| Principal payments of finance lease liabilities | (17.6) | (14.3) | |||||||||
| Proceeds from financing obligations | — | 20.9 | |||||||||
| Principal payments of financing obligations | (16.6) | (43.8) | |||||||||
| Net cash provided by (used in) financing activities | (123.6) | 128.5 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (0.3) | 0.4 | |||||||||
| Increase (decrease) in cash, cash equivalents, and restricted cash | (64.5) | 169.4 | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 258.2 | 87.1 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 193.7 | $ | 256.5 | |||||||
| Supplemental Cash Flow Information | |||||||||||
| Cash payments for interest, net of amount capitalized | $ | 176.7 | $ | 188.1 | |||||||
| Cash payments for income taxes, net of refunds | $ | 8.7 | $ | 13.3 | |||||||
- 5 -
| Non-cash Investing and Financing Activities | |||||||||||
| Acquisition of property, equipment and software by finance leases | $ | 0.2 | $ | 77.1 | |||||||
| Acquisition of property, equipment and software by financing obligations | 3.7 | 20.5 | |||||||||
| Decrease in property, equipment and software accrued in liabilities | (5.6) | (21.1) | |||||||||
| Non-cash purchases of property, equipment and software | $ | (1.7) | $ | 76.5 | |||||||
| Non-cash increase in buildings within property, equipment and software, net due to lease modification | $ | — | $ | 220.3 | |||||||
| Offering costs included in accrued liabilities | $ | — | $ | 1.3 | |||||||
| Other non-cash investing and financing activities | $ | 1.2 | $ | 2.8 | |||||||
The following table provides a reconciliation of cash, cash equivalents, and restricted cash to the total of such amounts shown on the Consolidated Statements of Cash Flows.
| Nine Months Ended September 30, | |||||||||||
| (In millions) | 2019 | 2020 | |||||||||
| Cash and cash equivalents | $ | 190.4 | $ | 253.2 | |||||||
| Restricted cash included in other non-current assets | 3.3 | 3.3 | |||||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 193.7 | $ | 256.5 | |||||||
See accompanying notes to the unaudited consolidated financial statements.
- 6 -
RACKSPACE TECHNOLOGY, INC.
(formerly known as Rackspace Corp.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 165.2 | $ | 1.6 | $ | 1,586.2 | $ | 2.5 | $ | (610.2) | $ | 980.1 | ||||||||||||||||||||||||
| Exercise of stock options and release of stock awards, net of shares withheld | 0.1 | — | (1.0) | — | — | (1.0) | |||||||||||||||||||||||||||||
| Repurchase of common stock | (0.1) | — | (0.3) | — | — | (0.3) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 10.5 | — | — | 10.5 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (60.5) | (60.5) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (10.8) | — | (10.8) | |||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 165.2 | $ | 1.6 | $ | 1,595.4 | $ | (8.3) | $ | (670.7) | $ | 918.0 | ||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 165.2 | $ | 1.6 | $ | 1,577.3 | $ | — | $ | (671.1) | $ | 907.8 | ||||||||||||||||||||||||
| — | — | — | — | 55.9 | 55.9 | ||||||||||||||||||||||||||||||
| Exercise of stock options and release of stock awards, net of shares withheld | 0.2 | — | (1.0) | — | — | (1.0) | |||||||||||||||||||||||||||||
| Repurchase of common stock | (0.2) | — | (2.2) | — | — | (2.2) | |||||||||||||||||||||||||||||
| Cash settlement of share-based awards | — | — | (1.5) | — | — | (1.5) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 22.8 | — | — | 22.8 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (55.5) | (55.5) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (8.3) | — | (8.3) | |||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 165.2 | $ | 1.6 | $ | 1,595.4 | $ | (8.3) | $ | (670.7) | $ | 918.0 | ||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 165.6 | $ | 1.6 | $ | 1,619.2 | $ | (53.7) | $ | (798.3) | $ | 768.8 | ||||||||||||||||||||||||
| Issuance of common stock upon initial public offering, net of offering costs | 33.5 | 0.4 | 657.4 | — | — | 657.8 | |||||||||||||||||||||||||||||
| Exercise of stock options and release of stock awards, net of shares withheld | 1.1 | — | 9.8 | — | — | 9.8 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 40.2 | — | — | 40.2 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (101.2) | (101.2) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 16.2 | — | 16.2 | |||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 200.2 | $ | 2.0 | $ | 2,326.6 | $ | (37.5) | $ | (899.5) | $ | 1,391.6 | ||||||||||||||||||||||||
- 7 -
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 165.4 | $ | 1.6 | $ | 1,602.7 | $ | 12.0 | $ | (717.5) | $ | 898.8 | ||||||||||||||||||||||||
| Issuance of common stock upon initial public offering, net of offering costs | 33.5 | 0.4 | 657.4 | — | — | 657.8 | |||||||||||||||||||||||||||||
| Exercise of stock options and release of stock awards, net of shares withheld | 1.3 | — | 9.7 | — | — | 9.7 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 56.8 | — | — | 56.8 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (182.0) | (182.0) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (49.5) | — | (49.5) | |||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 200.2 | $ | 2.0 | $ | 2,326.6 | $ | (37.5) | $ | (899.5) | $ | 1,391.6 | ||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
- 8 -
RACKSPACE TECHNOLOGY, INC.
(formerly known as Rackspace Corp.)
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
Rackspace Technology, Inc. ("Rackspace Technology") (formerly known as Rackspace Corp. until its legal name change on June 11, 2020 and formerly known as Inception Topco, Inc. until its legal name change on March 31, 2020), is a Delaware corporation controlled by investment funds affiliated with Apollo Global Management, Inc. and its subsidiaries (“Apollo”). Rackspace Technology was formed on July 21, 2016 but had no assets, liabilities or operating results until November 3, 2016 (the “Closing Date”) when Rackspace Hosting, Inc. (now named Rackspace Technology Global, Inc., or “Rackspace Technology Global”), a global provider of modern information technology-as-a-service, was acquired by Inception Parent, Inc., a wholly-owned entity indirectly owned by Rackspace Technology (the “Rackspace Acquisition”).
Rackspace Technology Global commenced operations in 1998 as a limited partnership, and was incorporated in Delaware in March 2000. Rackspace Technology serves as the holding company for Rackspace Technology Global and does not engage in any material business or operations other than those related to its indirect ownership of the capital stock of Rackspace Technology Global and its subsidiaries or business or operations otherwise customarily undertaken by a holding company.
For ease of reference, the terms “we,” “our company,” “the company,” “us,” or “our” as used in this report refer to Rackspace Technology and its consolidated subsidiaries.
On November 15, 2019, we acquired 100% of Onica Holdings LLC ("Onica") as described in more detail in Note 13, "Acquisitions." The preliminary estimate of fair values of Onica’s assets acquired and liabilities assumed, together with Onica’s results of operations subsequent to the November 15, 2019 acquisition date, are included in the unaudited consolidated financial statements.
On July 20, 2020, the board of directors of the company approved and effected a twelve-for-one stock split of the company’s common stock (the "Stock Split"). All common stock share and per-share data, excluding par value per share, included in these unaudited consolidated financial statements give effect to the Stock Split and have been adjusted retroactively for all periods presented.
On August 7, 2020, we completed our initial public offering (the “IPO”), in which we issued and sold 33,500,000 shares of our common stock at a public offering price of $21.00 per share. We received net proceeds of $666.6 million from sales of shares in the IPO, after deducting underwriters' discounts and commissions of $36.9 million, but before deducting offering expenses of $8.8 million.
The unaudited consolidated financial statements include the accounts of Rackspace Technology, Inc. and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Unaudited Interim Financial Information
The unaudited consolidated financial statements as of September 30, 2020, and for the three and nine months ended September 30, 2019 and 2020, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of December 31, 2019, included in our Registration Statement on Form S-1 (File No. 333-239794), as amended, including the final prospectus, dated August 4, 2020, included therein (the "Prospectus"). The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the Prospectus and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of our financial position as of September 30, 2020, our results of operations for the three and nine months ended September 30, 2019 and 2020, our cash flows for the nine months ended September 30, 2019 and 2020, and our stockholders' equity for the three and nine months ended September 30, 2019 and 2020.
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The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2020, or for any other interim period, or for any other future year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to the allowance for doubtful accounts, useful lives of property, equipment and software, software capitalization, incremental borrowing rates for lease liability measurement, fair values of intangible assets and reporting units, useful lives of intangible assets, share-based compensation, contingencies, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from our estimates.
Impact of COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The effects of COVID-19 are rapidly evolving, and the full impact and duration of the virus are unknown. Currently, COVID-19 has not had a significant impact on our operations or financial performance; however, the ultimate extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on our customers, vendors and employees and its impact on our sales cycles as well as industry events, all of which are uncertain and cannot be predicted. In addition, we face a greater degree of uncertainty in making estimates and assumptions needed to prepare our consolidated financial statements and footnotes.
Subsequent Events
On October 15, 2020, Rackspace Technology Global issued a Notice of Partial Redemption to holders of the 8.625% Senior Notes due 2024 (the "8.625% Senior Notes"). Pursuant to the terms of the indenture governing the 8.625% Senior Notes (the "Indenture"), on November 16, 2020, Rackspace Technology Global will redeem $86.0 million principal amount of the outstanding 8.625% Senior Notes at a price of 104.313%, plus accrued and unpaid interest, if any.
Significant Accounting Policies and Estimates
Our Prospectus includes an additional discussion of the significant accounting policies and estimates used in the preparation of our consolidated financial statements, which we are incorporating by reference herein. There were no material changes to our significant accounting policies and estimates during the nine months ended September 30, 2020, except for the adoptions of the Accounting Standards Updates ("ASU") discussed in "Recently Adopted Accounting Pronouncements" below.
Reclassifications
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation. Specifically, the non-current portion of "Finance lease liabilities" is now presented separately from "Other non-current liabilities" in the Consolidated Balance Sheets. This presentation change is due to the modification of certain leases in June 2020 which resulted in a change of classification from operating leases to finance leases, increasing the balance of the non-current portion of "Finance lease liabilities."
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Recently Adopted Accounting Pronouncements
Financial Instruments-Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which requires financial assets measured at amortized cost to be presented at the net amount expected to be collected using an allowance for expected credit losses, to be estimated by management based on historical experience, current conditions, and reasonable and supportable forecasts. We adopted this guidance on January 1, 2020, using the modified retrospective approach. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Derivatives and Hedging-Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to simplify the application of the hedge accounting guidance. The guidance expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements. The guidance also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness.
We adopted this ASU on January 1, 2020. The guidance applies to any existing hedges or new derivative instruments that are designated as hedges for derivative accounting purposes in future periods. We have historically not designated our interest rate swaps or foreign currency hedging contracts as hedges for derivative accounting purposes, However, on January 9, 2020, we designated certain of our interest rate swap agreements as cash flow hedges. Refer to Note 11, "Derivatives," for the cash flow hedge disclosures required by the provisions of this guidance.
Fair Value Measurement Disclosures
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which removes, modifies or adds certain disclosure requirements for fair value measurement disclosures. We adopted this guidance on January 1, 2020 on a prospective basis. The adoption did not have a material impact on our consolidated financial statements.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this guidance on January 1, 2020 on a prospective basis. The adoption of this guidance primarily resulted in changes to the presentation of certain implementation costs within our consolidated financial statements. Historically, these costs were capitalized as part of "Property, equipment, and software, net" and amortized over the useful life of the related software or hosting arrangement. Upon adoption, eligible costs incurred are now recorded within "Prepaid expenses" and "Other non-current assets" and amortized to either "Cost of revenue" or "Selling, general and administrative expenses" over the useful life of the related software or hosting arrangement. In addition, the cash flow presentation of these costs changed from investing cash flows under previous guidance to operating cash flows under the new guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
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Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. In July 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
2. Customer Contracts
The following table presents the balances related to customer contracts as of December 31, 2019 and September 30, 2020:
| (In millions) | Consolidated Balance Sheets Account | December 31, 2019 | September 30, 2020 | ||||||||||||||
| Accounts receivable, net | Accounts receivable, net (1) | $ | 350.3 | $ | 430.4 | ||||||||||||
| Current portion of contract assets | Other current assets | 7.8 | 14.9 | ||||||||||||||
| Non-current portion of contract assets | Other non-current assets | 7.2 | 11.6 | ||||||||||||||
| Current portion of deferred revenue | Deferred revenue | 66.6 | 59.6 | ||||||||||||||
| Non-current portion of deferred revenue | Other non-current liabilities | 14.2 | 13.8 | ||||||||||||||
(1) Allowance for doubtful accounts and accrued customer credits was $17.0 million and $16.5 million as of December 31, 2019 and September 30, 2020, respectively.
Amounts recognized in revenue for the three months ended September 30, 2019 and September 30, 2020, which were included in deferred revenue as of the beginning of each period, totaled $27.1 million and $28.0 million, respectively. Amounts recognized in revenue for the nine months ended September 30, 2019 and September 30, 2020, which were included in deferred revenue as of the beginning of each period totaled $44.1 million and $55.6 million, respectively.
Cost Incurred to Obtain and Fulfill a Contract
As of December 31, 2019 and September 30, 2020, the balances of capitalized costs to obtain a contract were $55.1 million and $57.2 million, respectively, and the balances of capitalized costs to fulfill a contract were $21.7 million and $24.3 million, respectively. These capitalized costs are included in “Other non-current assets” on the Consolidated Balance Sheets.
Amortization of capitalized sales commissions and implementation costs for the three and nine months ended September 30, 2019 and September 30, 2020 was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Amortization of capitalized sales commissions | $ | 10.6 | $ | 11.0 | $ | 30.2 | $ | 33.2 | |||||||||||||||
| Amortization of capitalized implementation costs | 3.8 | 4.4 | 10.8 | 13.0 | |||||||||||||||||||
Remaining Performance Obligations
As of September 30, 2020, the aggregate amount of transaction price allocated to remaining performance obligations was $876.6 million, of which 19% is expected to be recognized as revenue during 2020 and the remainder thereafter. These remaining performance obligations primarily relate to our fixed-term arrangements. Our other revenue arrangements are usage-based, and as such, we recognize revenue based on the right to invoice for the services performed.
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3. Net Loss Per Share
Basic loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average shares outstanding during the period.
The following table sets forth the computation of basic and diluted net loss per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except per share data) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Basic and diluted net loss per share: | |||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | (60.5) | $ | (101.2) | $ | (55.5) | $ | (182.0) | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Common stock | 165.2 | 186.7 | 165.2 | 172.6 | |||||||||||||||||||
| Number of shares used in per share computations | 165.2 | 186.7 | 165.2 | 172.6 | |||||||||||||||||||
| Net loss per share | $ | (0.37) | $ | (0.54) | $ | (0.34) | $ | (1.05) | |||||||||||||||
Potential common share equivalents consist of shares issuable upon the exercise of stock options or vesting of restricted stock, as well as contingent shares associated with our acquisition of Datapipe Parent, Inc. Since we were in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. We excluded 21.4 million and 26.5 million potential common shares from the computation of dilutive loss per share for the three months ended September 30, 2019 and 2020, respectively, and 21.4 million and 26.5 million potential shares for the nine months ended September 30, 2019 and 2020, respectively, because the effect would have been anti-dilutive.
4. Property, Equipment and Software, net
Property, equipment and software, net, at December 31, 2019 and September 30, 2020 consisted of the following:
| (In millions) | December 31, 2019 | September 30, 2020 | |||||||||
| Computers and equipment | $ | 1,155.9 | $ | 1,179.9 | |||||||
| Software | 441.6 | 475.5 | |||||||||
| Furniture and fixtures | 31.3 | 25.1 | |||||||||
Buildings and leasehold improvements (1) | 303.7 | 512.6 | |||||||||
| Land | 32.2 | 32.0 | |||||||||
| Property, equipment and software, at cost | 1,964.7 | 2,225.1 | |||||||||
| Less: Accumulated depreciation and amortization | (1,255.2) | (1,352.1) | |||||||||
| Work in process | 18.3 | 19.8 | |||||||||
| Property, equipment and software, net | $ | 727.8 | $ | 892.8 | |||||||
(1) During the nine months ended September 30, 2020, we recorded $220.3 million to buildings and leasehold improvements related to lease modifications in June 2020 which resulted in a change of classification from operating leases to finance leases.
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5. Goodwill and Intangible Assets
The following table sets forth the changes in the carrying amounts of goodwill by reportable segment during the nine months ended September 30, 2020:
| (In millions) | Multicloud Services | Apps & Cross Platform | OpenStack Public Cloud | Total Consolidated | |||||||||||||||||||
| Balance as of December 31, 2019 | $ | 2,371.6 | $ | 322.2 | $ | 52.0 | $ | 2,745.8 | |||||||||||||||
| Measurement period adjustments | (0.2) | — | — | (0.2) | |||||||||||||||||||
| Foreign currency translation | (4.1) | (0.3) | (0.2) | (4.6) | |||||||||||||||||||
Balance as of September 30, 2020 | $ | 2,367.3 | $ | 321.9 | $ | 51.8 | $ | 2,741.0 | |||||||||||||||
| Gross goodwill | $ | 2,662.3 | $ | 321.9 | $ | 51.8 | $ | 3,036.0 | |||||||||||||||
| Less: Accumulated impairment charges | (295.0) | — | — | (295.0) | |||||||||||||||||||
Goodwill, net as of September 30, 2020 | $ | 2,367.3 | $ | 321.9 | $ | 51.8 | $ | 2,741.0 | |||||||||||||||
The following tables provide information regarding our intangible assets other than goodwill:
| December 31, 2019 | |||||||||||||||||
| (In millions) | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||||
| Customer relationships | $ | 1,983.7 | $ | (459.9) | $ | 1,523.8 | |||||||||||
| Property tax abatement | 16.0 | (5.6) | 10.4 | ||||||||||||||
| Other | 43.8 | (10.6) | 33.2 | ||||||||||||||
| Total definite-lived intangible assets | 2,043.5 | (476.1) | 1,567.4 | ||||||||||||||
| Trade name (indefinite-lived) | 250.0 | — | 250.0 | ||||||||||||||
| Total intangible assets other than goodwill | $ | 2,293.5 | $ | (476.1) | $ | 1,817.4 | |||||||||||
| September 30, 2020 | |||||||||||||||||
| (In millions) | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||||
| Customer relationships | $ | 1,982.3 | $ | (581.8) | $ | 1,400.5 | |||||||||||
| Property tax abatement | 16.0 | (7.0) | 9.0 | ||||||||||||||
| Other | 43.8 | (19.3) | 24.5 | ||||||||||||||
| Total definite-lived intangible assets | 2,042.1 | (608.1) | 1,434.0 | ||||||||||||||
| Trade name (indefinite-lived) | 250.0 | — | 250.0 | ||||||||||||||
| Total intangible assets other than goodwill | $ | 2,292.1 | $ | (608.1) | $ | 1,684.0 | |||||||||||
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6. Investments
In June 2019, CrowdStrike Holdings, Inc. ("CrowdStrike"), an entity in which Rackspace US, Inc. held an equity investment, completed an initial public offering and became a publicly-traded company. Prior to the date of CrowdStrike's initial public offering, our investment in CrowdStrike had a carrying value of $10.0 million and was accounted for as an equity investment without a readily determinable fair value. With the availability of observable price changes following the completion of CrowdStrike's initial public offering, our investment in CrowdStrike was measured at fair value on a prospective basis using the end of period quoted stock price, which is classified as a Level 1 input within the fair value hierarchy. In December 2019, Rackspace US, Inc. sold the investment in CrowdStrike for $106.9 million in cash proceeds.
We hold other equity investments that do not have readily determinable fair values. The aggregate carrying value of these other equity investments is immaterial.
For the three months ended September 30, 2019, we recognized a loss on investment activity of $22.0 million, which was entirely due to the decrease in the fair value of the CrowdStrike investment. For the nine months ended September 30, 2019, we recognized a net gain on investment activity of $121.4 million which was primarily comprised of a $118.8 million unrealized gain related to the increase in the fair value of the CrowdStrike investment and a $2.6 million realized gain recognized upon the receipt of proceeds related to the 2017 sale of an equity investment. For the nine months ended September 30, 2020, we recognized a net gain on investment activity of $0.9 million, primarily comprised of a realized gain upon the receipt of proceeds related to the 2017 sale of an equity investment. There was minimal activity for the three months ended September 30, 2020.
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7. Debt
Debt consisted of the following:
| December 31, 2019 | |||||||||||||||||
| (In millions) | Term Loan Facility | 8.625% Senior Notes due 2024 | Total | ||||||||||||||
| Principal balance | $ | 2,824.6 | $ | 1,120.2 | $ | 3,944.8 | |||||||||||
| Unamortized debt issuance costs | (48.6) | (18.0) | (66.6) | ||||||||||||||
| Unamortized debt discount | (4.9) | — | (4.9) | ||||||||||||||
| Total debt | 2,771.1 | 1,102.2 | 3,873.3 | ||||||||||||||
| Less: current portion of debt | (29.0) | — | (29.0) | ||||||||||||||
| Debt, excluding current portion | $ | 2,742.1 | $ | 1,102.2 | $ | 3,844.3 | |||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| (In millions) | Term Loan Facility | 8.625% Senior Notes due 2024 | Accounts Receivable Financing Agreement | Total | |||||||||||||||||||
| Principal balance | $ | 2,802.9 | $ | 605.2 | $ | 65.0 | $ | 3,473.1 | |||||||||||||||
| Unamortized debt issuance costs | (39.7) | (8.2) | — | (47.9) | |||||||||||||||||||
| Unamortized debt discount | (4.0) | — | — | (4.0) | |||||||||||||||||||
| Total debt | 2,759.2 | 597.0 | 65.0 | 3,421.2 | |||||||||||||||||||
| Less: current portion of debt | (29.0) | — | — | (29.0) | |||||||||||||||||||
| Debt, excluding current portion | $ | 2,730.2 | $ | 597.0 | $ | 65.0 | $ | 3,392.2 | |||||||||||||||
Senior Facilities
The First Lien Credit Agreement includes a first lien term loan facility ("Term Loan Facility") and a revolving credit facility ("Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Facilities").
On July 20, 2020, we entered into an amendment to the First Lien Credit Agreement that modified the terms of the Revolving Credit Facility effective upon the closing of the IPO on August 7, 2020. The amendment (i) increased the amount of the commitments available under the Revolving Credit Facility from $225.0 million to $375.0 million, (ii) reduced the applicable margin with respect to the Revolving Credit Facility to 3.00% for LIBOR loans and 2.00% for base rate loans, but includes a 1.00% LIBOR “floor” applicable to LIBOR loans, and (iii) extended the maturity date with respect to the Revolving Credit Facility from November 3, 2021 to August 7, 2025; however, if 91 days prior to the scheduled maturity date of (A) the Term Loan Facility, more than $50.0 million aggregate principal amount of loans remains outstanding under the Term Loan Facility, or (B) the 8.625% Senior Notes, more than $50.0 million aggregate principal amount of the 8.625% Senior Notes remains outstanding, in either such case, the Revolving Credit Facility will mature on such earlier date.
The amendment to the Revolving Credit Facility also modified the financial maintenance covenant applicable to the Revolving Credit Facility that limits our net first lien leverage ratio to be a maximum of 5.00 to 1.00 (as compared to 3.50 to 1.00 prior to giving effect to the amendment). This financial maintenance covenant is only applicable and tested if the aggregate amount of outstanding borrowings under the Revolving Credit Facility and letters of credit issued thereunder (excluding $25.0 million of undrawn letters of credit and cash collateralized letters of credit) as of the last day of a fiscal quarter is equal to or greater than 35% of the Revolving Credit Facility commitments as of the last day of such fiscal quarter. Other than described in this and the previous paragraph, the terms and conditions of the Revolving Credit Facility remained the same, and the amendment did not amend or otherwise modify the terms of the Term Loan Facility.
We accounted for the amendment to the Revolving Credit Facility as a debt modification and recorded $0.6 million in debt issuance costs to "Other non-current assets" in the Consolidated Balance Sheets. These will be amortized, along with the unamortized debt issuance costs associated with the prior arrangement, on a straight-line basis to "Interest expense" in the Consolidated Statements of Comprehensive Loss over the five-year term of the modified arrangement.
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As of September 30, 2020, the Revolving Credit Facility had total commitments of $375.0 million and matures on August 7, 2025. Over the course of the nine months ended September 30, 2020, Rackspace Technology Global borrowed and repaid an aggregate $245.0 million under the Revolving Credit Facility. As of September 30, 2020, we had no outstanding borrowings under the Revolving Credit Facility.
The Term Loan Facility matures on November 3, 2023 and, as of September 30, 2020, the interest rate on the Term Loan Facility was 4.00%. Rackspace Technology Global makes quarterly principal payments of $7.2 million. See Note 11, "Derivatives" for information on interest rate swap agreements we utilize to manage the interest rate risk on the Term Loan Facility.
The fair value of the Term Loan Facility as of September 30, 2020 was $2,739.8 million, based on quoted market prices for identical assets that are traded in over-the-counter secondary markets that are not considered active. The fair value of the Term Loan Facility is classified as Level 2 within the fair value hierarchy.
As of September 30, 2020, Rackspace Technology Global was in compliance with all covenants under the Senior Facilities.
8.625% Senior Notes due 2024
The 8.625% Senior Notes mature on November 15, 2024 and, as of September 30, 2020, Rackspace Technology Global was in compliance with all covenants under the indenture governing the 8.625% Senior Notes (the "Indenture").
During the nine months ended September 30, 2019, Rackspace Technology Global repurchased and surrendered for cancellation $73.9 million of principal amount of 8.625% Senior Notes for $63.7 million including accrued interest of $0.7 million. In connection with these repurchases, we recorded a gain on debt extinguishment of $9.5 million in our Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2019.
On August 12, 2020, Rackspace Technology Global commenced a tender offer to purchase for cash up to $600.0 million aggregate principal amount of the $1,120.2 million outstanding 8.625% Senior Notes. Prior to the expiration of the tender offer, holders of the 8.625% Senior Notes validly tendered $515.0 million aggregate principal amount of the 8.625% Senior Notes. Rackspace Technology Global repurchased the tendered 8.625% Senior Notes for aggregate cash of $557.2 million, which reflected a price of 105.75% of the principal amount, plus accrued and unpaid interest. Following the repurchases, Rackspace Technology Global canceled $515.0 million of the 8.625% Senior Notes. In connection with these repurchases, we recorded a loss on debt extinguishment of $37.0 million in our Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2020, comprised of a $29.7 million premium on repurchase, $7.1 million write-off of unamortized debt issuance costs, and transaction fees of $0.2 million.
The fair value of the outstanding 8.625% Senior Notes as of September 30, 2020 was $632.4 million, based on quoted market prices for identical assets that are traded in over-the-counter secondary markets that are not considered active. The fair value of the 8.625% Senior Notes is classified as Level 2 within the fair value hierarchy.
Accounts Receivable Financing Agreement
On March 19, 2020, a wholly owned subsidiary of the company entered into an accounts receivable financing agreement (the "Receivables Financing Facility"). Pursuant to the agreements evidencing the Receivables Financing Facility, Rackspace Receivables, LLC, a bankruptcy-remote special purpose vehicle ("SPV") wholly owned by Rackspace Technology Global, has granted a security interest in all of its current and future receivables and related assets in exchange for a credit facility permitting borrowings of up to a maximum aggregate amount of $100.0 million from time to time. Such borrowings are used by the SPV to finance purchases of accounts receivable. We recorded $1.0 million of fees and expenses related to the Receivables Financing Facility as debt issuance costs, which are included in "Other non-current assets" in the Consolidated Balance Sheets.
The amount of advances available are determined based on advance rates relating to the eligibility of the receivables held by the SPV at that time. Advances bear interest based on LIBOR plus a margin. The last date on which advances may be made is March 21, 2022, unless the maturity of the Receivables Financing Facility is otherwise accelerated. In addition to other customary fees associated with financings of this type, the SPV is required to pay a monthly commitment fee based on the unused amount of the facility.
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As of September 30, 2020, our total borrowing capacity under the Receivables Financing Facility was $68.0 million and $65.0 million was borrowed and outstanding. The interest rate on the Receivables Financing Facility was 2.50% as of September 30, 2020.
The agreements evidencing the Receivables Financing Facility contain customary representations and warranties, affirmative and negative covenants, and events of default. As of September 30, 2020, the company was in compliance with all covenants under the Receivables Financing Facility.
8. Commitments and Contingencies
We have contingencies that arise from various litigation, claims and commitments, none of which we consider to be material.
From time to time, we are a party to various claims asserting that certain of our services and technologies infringe the intellectual property rights of others. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, products, or services, and may also cause us to change our business practices and require development of non-infringing products or technologies, which could result in a loss of revenue for us or otherwise harm our business.
We record an accrual for a loss contingency when a loss is considered probable and reasonably estimable. As additional facts concerning a loss contingency become known, we reassess our position and make appropriate adjustments to a recorded accrual. The amount that will ultimately be paid related to a matter may differ from the recorded accrual, and the timing of such payments, if any, may be uncertain.
We cannot predict the impact, if any, that any current matter will have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of these matters, including the early stage and lack of specific damage claims in many of them, we cannot estimate a range of possible losses from them at this time.
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9. Share-Based Compensation and Settlement of Share-Based Awards
Repurchase of Common Stock
During the three and nine months ended September 30, 2019, we repurchased $0.3 million and $2.2 million, or 0.1 million and 0.2 million shares, respectively, of our common stock. These shares were subsequently retired.
Settlement of Share-Based Awards
As a result of the Rackspace Acquisition, Rackspace Technology Global had obligations related to the settlement of restricted stock units that were outstanding at the Closing Date. These obligations required installment payments that began in November 2016 and ended in the first quarter of 2019. We made cash payments of $19.2 million during the nine months ended September 30, 2019 and recognized compensation expense of $2.7 million within "Selling, general and administrative expenses" in the Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2019.
In addition, in connection with an employee's departure, we settled options and restricted stock for a one-time cash payment of $1.5 million during the nine months ended September 30, 2019.
Share-Based Compensation Expense
In April 2017, the Executive Committee of the board of directors authorized the company to adopt the Rackspace Technology, Inc. Equity Incentive Plan (the “2017 Incentive Plan”).
On July 24, 2020, the board of directors approved, effective on August 7, 2020, the Rackspace Technology, Inc. 2020 Equity Incentive Plan (the “2020 Incentive Plan” and, together with the 2017 Incentive Plan, the “Incentive Plans”) and amendments to the 2017 Incentive Plan which, among other things, resulted in the termination of the 2017 Incentive Plan, except as it relates to outstanding awards, and any remaining shares reserved for future grants under the 2017 Incentive Plan were released.
The 2020 Incentive Plan provides for the grant of stock options, including incentive stock options (“ISOs”), and nonqualified stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), other stock-based incentive awards, dividend equivalents and cash-based awards (collectively, “awards”). ISOs may be granted only to our employees or an employee of a parent or subsidiary. All other awards may be granted to employees and consultants of the company and its parents and subsidiaries, as well as all non-employee members of our board of directors. The maximum number of shares of our common stock available for issuance under the 2020 Incentive Plan is 25.0 million shares.
An Employee Stock Purchase Plan (the "ESPP") was approved by the company's board of directors on July 24, 2020 and became effective on August 7, 2020. Under the ESPP, eligible employees may purchase a limited number of shares of our common stock at the lesser of 85% of the market value on the enrollment date or 85% of the market value on the purchase date. The maximum shares available for issuance under the ESPP is 11.5 million shares. The fair value on each enrollment date is determined using the Black-Scholes option-pricing model. The share-based compensation expense recognized for the ESPP was $0.7 million during the three and nine months ended September 30, 2020. No shares were issued through the ESPP during the nine months ended September 30, 2020.
During the nine months ended September 30, 2020, we granted 8.2 million stock options and 1.2 million RSUs under the Incentive Plans with weighted-average grant date fair values of $8.38 and $17.80, respectively. The majority of the options were granted as part of our annual compensation award process and vest ratably over a three-year period, subject to continued service. Also included in the 8.2 million stock options granted were 2.6 million stock options granted to certain executives that vest in part subject to continued service ratably over a five-year period and in part based upon the attainment of performance and market conditions. The majority of the RSUs granted were part of a grant to all eligible employees on the date of our IPO and vest six months after the IPO.
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Share-based compensation expense recognized for the three and nine months ended September 30, 2019 and 2020 was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Cost of revenue | $ | 1.8 | $ | 4.5 | $ | 4.1 | $ | 8.6 | |||||||||||||||
| Selling, general and administrative expenses | 8.7 | 35.7 | 18.7 | 48.2 | |||||||||||||||||||
| Pre-tax share-based compensation expense | 10.5 | 40.2 | 22.8 | 56.8 | |||||||||||||||||||
| Less: Income tax benefit | (2.2) | (8.4) | (4.8) | (11.9) | |||||||||||||||||||
| Total share-based compensation expense, net of tax | $ | 8.3 | $ | 31.8 | $ | 18.0 | $ | 44.9 | |||||||||||||||
Upon the completion of the IPO, it was determined that certain awards with performance and market conditions, tied to a liquidity event and the achievement of targets based on a multiple of invested capital ("MOIC") for Apollo, were probable of vesting. As a result of this change in estimate, the company recognized $20.2 million of share-based compensation expense, related to service received since the grant date of the respective awards, during the three months ended September 30, 2020.
As of September 30, 2020, there was $92.7 million and $18.6 million of total unrecognized compensation cost related to stock options and restricted stock, respectively, which will be recognized using the straight-line method over a weighted average period of 2.0 years and 1.0 year, respectively.
10. Taxes
We are subject to U.S. federal income tax and various state, local, and international income taxes in numerous jurisdictions. The differences between our effective tax rate and the U.S. federal statutory rate of 21% generally result from various factors, including the geographical distribution of taxable income, tax credits, contingency reserves for uncertain tax positions, and permanent differences between the book and tax treatment of certain items. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. For the three and nine months ended September 30, 2020, our effective tax rate is lower than the U.S. federal statutory rate of 21% due to the net impact of the geographical distribution of our earnings, the application of the global intangible low-taxed income (“GILTI”) provisions that were implemented with the Tax Cuts and Jobs Act (the “Act”) that was passed on December 22, 2017, as well as executive compensation that is nondeductible under Internal Revenue Code ("IRC") Section 162(m) as a result of the IPO.
On July 27, 2015, the U.S. Tax Court ("Tax Court") issued an opinion in Altera Corp. ("Altera") v. Commissioner ("Tax Court Opinion"), which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Opinion was appealed by the Commissioner to the Ninth Circuit Court of Appeals ("Ninth Circuit"). On June 7, 2019, a three-judge panel from the Ninth Circuit issued an opinion that reversed the Tax Court Opinion. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit, which the Ninth Circuit subsequently denied. On February 10, 2020, Altera submitted a petition for writ of certiorari to the U.S. Supreme Court. On June 22, 2020, the U.S. Supreme Court denied Altera’s petition for writ of certiorari and will not review the Ninth Circuit’s June 7, 2019 decision that upheld the inclusion of share-based compensation in a cost sharing arrangement. Given the U.S. Supreme Court’s denial of the petition for writ of certiorari, we believe it is appropriate to record the financial statement impact of including share-based compensation in historical cost sharing payments discretely in the nine month period ending September 30, 2020 for years prior to 2020. The aggregate income tax impact related to the Altera decision is less than $1.0 million. If, at a future date, Altera secured a favorable ruling from the U.S. Supreme Court, we would re-evaluate the decision to record an income tax benefit at that time.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law in response to the COVID-19 pandemic. The CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) of the Internal Revenue Code increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification significantly increases our allowable interest expense deduction resulting in less utilization of prior year net operating losses in that year. The change in the interest expense limitation pursuant to the CARES Act did not have an impact on the three or nine months ended September 30, 2020 as it is not expected to impact our net deferred tax liability for 2020. As a result of the CARES Act, it is anticipated that we will fully deduct interest expense incurred in 2020 and may be able to deduct previously disallowed interest expense carrying forward from 2018.
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11. Derivatives
We utilize derivative instruments, including interest rate swap agreements and foreign currency hedging contracts, to manage our exposure to interest rate risk and foreign currency fluctuations. We only hold such instruments for economic hedging purposes, not for speculative or trading purposes. Our derivative instruments are transacted only with highly-rated institutions, which reduces our exposure to credit risk in the event of nonperformance.
Interest Rate Swaps
We are exposed to interest rate risk associated with fluctuations in interest rates on the floating-rate Term Loan Facility. The objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we have entered into interest rate swap agreements as part of our interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
In December 2016, we entered into seven floating-to-fixed interest rate swap agreements to manage our risk from interest rate fluctuations associated with the floating-rate Term Loan Facility. The swap agreements became effective on February 3, 2017 with an aggregate notional amount of $1.5 billion. Two swap agreements matured in 2018, one agreement matured during the nine months ended September 30, 2019, and one agreement matured during the nine months ended September 30, 2020. The remaining three swap agreements in effect as of September 30, 2020 have an aggregate notional amount of $1.05 billion and mature over the next two years. On a quarterly basis, we net settle with the counterparty for the difference between the fixed rate specified in each swap agreement, ranging from 1.7625% to 1.9040%, and the variable rate based upon the three-month LIBOR as applied to the notional amount of the swap.
In December 2018, we entered into four additional floating-to-fixed interest rate swap agreements with an aggregate notional amount of $1.35 billion and a maturity date of November 3, 2023. These swap agreements are forward-starting, and as of September 30, 2020, two swap agreements, with an aggregate notional amount of $300 million, were effective. The remaining swap agreements become effective each year thereafter to coincide with the maturity dates of the outstanding December 2016 swap agreements. On a quarterly basis, we net settle with the counterparty for the difference between the fixed rate specified in each swap agreement, ranging from 2.7350% to 2.7490%, and the variable rate based upon the three-month LIBOR as applied to the notional amount of the swap.
As of December 31, 2019, none of our interest rate swap agreements were designated as cash flow hedges of interest rate risk for accounting purposes, therefore, all changes in the fair value of the interest rate swap agreements were recorded to "Interest expense" in the Consolidated Statements of Comprehensive Loss. On January 9, 2020, we designated certain of our swaps as cash flow hedges. On the designation date, the cash flow hedges were in a $39.9 million liability position ("off-market swap value"). The cash flow hedges were expected to be highly effective on the designation date and, on a quarterly basis, we perform retrospective and prospective assessments to determine whether the cash flow hedges continue to be highly effective, which we have deemed to be a dollar-offset ratio between 80% to 125%. As long as the cash flow hedges are highly effective, changes in fair value are recorded to "Accumulated other comprehensive income (loss)" in the Consolidated Balance Sheets and reclassified to "Interest expense" in the period when the underlying transaction affects earnings. The off-market swap value will be amortized as a reduction to "Interest expense" on a straight-line basis over the remaining term of each cash flow hedge. The income tax effects of cash flow hedges are released from "Accumulated other comprehensive income (loss)" in the period when the underlying transaction affects earnings. Any stranded income tax effects are released from “Accumulated other comprehensive income (loss)” into “Benefit (provision) for income taxes” under the portfolio approach. As of September 30, 2020, all of our cash flow hedges were highly effective.
Our interest rate swap agreements are recognized at fair value in the Consolidated Balance Sheets and are valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy.
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Foreign Currency Hedging Contracts
The majority of our customers are invoiced, and the majority of our expenses are paid, by us or our subsidiaries in the functional currency of our company or our subsidiaries, respectively. We also have exposure to foreign currency transaction gains and losses as the result of certain receivables due from our foreign subsidiaries. As such, the results of operations and cash flows of our foreign subsidiaries are subject to fluctuations in foreign currency exchange rates. The objective of our foreign currency hedging contracts is to manage our exposure to foreign currency movements. To accomplish this objective, we may enter into foreign currency forward contracts and collars. A forward contract is an agreement to buy or sell a quantity of a currency at a predetermined future date and at a predetermined exchange rate. A collar is a strategy that uses a combination of a purchased put option and a sold call option with equal premiums to hedge a portion of anticipated cash flows, or to limit possible gains or losses on an underlying asset or liability to a specific range. The put and call options have identical notional amounts and settlement dates.
In November 2018, we entered into one foreign currency forward contract. Under the terms of the contract, we sold £75 million at a rate of 1.3002 British pound sterling to U.S. dollar and received $97.5 million. This contract settled on November 29, 2019 and we received a final net payment of $0.8 million.
In November 2019, we entered into two foreign currency net-zero cost collar contracts with an aggregate notional amount of £100 million and a maturity date of November 30, 2020. Under the terms of the contracts, the British pound sterling to U.S. dollar exchange rate floats between 1.2375 and 1.3475. On March 26, 2020, we settled one of these contracts, with an aggregate notional amount of £50 million, and we received a final net payment of $1.9 million.
In March 2020, we entered into three foreign currency forward contracts to manage our exposure to movements in the British pound sterling, Euro and Mexican peso. All three contracts settled on June 30, 2020, and we made a final net payment of $1.7 million resulting from the following:
•We sold £32 million at a rate of 1.1902 British pound to U.S. dollar and received $38.1 million.
•We sold €6 million at a rate of 1.0921 Euro to U.S. dollar and received $6.6 million.
•We sold $2.1 million at a rate of 24.2040 U.S. dollar to Mexican peso and received Mex$50 million.
In June 2020, we entered into three foreign currency forward contracts to manage our exposure to movements in the British pound sterling, Euro and Mexican peso. All three contracts settled on September 30, 2020 and we made a final net payment of $1.6 million resulting from the following:
•We sold £32 million at a rate of 1.24095 British pound to U.S. dollar and received $39.7 million.
•We sold €6 million at a rate of 1.1241 Euro to U.S. dollar and received $6.7 million.
•We sold $2.2 million at a rate of 23.0330 U.S. dollar to Mexican peso and received Mex$50 million.
In September 2020, we entered into three foreign currency forward contracts to manage our exposure to movements in the British pound sterling, Euro and Mexican peso. All three contracts have a maturity date of December 31, 2020. On the maturity date, the following will occur:
•We will sell £32 million at a rate of 1.28495 British pound to U.S. dollar and receive $41.1 million.
•We will sell €6 million at a rate of 1.1684 Euro to U.S. dollar and receive $7.0 million.
•We will sell $2.2 million at a rate of 22.8340 U.S. dollar to Mexican peso and receive Mex$50 million.
These contracts are recognized at fair value in the Consolidated Balance Sheets and are valued using pricing models that rely on market observable inputs such as current exchange rates, which are classified as Level 2 inputs within the fair value hierarchy. We have not designated these contracts as cash flow hedges for accounting purposes, therefore, all changes in fair value are recorded in "Other income (expense), net."
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Fair Values of Derivatives on the Consolidated Balance Sheets
The fair values of our derivatives and their location on the Consolidated Balance Sheets as of December 31, 2019 and September 30, 2020 were as follows:
| December 31, 2019 | September 30, 2020 | |||||||||||||||||||||||||
| (In millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Location | |||||||||||||||||||||||||
| Interest rate swaps | Other current liabilities | $ | — | $ | 3.5 | $ | — | $ | — | |||||||||||||||||
| Interest rate swaps | Other non-current liabilities | — | 33.1 | — | — | |||||||||||||||||||||
| Foreign currency contracts | Other current assets | 1.4 | — | 0.5 | — | |||||||||||||||||||||
| Foreign currency contracts | Other current liabilities | — | 2.9 | — | 0.3 | |||||||||||||||||||||
| Total | $ | 1.4 | $ | 39.5 | $ | 0.5 | $ | 0.3 | ||||||||||||||||||
| Derivatives designated as hedging instruments | Location | |||||||||||||||||||||||||
| Interest rate swaps | Other current liabilities | $ | — | $ | — | $ | — | $ | 21.8 | |||||||||||||||||
| Interest rate swaps | Other non-current liabilities | — | — | — | 69.9 | |||||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | 91.7 | ||||||||||||||||||
For financial statement presentation purposes, we do not offset assets and liabilities under master netting arrangements and all amounts above are presented on a gross basis. The following table, however, is presented on a net asset and net liability basis:
| December 31, 2019 | September 30, 2020 | ||||||||||||||||||||||||||||||||||
| (In millions) | Gross Amounts on Balance Sheet | Effect of Counter-Party Netting | Net Amounts | Gross Amounts on Balance Sheet | Effect of Counter-Party Netting | Net Amounts | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 1.4 | $ | (1.4) | $ | — | $ | 0.5 | $ | (0.5) | $ | — | |||||||||||||||||||||||
| Total | $ | 1.4 | $ | (1.4) | $ | — | $ | 0.5 | $ | (0.5) | $ | — | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 36.6 | $ | — | $ | 36.6 | $ | 91.7 | $ | (0.2) | $ | 91.5 | |||||||||||||||||||||||
| Foreign currency contracts | 2.9 | (1.4) | 1.5 | 0.3 | (0.3) | — | |||||||||||||||||||||||||||||
| Total | $ | 39.5 | $ | (1.4) | $ | 38.1 | $ | 92.0 | $ | (0.5) | $ | 91.5 | |||||||||||||||||||||||
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Effect of Derivatives on the Consolidated Statements of Comprehensive Loss
The effect of our derivatives and their location on the Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2020 was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (In millions) | 2019 | 2020 | 2019 | 2020 | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Location | |||||||||||||||||||||||||
| Interest rate swaps | Interest expense | $ | (11.8) | $ | — | $ | (61.0) | $ | (3.2) | |||||||||||||||||
| Foreign currency contracts | Other income (expense), net | 3.4 | (3.3) | 4.3 | 0.3 | |||||||||||||||||||||
| Derivatives designated as hedging instruments | Location | |||||||||||||||||||||||||
| Interest rate swaps | Interest expense | $ | — | $ | (4.4) | $ | — | $ | (6.1) | |||||||||||||||||
Interest expense was $80.9 million and $68.3 million for the three months ended September 30, 2019 and 2020, respectively, and $270.7 million and $209.2 million for the nine months ended September 30, 2019 and 2020, respectively. As of September 30, 2020, the amount of cash flow hedge losses included within "Accumulated other comprehensive income (loss)" that is expected to be reclassified as an increase to "Interest expense" over the next 12 months is approximately $19.2 million. See Note 14, "Accumulated Other Comprehensive Income (Loss)," for information regarding changes in fair value of our derivatives designated as hedging instruments.
Credit-risk-related Contingent Features
We have agreements with interest rate swap counterparties that contain a provision whereby if we default on any of our material indebtedness, then we could also be declared in default of our interest rate swap agreements. As of September 30, 2020, our interest rate swap agreements with an aggregate fair value of $91.7 million were in a net liability position. However, if we were in default, our master netting arrangements with certain of our interest rate swap counterparties contain provisions which could result in net settlement of all outstanding agreements with an aggregate fair value of $91.5 million in a net liability position.
12. Divestitures
On February 1, 2017, we completed the sale of assets of our Mailgun business for total consideration of $40.2 million, which was comprised of an initial cash payment of $20.5 million, a promissory note with a fair value of $14.8 million, and an equity interest in the new entity, Mailgun Technologies, Inc. ("Mailgun Technologies") with a fair value of $4.9 million.
In March 2019, we received $18.0 million in cash from Mailgun Technologies as repayment for the promissory note balance of $15.9 million, which included accrued interest of $1.2 million. As such, we recorded a gain of $2.1 million, which is reflected within "Gain on sale" in the Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2019.
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13. Acquisitions
Onica
On November 15, 2019, Rackspace Technology acquired 100% of Onica, an Amazon Web Services ("AWS") Partner Network Premier Consulting Partner and AWS Managed Service Provider providing cloud-native consulting and managed services, including strategic advisory, architecture and engineering and application development services. Total consideration to acquire Onica was $323.4 million, net of cash acquired of $7.5 million, for a net purchase price of $315.9 million. Total consideration includes the purchase price adjustment resulting from the difference between net working capital on the date of acquisition compared to the estimated net working capital used to determine the closing consideration (the "Purchase Price Adjustment").
The Onica acquisition was accounted for using the acquisition method of accounting, in accordance with the accounting guidance for business combinations. Accordingly, the purchase price has been preliminarily allocated (pending the final valuation of certain tangible and intangible assets acquired and liabilities assumed, including deferred taxes) to the acquired assets and liabilities based upon their estimated fair values at the date of acquisition.
The preliminary allocation of the purchase price as of the November 15, 2019 closing date (as adjusted through September 30, 2020, as described below) is as follows:
| (In millions) | November 15, 2019 | ||||
| Onica Acquisition Consideration | $ | 323.4 | |||
| Allocated to: | |||||
| Cash and cash equivalents | $ | 7.5 | |||
| Intangible assets | 61.8 | ||||
| Liabilities assumed, net of other assets acquired | (11.0) | ||||
| Net assets acquired | $ | 58.3 | |||
| Goodwill | $ | 265.1 | |||
During the nine months ended September 30, 2020, we recorded a measurement period adjustment to the preliminary amounts recorded as of November 15, 2019. We recorded a measurement period adjustment of $0.2 million to Onica Acquisition Consideration associated with the Purchase Price Adjustment, for a total net decrease to goodwill of $0.2 million. The Purchase Price Adjustment is included in "Other investing activities" in the Consolidated Statements of Cash Flows. The adjustment to the preliminary allocation is as follows:
| (In millions) | As Previously Determined | Measurement Period Adjustments | Revised | ||||||||||||||
| Onica Acquisition Consideration | $ | 323.6 | $ | (0.2) | $ | 323.4 | |||||||||||
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14. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consisted of the following:
| (In millions) | Accumulated Foreign Currency Translation Adjustments | Accumulated Gains (Losses) on Derivative Contracts | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||
| Balance at June 30, 2019 | $ | 2.5 | $ | — | $ | 2.5 | |||||||||||
Foreign currency translation adjustments, net of tax benefit of $1.0 | (10.8) | — | (10.8) | ||||||||||||||
| Balance at September 30, 2019 | $ | (8.3) | $ | — | $ | (8.3) | |||||||||||
| (In millions) | Accumulated Foreign Currency Translation Adjustments | Accumulated Gains (Losses) on Derivative Contracts | Accumulated Other Comprehensive Loss | ||||||||||||||
| Balance at December 31, 2018 | $ | — | $ | — | $ | — | |||||||||||
Foreign currency translation adjustments, net of tax benefit of $1.2 | (8.3) | — | (8.3) | ||||||||||||||
| Balance at September 30, 2019 | $ | (8.3) | $ | — | $ | (8.3) | |||||||||||
| (In millions) | Accumulated Foreign Currency Translation Adjustments | Accumulated Losses on Derivative Contracts | Accumulated Other Comprehensive Loss | ||||||||||||||
| Balance at June 30, 2020 | $ | (7.5) | $ | (46.2) | $ | (53.7) | |||||||||||
Foreign currency translation adjustments, net of tax expense of $1.0 | 11.7 | — | 11.7 | ||||||||||||||
Unrealized gains on derivative contracts, net of tax expense of $0.4 | — | 1.3 | 1.3 | ||||||||||||||
Amount reclassified from Accumulated comprehensive income (loss) into earnings, net of tax benefit of $1.2 (1) | — | 3.2 | 3.2 | ||||||||||||||
| Balance at September 30, 2020 | $ | 4.2 | $ | (41.7) | $ | (37.5) | |||||||||||
(1) Includes Interest expense recognized of $5.9 million, partially offset by amortization of off-market swap value of $1.5 million for the three months ended September 30, 2020.
| (In millions) | Accumulated Foreign Currency Translation Adjustments | Accumulated Losses on Derivative Contracts | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||
| Balance at December 31, 2019 | $ | 12.0 | $ | — | $ | 12.0 | |||||||||||
Foreign currency translation adjustments, net of tax benefit of $0.4 | (7.8) | — | (7.8) | ||||||||||||||
Unrealized losses on derivative contracts, net of tax benefit of $15.9 | — | (46.2) | (46.2) | ||||||||||||||
Amount reclassified from Accumulated comprehensive income (loss) into earnings, net of tax benefit of $1.6 (1) | — | 4.5 | 4.5 | ||||||||||||||
| Balance at September 30, 2020 | $ | 4.2 | $ | (41.7) | $ | (37.5) | |||||||||||
(1) Includes Interest expense recognized of $10.3 million, partially offset by amortization of off-market swap value of $4.2 million for the nine months ended September 30, 2020.
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15. Related Party Transactions
In connection with the Rackspace Acquisition, we entered into a management consulting agreement with affiliates of Apollo and Searchlight Capital Partners L.P (“Searchlight”), (the “Apollo/Searchlight Management Consulting Agreement”) and a transaction fee agreement with an affiliate of Apollo (the “Transaction Fee Agreement”). In addition, on November 15, 2017, we entered into a management consulting agreement with ABRY Partners, LLC and ABRY Partners II, LLC (collectively, “ABRY”) (the “ABRY Management Consulting Agreement”). For the three and nine months ended September 30, 2019, we recorded $3.7 million and $9.6 million, respectively, and for the three and nine months ended September 30, 2020, we recorded $1.3 million and $8.4 million, respectively, of management consulting fees within "Selling, general and administrative expenses" in the Consolidated Statements of Comprehensive Loss.
On July 24, 2020, we executed termination letters with each of the parties to the Apollo/Searchlight Management Consulting Agreement, the Transaction Fee Agreement and the ABRY Management Consulting Agreement, whereby all such agreements terminated effective as of the pricing of the IPO on August 4, 2020. Therefore no management consulting or transaction fees were accrued or were payable under any of these agreements for periods subsequent to August 4, 2020.
Affiliates of ABRY are also Term Loan Facility lenders under the First Lien Credit Agreement. As of September 30, 2020, the outstanding principal amount of the Term Loan Facility was $2,802.9 million, of which $43.9 million, or 1.6%, is due to ABRY affiliates.
As part of the IPO, Apollo Global Securities, LLC, an affiliate of Apollo, received fees of $2.7 million in connection with their role as an underwriter in the IPO.
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16. Segment Reporting
We have organized our operations into the following three operating segments, which correspond directly to our reportable segments: Multicloud Services, Apps & Cross Platform, and OpenStack Public Cloud. Our segments are based upon a number of factors, including, the basis for our budgets and forecasts, organizational and management structure and the financial information regularly used by our Chief Operating Decision Maker to make key decisions and to assess performance. We assess financial performance of our segments on the basis of revenue and adjusted gross profit, which is a non-GAAP measure of profitability. For the calculation of adjusted gross profit, we allocate certain costs, such as data center operating costs, customer support costs, license expense, and depreciation, to our segments generally based on segment revenue.
The table below presents a reconciliation of revenue by reportable segment to consolidated revenue and a reconciliation of segment adjusted gross profit to total consolidated gross profit for the three and nine months ended September 30, 2019 and 2020.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Revenue by segment: | |||||||||||||||||||||||
| Multicloud Services | $ | 450.2 | $ | 542.1 | $ | 1,352.6 | $ | 1,569.0 | |||||||||||||||
| Apps & Cross Platform | 81.1 | 83.9 | 238.2 | 245.3 | |||||||||||||||||||
| OpenStack Public Cloud | 70.4 | 55.7 | 220.2 | 176.6 | |||||||||||||||||||
| Total consolidated revenue | $ | 601.7 | $ | 681.7 | $ | 1,811.0 | $ | 1,990.9 | |||||||||||||||
| Adjusted gross profit by segment: | |||||||||||||||||||||||
| Multicloud Services | $ | 194.0 | $ | 202.5 | $ | 572.9 | $ | 600.0 | |||||||||||||||
| Apps & Cross Platform | 31.1 | 27.7 | 88.2 | 84.8 | |||||||||||||||||||
| OpenStack Public Cloud | 35.9 | 25.3 | 114.2 | 78.3 | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Share-based compensation expense | (1.8) | (4.5) | (4.1) | (8.6) | |||||||||||||||||||
Other compensation expense (1) | (0.6) | (1.5) | (1.5) | (4.9) | |||||||||||||||||||
Purchase accounting impact on revenue (2) | — | — | 0.2 | — | |||||||||||||||||||
Purchase accounting impact on expense (2) | (2.5) | (1.2) | (7.3) | (4.7) | |||||||||||||||||||
Restructuring and transformation expenses (3) | (2.3) | (2.5) | (5.8) | (7.9) | |||||||||||||||||||
| Total consolidated gross profit | $ | 253.8 | $ | 245.8 | $ | 756.8 | $ | 737.0 | |||||||||||||||
(1) Adjustments for retention bonuses, mainly in connection with restructuring and transformation projects, and the related payroll tax.
(2) Adjustment for the impact of purchase accounting from the Rackspace Acquisition on revenue and expenses.
(3) Adjustment for the impact of business transformation and optimization activities, as well as associated severance, facility closure costs and lease termination expenses.
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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help readers understand our results of operations, financial condition and cash flows and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report") and with the audited consolidated financial statements and the related notes as of December 31, 2019, included in our Registration Statement on Form S-1 (File No. 333-239794), as amended, including the final prospectus, dated August 4, 2020, included therein (the "Prospectus"). References to “Rackspace Technology,” “we,” “our company,” “the company,” “us,” or “our” refer to Rackspace Technology, Inc. and its consolidated subsidiaries.
The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See “Special Note Regarding Forward-Looking Statements” contained elsewhere in this Quarterly Report.
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Overview
We are a leading end-to-end multicloud technology services company. We design, build and operate our customers’ cloud environments across all major technology platforms, irrespective of technology stack or deployment model. We partner with our customers at every stage of their cloud journey, enabling them to modernize applications, build new products and adopt innovative technologies.
We operate our business and report our results through three reportable segments: (1) Multicloud Services, (2) Apps & Cross Platform and (3) OpenStack Public Cloud. Our Multicloud Services segment includes our multicloud services offerings, as well as professional services related to designing and building multicloud solutions and cloud-native applications. Our Apps & Cross Platform segment includes managed applications, managed security and data services, as well as professional services related to designing and implementing application, security and data services. In early 2017, we determined that our OpenStack Public Cloud offering was not core to our go-forward operations and we ceased to incentivize our sales team to promote and sell the product by the end of that year. We continue to serve our existing OpenStack Public Cloud customer base while we focus our growth strategy and investments on our Multicloud Services and Apps & Cross Platform offerings. See Item 1 of Part I, Financial Statements - Note 16, "Segment Reporting" for additional information about our segments. We refer to certain supplementary “Core” financial measures, which reflect the results or otherwise pertain to the performance of our Multicloud Services and Apps & Cross Platform segments, in the aggregate. Our Core financial measures exclude the results and performance of our OpenStack Public Cloud segment.
We generate revenue primarily through the sale of consumption-based contracts for our services offerings, which are recurring in nature. We also generate revenue from the sale of professional services related to designing and building customer solutions, which are non-recurring in nature. Arrangements within our Multicloud Services offerings generally have a fixed term, typically from 12 to 36 months, with a monthly recurring fee based on the computing resources provided to and utilized by the customer, the complexity of the underlying infrastructure and the level of support we provide. Our other primary sources of revenue are for public cloud services within our Multicloud Services, our Apps & Cross Platform and our OpenStack Public Cloud offerings. Contracts for these arrangements typically operate on a month-to-month basis and can be canceled at any time without penalty.
On November 15, 2019, we acquired 100% of Onica Holdings LLC ("Onica") as described in more detail in Item 1 of Part I, Financial Statements - Note 13, "Acquisitions." The preliminary estimate of fair values of Onica’s assets acquired and liabilities assumed, together with Onica’s results of operations subsequent to the November 15, 2019 acquisition date, are included in the unaudited consolidated financial statements.
On August 7, 2020, we completed our initial public offering (the “IPO”), in which we issued and sold 33,500,000 shares of our common stock at a public offering price of $21.00 per share. We received proceeds of $666.6 million from sales of shares in the IPO, after deducting underwriters' discounts and commissions of $36.9 million, but before deducting offering expenses of $8.8 million.
Subsequent Events
For a description of subsequent events, see Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies."
Impact of COVID-19
The recent outbreak of a novel strain of coronavirus, now referred to as COVID-19, has spread globally, including within the United States and resulted in The World Health Organization declaring the outbreak a "pandemic" in March 2020. The effects of COVID-19 are rapidly evolving, and the full impact and duration of the virus are unknown. Managing COVID-19 has severely impact healthcare systems and businesses worldwide. The effects of COVID-19 and the response to the virus have negatively impacted overall economic conditions. To date, COVID-19 has not adversely affected our results of operations or financial condition in any material respect; however, the ultimate extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on our customers, vendors and employees and its impact on our sales cycles as well as industry events, all of which are uncertain and cannot be predicted. If the pandemic or the resulting economic downturn continues to worsen, we could experience service disruption, loss of customers or higher levels of doubtful trade accounts receivable, which could have an adverse effect on our results of operations and cash flows. At this point, we are focused on the health and safety of our employees, customers and partners and, among other things, have implemented a work-from-home policy and are
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limiting contact between our employees and customers while continuing to deliver a Fanatical Experience. To date, the impact on our business has been limited as most of our services are already delivered remotely or capable of being delivered remotely and we have a diverse customer base. In addition, our mitigation efforts, including offering our customers contract extensions in exchange for better payment terms and obtaining improved payment terms from our vendors, have generally been successful since the start of the pandemic. The full extent to which COVID-19 may impact our financial condition or results of operations over the medium to long term, however, remains uncertain. Due to our recurring revenue business model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods, if at all. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.
Key Factors Affecting Our Performance
We believe our combination of proprietary technology, automation capabilities and technical expertise creates a value proposition for our customers that is hard to replicate for both competitors and in-house IT departments. Our continued success depends to a significant extent on our ability to meet the challenges presented by our highly competitive and dynamic market, including the following key factors:
Differentiating Our Service Offerings in a Competitive Market Environment
Our success depends to a significant extent on our ability to differentiate, expand and upgrade our service offerings in line with developing customer needs, while deepening our relationships with leading public cloud service providers and establishing new relationships, including with sales partners. We are a certified premier consulting and managed services partner to some of the largest cloud computing platforms, including AWS, Azure, Google Cloud, Oracle, Salesforce, SAP and VMWare. We believe we are unique in our ability to serve customers across major technology stacks and deployment options, all while delivering a Fanatical Experience. Annualized Recurring Revenue (“ARR”), which we believe is an important indicator of our market differentiation and future revenue opportunity from recurring customer contracts, was $2,346.2 million and $2,576.4 million for the three months ended September 30, 2019 and 2020, respectively. See “Key Operating Metrics.”
Customer Relationships and Retention
Our success greatly depends on our ability to retain and develop opportunities with our existing customers and to attract new customers. We operate in a growing but competitive and evolving market environment, requiring innovation to differentiate us from our competitors. We believe that our integrated cloud service portfolio and our differentiated customer experience and technology are keys to retaining and growing revenue from existing customers as well as acquiring new customers. For example, we believe that the Rackspace Fabric provides customers a unified experience across their entire cloud and security footprint, and that our Rackspace Service Blocks model provides for customizable services consumption, enabling us to deliver IT services in a recurring and scalable way. These offerings differentiate us from legacy IT service providers that operate under long-term fixed and project-based fee structures often tethered to their existing technologies with less automation.
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Shift in Capital Intensity
In recent years, the mix of our revenues has shifted from high capital intensity service offerings to low capital intensity service offerings and we expect this mix shift to continue. Historically, we primarily offered dedicated hosting and OpenStack Public Cloud services to our customers, which required us to deploy servers and equipment to ensure adequate capacity for new customers and, in certain cases, on behalf of customers at the start or during the performance of a contract, resulting in a high level of anticipatory and success-based capital expenditures. Today, the vast majority of our revenue is derived from service offerings, such as multicloud services, application services and professional services, which have significantly lower success-based capital requirements because they allow us to leverage our partners’ infrastructure or technology because we are able to use technology to make our capital expenditures more efficient. As a result, we have recently experienced and expect to continue to experience changes in our capital expenditures requirements. Our capital expenditures equaled 9% and 7% of our revenue for the three months ended September 30, 2019 and 2020, respectively, and 8% and 9% of our revenue for the nine months ended September 30, 2019 and 2020, respectively. Our capital expenditures were slightly higher in the nine months ended September 30, 2020 in part due to higher success-based spend to deploy customer environments and the refresh of certain data center equipment within our normal maintenance cycle. While there is some variability in capital expenditures from quarter to quarter due to timing of purchases, we continue to see a reduction in capital intensity over the longer term.
Key Operating Metrics
The following table and discussion present and summarize our key operating performance indicators, which management uses as measures of our current and future business and financial performance:
| Three Months Ended September 30, | |||||||||||
| (In millions, except %) | 2019 | 2020 | |||||||||
| Bookings | $ | 192.1 | $ | 314.6 | |||||||
| Annualized Recurring Revenue (ARR) | $ | 2,346.2 | $ | 2,576.4 | |||||||
| Core Quarterly Net Revenue Retention Rate | 99 | % | 100 | % | |||||||
| Quarterly Net Revenue Retention Rate | 99 | % | 100 | % | |||||||
Bookings
We calculate Bookings for a given period as the annualized monthly value of our recurring customer contracts entered into during the period from (i) new customers and (ii) net upgrades by existing customers within the same workload, plus the actual (not annualized) estimated value of professional services consulting, advisory or project-based orders received during the period. “Recurring customer contracts” are any contracts entered into on a multi-year or month-to-month basis, but excluding any professional services contracts for consulting, advisory or project-based work.
Bookings for any period may reflect orders that we perform in the same period, orders that remain outstanding as of the end of the period and the annualized value of recurring month-to-month contracts entered into during the period, even if the terms of such contracts do not require the contract to be renewed. Bookings include net upgrades by existing customers within the same workload, but exclude net downgrades by such customers within that workload. Any customer that contracts for a new workload is considered a new customer and the entire value of the contract or upgrade is recorded in Bookings, irrespective of whether the same customer canceled or downgraded other workloads. Bookings also do not include the impact of any known contract non-renewals or service cancellations by our customers, except for positive net upgrades by existing customers. In cases where a new or upgrading customer enters into a multi-year contract, Bookings include only the annualized contract value. Bookings do not include usage-based fees in excess of contracted minimum commitments until actually incurred.
We use Bookings to measure the amount of new business generated in a period, which we believe is an important indicator of new customer acquisition and our ability to cross-sell new services to existing customers. Bookings are also used by management as a factor in determining performance-based compensation for our sales force. While we believe Bookings, in combination with other metrics, is an indicator of our near-term future revenue opportunity, it is not intended to be used as a projection of future revenue. Our calculation of Bookings may differ from similarly titled metrics presented by other companies.
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Our Bookings increased $122.5 million to $314.6 million for the three months ended September 30, 2020 from $192.1 million for the three months ended September 30, 2019. The increase in Bookings was attributable to the execution of several initiatives focused on enhancing growth, including an investment in sales, an improvement in sales productivity, an increase in the number of enterprise customers and an increase in the number of new deals with large contract values.
Annualized Recurring Revenue
We calculate Annualized Recurring Revenue, or ARR, by annualizing our actual revenue from existing recurring customer contracts (as defined under “Bookings” above) for the most recently completed fiscal quarter. ARR is not adjusted for the impact of any known or projected future customer cancellations, service upgrades or downgrades or price increases or decreases.
We use ARR as a measure of our revenue trend and an indicator of our future revenue opportunity from existing recurring customer contracts, assuming zero cancellations. The amount of actual revenue that we recognize over any 12-month period is likely to differ from ARR at the beginning of that period, sometimes significantly. This may occur due to new Bookings, higher or lower professional services revenue, subsequent changes in our pricing, service cancellations, upgrades or downgrades and acquisitions or divestitures. Our calculation of ARR may differ from similarly titled metrics presented by other companies.
Our ARR was $2,346.2 million and $2,576.4 million for the three months ended September 30, 2019 and 2020, respectively.
Quarterly Net Revenue Retention Rate
Our Quarterly Net Revenue Retention Rate, which we use to measure our success in retaining and growing revenue from our existing customers, compares sequential quarterly revenue from the same cohort of customers. We calculate our Quarterly Net Revenue Retention Rate for a given quarterly period as the revenue from the cohort of customers for the latest reported fiscal quarter (the numerator), divided by revenue from such customers for the immediately preceding fiscal quarter (denominator). Existing customer revenue for the earlier of the two fiscal quarters is calculated on a constant currency basis, applying the average exchange rate for the latest reported fiscal quarter to the immediately preceding fiscal quarter, to eliminate the effects of foreign currency fluctuations. The numerator and denominator only include revenue from customers that we served and from which we recognized revenue in the first month of the earliest of the two quarters being compared. Our calculation of Quarterly Net Revenue Retention Rate for any fiscal quarter includes the positive revenue impacts of selling new services to existing customers and the negative revenue impacts of attrition among this cohort of customers. Our calculation of Quarterly Net Revenue Retention Rate may differ from similarly titled metrics presented by other companies.
Throughout the MD&A, we present our Quarterly Net Revenue Retention Rate on a consolidated basis and also on a Core basis, referred to as “Core Quarterly Net Revenue Retention Rate,” as well as by segment.
Our Quarterly Net Revenue Retention Rate was 99% and 100% for the three-month periods ended September 30, 2019 and 2020, respectively, despite our continued shift away from OpenStack Public Cloud to our other service offerings. Our Core Quarterly Net Revenue Retention Rate was 99% and 100% for the three-month periods ended September 30, 2019 and 2020, respectively, reflecting the stickiness of our subscription-based revenue model.
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Key Components of Statement of Operations
Revenue
A substantial amount of our revenue, particularly within our Multicloud Services segment, is generated pursuant to contracts that typically have a fixed term (typically from 12 to 36 months). Our customers generally have the right to cancel their contracts by providing us with written notice prior to the end of the fixed term, though most of our contracts provide for termination fees in the event of cancellation prior to the end of their term, typically amounting to the outstanding value of the contract. These contracts include a monthly recurring fee, which is determined based on the computing resources utilized and provided to the customer, the complexity of the underlying infrastructure and the level of support we provide. Our public cloud services within the Multicloud Services segment and most of our Apps & Cross Platform and OpenStack Public Cloud services generate usage-based revenue invoiced on a month-to-month basis and can be canceled at any time without penalty. We also generate revenue from usage-based fees and fees from professional services earned from customers using our hosting and other services. We typically recognize revenue on a daily basis, as services are provided, in an amount that reflects the consideration to which we expect to be entitled in exchange for our services. Our usage-based arrangements generally include a variable consideration component, consisting of monthly utility fees, with a defined price and undefined quantity. Our customer contracts also typically contain service level guarantees, including with respect to network uptime requirements, that provide discounts when we fail to meet specific obligations and, with respect to certain products, we may offer volume discounts based on usage. As these variable consideration components consist of a single distinct daily service provided on a single performance obligation, we account for all of them as services are provided and earned.
Cost of revenue
Cost of revenue consists primarily of depreciation of servers, software and other systems infrastructure and personnel costs (including salaries, bonuses, benefits and share-based compensation) for engineers, developers and other employees involved in the delivery of services to our customers. Cost of revenue also includes data center rent and other infrastructure maintenance and support costs, including usage charges for third-party infrastructure, software license costs and utilities. Cost of revenue is driven mainly by demand for our services, our service mix and the cost of labor in a given geography.
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Selling, general and administrative expenses (SG&A)
Selling, general and administrative expenses consist primarily of personnel costs (including salaries, bonuses, commissions, benefits and share-based compensation) for our sales force, executive team and corporate administrative and support employees, including our human resources, finance, accounting and legal functions. SG&A also includes research and development costs, repair and maintenance of corporate infrastructure, facilities rent, third-party advisory fees (including audit, legal and management consulting costs), marketing and advertising costs and insurance, as well as the amortization of related intangible assets and certain depreciation of fixed assets. Research and development costs were $12 million and $8 million for the three months ended September 30, 2019 and 2020, respectively, and $44 million and $29 million for the nine months ended September 30, 2019 and 2020, respectively. Advertising costs were $10 million for the three months ended September 30, 2019 and 2020, and $30 million for the nine months ended September 30, 2019 and 2020.
SG&A also includes transaction costs related to acquisitions and financings along with costs related to integration and business transformation initiatives which may impact the comparability of SG&A between periods.
Additionally, SG&A has historically included management fees. The management consulting agreements were terminated on August 4, 2020, and therefore no management fees will accrue or be payable for periods subsequent to that date, thereby reducing our SG&A expenses; however, we also expect certain of our other our recurring SG&A costs to increase on account of the expansion of accounting, legal, investor relations and other functions, incremental insurance coverage and other services needed to operate as a public company.
Income taxes
Our income tax benefit (provision) and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future taxes to be paid. To date, we have recorded consolidated tax benefits, reflecting our net losses, though certain of our non-U.S. subsidiaries have incurred corporate tax expense according to the relevant taxing jurisdictions. We are under certain domestic and foreign tax audits. Due to the complexity involved with certain tax matters, there is the possibility that the various taxing authorities may disagree with certain tax positions filed on our income tax returns. We believe we have made adequate provision for all uncertain tax positions. See Item 1 of Part I, Financial Statements - Note 10, "Taxes."
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Results of Operations
We discuss our historical results of operations, and the key components of those results, below. Past financial results are not necessarily indicative of future results.
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2020
The following table sets forth our results of operations for the specified periods, as well as changes between periods and as a percentage of revenue for those same periods (totals in table may not foot due to rounding):
| Three Months Ended September 30, | Year-Over-Year Comparison | ||||||||||||||||||||||||||||||||||
| 2019 | 2020 | ||||||||||||||||||||||||||||||||||
| (In millions, except %) | Amount | % Revenue | Amount | % Revenue | Amount | % Change | |||||||||||||||||||||||||||||
| Revenue | $ | 601.7 | 100.0 | % | $ | 681.7 | 100.0 | % | $ | 80.0 | 13.3 | % | |||||||||||||||||||||||
| Cost of revenue | (347.9) | (57.8) | % | (435.9) | (63.9) | % | (88.0) | 25.3 | % | ||||||||||||||||||||||||||
| Gross profit | 253.8 | 42.2 | % | 245.8 | 36.1 | % | (8.0) | (3.2) | % | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | (221.7) | (36.9) | % | (260.5) | (38.2) | % | (38.8) | 17.5 | % | ||||||||||||||||||||||||||
| Income (loss) from operations | 32.1 | 5.3 | % | (14.7) | (2.2) | % | (46.8) | NM | |||||||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||||||||||||||
| Interest expense | (80.9) | (13.4) | % | (68.3) | (10.0) | % | 12.6 | (15.6) | % | ||||||||||||||||||||||||||
| Loss on investments, net | (22.0) | (3.7) | % | — | — | % | 22.0 | (100.0) | % | ||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | % | (37.0) | (5.4) | % | (37.0) | 100.0 | % | ||||||||||||||||||||||||||
| Other income, net | 1.1 | 0.2 | % | 0.7 | 0.1 | % | (0.4) | (36.4) | % | ||||||||||||||||||||||||||
| Total other income (expense) | (101.8) | (16.9) | % | (104.6) | (15.3) | % | (2.8) | 2.8 | % | ||||||||||||||||||||||||||
| Loss before income taxes | (69.7) | (11.6) | % | (119.3) | (17.5) | % | (49.6) | 71.2 | % | ||||||||||||||||||||||||||
| Benefit for income taxes | 9.2 | 1.5 | % | 18.1 | 2.7 | % | 8.9 | 96.7 | % | ||||||||||||||||||||||||||
| Net loss | $ | (60.5) | (10.1) | % | $ | (101.2) | (14.8) | % | $ | (40.7) | 67.3 | % | |||||||||||||||||||||||
NM = not meaningful.
Revenue
Revenue increased $80 million, or 13.3%, to $682 million in the three months ended September 30, 2020 from $602 million in the three months ended September 30, 2019. Revenue was positively impacted by the acquisition of Onica in November 2019 as well as new customer acquisition and growing customer spend in our Multicloud Services and Apps & Cross Platform segments, as discussed below. Our Quarterly Net Revenue Retention Rate was 100% in the three months ended September 30, 2020.
After removing the impact of foreign currency fluctuations, on a constant currency basis, revenue increased 12.6% period-on-period. On a constant currency basis, assuming the Onica acquisition was consummated on January 1, 2019, we estimate that our constant currency revenue would have increased by 6.6% period-on-period. Although such estimate of constant currency revenue is based on assumptions that management believes are reasonable, it is not necessarily indicative of the constant currency revenue that would have been achieved had such acquisition occurred on January 1, 2019. The following table presents revenue growth by segment:
| Three Months Ended September 30, | % Change | ||||||||||||||||||||||
| (In millions, except %) | 2019 | 2020 | Actual | Constant Currency (1) | |||||||||||||||||||
| Multicloud Services | $ | 450.2 | $ | 542.1 | 20.4 | % | 19.6 | % | |||||||||||||||
| Apps & Cross Platform | 81.1 | 83.9 | 3.4 | % | 3.2 | % | |||||||||||||||||
| Core Revenue | 531.3 | 626.0 | 17.8 | % | 17.1 | % | |||||||||||||||||
| OpenStack Public Cloud | 70.4 | 55.7 | (20.8) | % | (21.4) | % | |||||||||||||||||
| Total | $ | 601.7 | $ | 681.7 | 13.3 | % | 12.6 | % | |||||||||||||||
(1) Refer to "Non-GAAP Financial Measures" in this section for further explanation and reconciliation.
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Multicloud Services revenue in the three months ended September 30, 2020 increased 20%, on an actual and constant currency basis, from the three months ended September 30, 2019, reflecting the positive impact of the November 2019 acquisition of Onica. Underlying growth was driven by both the acquisition of new customers and increased spend by existing customers, partially offset by cancellations by existing customers. The Quarterly Net Revenue Retention Rate for our Multicloud Services segment was 100% in the three months ended September 30, 2020.
Apps & Cross Platform revenue in the three months ended September 30, 2020 increased 3%, on an actual and constant currency basis, from the three months ended September 30, 2019, due to growth in our offerings for managed security and management of productivity and collaboration applications, partially offset by a decrease in professional services revenue. The Quarterly Net Revenue Retention Rate for our Apps & Cross Platform segment was 101% in the three months ended September 30, 2020.
OpenStack Public Cloud revenue in the three months ended September 30, 2020 decreased 21%, on an actual and constant currency basis, from the three months ended September 30, 2019 due to customer churn.
Cost of Revenue
Cost of revenue increased $88 million, or 25%, to $436 million in the three months ended September 30, 2020 from $348 million in the three months ended September 30, 2019, primarily due to an $81 million increase in usage charges for third-party infrastructure associated with growth in these offerings and the impact of an increased volume of larger, multi-year customer contracts which typically have a larger infrastructure component and lower margins. Personnel costs increased $14 million, primarily due to the addition of former Onica employees. These increases were partially offset by an $8 million reduction in data center costs as a result of initiatives to lower our cost structure, which included the consolidation of data center facilities, as well as the modification of certain leases in June 2020 which resulted in a change of classification from operating leases to finance leases. Additionally, there was a $2 million decrease in depreciation expense primarily related to certain property, equipment and software reaching the end of its useful life for depreciation purposes as we shift towards faster-growing, value-added service offerings which have significantly lower capital requirements than our legacy capital-intensive revenue streams, partially offset by an increase in depreciation expense related to the lease modifications discussed above.
As a percentage of revenue, cost of revenue increased 610 basis points in the three months ended September 30, 2020 to 63.9% from 57.8% in the three months ended September 30, 2019, driven by a 1,050 basis point increase in usage charges for third-party infrastructure, partially offset by a 230 basis point decrease related to data center expense and a 160 basis point reduction in depreciation expense.
Gross Profit and Adjusted Consolidated and Segment Adjusted Gross Profit
Our consolidated gross profit was $246 million in the three months ended September 30, 2020, a decrease of $8 million from $254 million in the three months ended September 30, 2019. Our Adjusted Consolidated Gross Profit was $256 million in the three months ended September 30, 2020, a decrease of $6 million from $261 million in the three months ended September 30, 2019. Adjusted Consolidated Gross Profit is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more information. Our consolidated gross margin was 36.1% in the three months ended September 30, 2020, a decrease of 610 basis points from 42.2% in the three months ended September 30, 2019.
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The table below presents our segment adjusted gross profit and gross margin for the periods indicated, and the change in gross profit between periods:
| Three Months Ended September 30, | Year-Over-Year Comparison | ||||||||||||||||||||||||||||||||||
| (In millions, except %) | 2019 | 2020 | |||||||||||||||||||||||||||||||||
| Adjusted gross profit by segment: | Amount | % of Segment Revenue | Amount | % of Segment Revenue | Amount | % Change | |||||||||||||||||||||||||||||
| Multicloud Services | $ | 194.0 | 43.1 | % | $ | 202.5 | 37.4 | % | $ | 8.5 | 4.4 | % | |||||||||||||||||||||||
| Apps & Cross Platform | 31.1 | 38.3 | % | 27.7 | 33.0 | % | (3.4) | (10.9) | % | ||||||||||||||||||||||||||
| OpenStack Public Cloud | 35.9 | 51.0 | % | 25.3 | 45.4 | % | (10.6) | (29.5) | % | ||||||||||||||||||||||||||
| Adjusted Consolidated Gross Profit | 261.0 | 255.5 | (5.5) | (2.1) | % | ||||||||||||||||||||||||||||||
| Less: | |||||||||||||||||||||||||||||||||||
| Share-based compensation expense | (1.8) | (4.5) | |||||||||||||||||||||||||||||||||
Other compensation expense (1) | (0.6) | (1.5) | |||||||||||||||||||||||||||||||||
Purchase accounting impact on expense (2) | (2.5) | (1.2) | |||||||||||||||||||||||||||||||||
Restructuring and transformation expenses (3) | (2.3) | (2.5) | |||||||||||||||||||||||||||||||||
| Total consolidated gross profit | $ | 253.8 | $ | 245.8 | |||||||||||||||||||||||||||||||
| (1) | Adjustments for retention bonuses, mainly in connection with restructuring and transformation projects, and the related payroll tax. | ||||
| (2) | Adjustment for the impact of purchase accounting from the Rackspace Acquisition on expenses. | ||||
| (3) | Adjustment for the impact of business transformation and optimization activities, as well as associated severance, facility closure costs and lease termination expenses. | ||||
Multicloud Services adjusted gross profit increased by 4% in the three months ended September 30, 2020 from the three months ended September 30, 2019. Segment adjusted gross profit as a percentage of segment revenue decreased by 570 basis points, reflecting a 33% increase in segment cost of revenue and a 20% increase in segment revenue. The increase in costs was mainly driven by higher third-party infrastructure costs associated with segment growth and the addition of former Onica employees’ personnel costs. Partially offsetting the increase was lower depreciation and data center costs.
Apps & Cross Platform adjusted gross profit decreased 11% in the three months ended September 30, 2020 from the three months ended September 30, 2019. Segment adjusted gross profit as a percentage of segment revenue decreased by 530 basis points, reflecting a 12% increase in segment cost of revenue and a 3% increase in segment revenue. The increase in cost of revenue was driven by the segment’s higher business volume as well as investments to support more service-oriented offerings and higher third-party infrastructure costs.
OpenStack Public Cloud adjusted gross profit decreased 30% in the three months ended September 30, 2020 from the three months ended September 30, 2019 due to customer churn. Segment adjusted gross profit as a percentage of segment revenue decreased by 560 basis points, reflecting a 21% decrease in segment revenue, partially offset by a 12% decrease in segment cost of revenue.
The aggregate amount of costs reflected in consolidated gross profit but excluded from segment adjusted gross profit was $9.7 million in the three months ended September 30, 2020, an increase of $2.5 million from $7.2 million in the three months ended September 30, 2019, reflecting higher share-based compensation and other compensation expense, partially offset by lower purchase accounting adjustments. For more information about our segment adjusted gross profit, see Item 1 of Part I, Financial Statements - Note 16, "Segment Reporting."
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $39 million, or 18%, to $261 million in the three months ended September 30, 2020 from $222 million in the three months ended September 30, 2019, primarily due to a $22 million increase in personnel costs. The fluctuation in personnel costs was driven by a $27 million increase in share-based compensation expense primarily related to the recognition of expense for certain awards that became probable of vesting during the current quarter, as further discussed in Item 1 of Part I, Financial Statements - Note 9, "Share-Based Compensation and Settlement of Share-Based Awards." Personnel costs also increased due to the impact of the Onica acquisition and an increase in commissions expense, partially offset by higher severance expense during the prior year period related to business optimization initiatives. The remaining increase in selling, general and administrative expenses is related to business transformation initiatives, integrating Onica, and costs incurred related to the IPO, including incremental costs to operate as a public company, partially offset by a reduction in management consulting fees as the agreements were terminated in connection with the IPO.
As a percentage of revenue, selling, general and administrative expenses increased 130 basis points, to 38.2% in the three months ended September 30, 2020 from 36.9% in the three months ended September 30, 2019, for the reasons discussed above, partially offset by our revenue growth compared to aggregate decreases in other SG&A expenses.
Interest Expense
Interest expense decreased $13 million to $68 million in the three months ended September 30, 2020 from $81 million in the three months ended September 30, 2019, primarily due to the January 2020 designation of certain of our interest rate swap agreements as cash flow hedges, as further discussed in Item 1 of Part I, Financial Statements - Note 11, "Derivatives." In the three months ended September 30, 2019, we recorded $12 million of interest expense related to the change in the fair value of interest rate swaps compared to $4 million recorded to interest expense in the three months ended September 30, 2020. The extinguishment of $515 million principal amount of our 8.625% Senior Notes through a tender offer in the three months ended September 30, 2020 also contributed to the decrease in interest expense.
Loss on Investments, Net
Loss on investments was $22 million in the three months ended September 30, 2019, driven by the unrealized loss on our CrowdStrike investment, as further discussed in Item 1 of Part I, Financial Statements - Note 6, "Investments."
Loss on Extinguishment of Debt
We recorded a $37 million loss on debt extinguishment in the three months ended September 30, 2020 related to the repurchase of $515 million principal amount of our 8.625% Senior Notes through a tender offer, as further discussed in Item 1 of Part I, Financial Statements - Note 7, "Debt."
Other Income, Net
Other income decreased due to changes in the fair value of foreign currency derivatives, as further discussed in Item 1 of Part I, Financial Statements - Note 11, "Derivatives," partially offset by foreign currency transaction gains.
Benefit for Income Taxes
Our income tax benefit increased by $9 million to $18 million in the three months ended September 30, 2020 from $9 million in the three months ended September 30, 2019. Our effective tax rate increased from 13.2% in the three months ended September 30, 2019 to 15.1% in the three months ended September 30, 2020. The increase in the effective tax rate year-over-year and the difference between the effective tax rate for the three months ended September 30, 2020 and the statutory rate are primarily due to the geographic distribution of profits, as well as executive compensation that is nondeductible under Internal Revenue Code ("IRC") Section 162(m) as a result of the IPO.
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Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2020
The following table sets forth our results of operations for the specified periods, as well as changes between periods and as a percentage of revenue for those same periods (totals in table may not foot due to rounding):
| Nine Months Ended September 30, | Year-Over-Year Comparison | ||||||||||||||||||||||||||||||||||
| 2019 | 2020 | ||||||||||||||||||||||||||||||||||
| (In millions, except %) | Amount | % Revenue | Amount | % Revenue | Amount | % Change | |||||||||||||||||||||||||||||
| Revenue | $ | 1,811.0 | 100.0 | % | $ | 1,990.9 | 100.0 | % | $ | 179.9 | 9.9 | % | |||||||||||||||||||||||
| Cost of revenue | (1,054.2) | (58.2) | % | (1,253.9) | (63.0) | % | (199.7) | 18.9 | % | ||||||||||||||||||||||||||
| Gross profit | 756.8 | 41.8 | % | 737.0 | 37.0 | % | (19.8) | (2.6) | % | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | (679.9) | (37.5) | % | (707.5) | (35.5) | % | (27.6) | 4.1 | % | ||||||||||||||||||||||||||
| Gain on sale | 2.1 | 0.1 | % | — | — | % | (2.1) | (100.0) | % | ||||||||||||||||||||||||||
| Income from operations | 79.0 | 4.4 | % | 29.5 | 1.5 | % | (49.5) | (62.7) | % | ||||||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||||||||||||||
| Interest expense | (270.7) | (14.9) | % | (209.2) | (10.5) | % | 61.5 | (22.7) | % | ||||||||||||||||||||||||||
| Gain on investments, net | 121.4 | 6.7 | % | 0.9 | 0.0 | % | (120.5) | (99.3) | % | ||||||||||||||||||||||||||
| Gain (loss) on extinguishment of debt | 9.5 | 0.5 | % | (37.0) | (1.9) | % | (46.5) | NM | |||||||||||||||||||||||||||
| Other income (expense), net | (1.2) | (0.1) | % | 0.4 | 0.0 | % | 1.6 | NM | |||||||||||||||||||||||||||
| Total other income (expense) | (141.0) | (7.8) | % | (244.9) | (12.3) | % | (103.9) | 73.7 | % | ||||||||||||||||||||||||||
| Loss before income taxes | (62.0) | (3.4) | % | (215.4) | (10.8) | % | (153.4) | NM | |||||||||||||||||||||||||||
| Benefit for income taxes | 6.5 | 0.4 | % | 33.4 | 1.7 | % | 26.9 | NM | |||||||||||||||||||||||||||
| Net loss | $ | (55.5) | (3.1) | % | $ | (182.0) | (9.1) | % | $ | (126.5) | NM | ||||||||||||||||||||||||
NM = not meaningful.
Revenue
Revenue increased $180 million, or 9.9%, to $1,991 million in the nine months ended September 30, 2020 from $1,811 million in the nine months ended September 30, 2019. Revenue was positively impacted by the acquisition of Onica in November 2019 as well as new customer acquisition and growing customer spend in our Multicloud Services and Apps & Cross Platform segments, as discussed below.
After removing the impact from foreign currency fluctuations, on a constant currency basis, revenue increased 10.0% period-on-period. On a constant currency basis, assuming the Onica acquisition was consummated on January 1, 2019, we estimate that our constant currency revenue would have increased by 4.5% period-on-period. Although such estimate of constant currency revenue is based on assumptions that management believes are reasonable, it is not necessarily indicative of the constant currency revenue that would have been achieved had such acquisition occurred on January 1, 2019. The following table presents revenue growth by segment:
| Nine Months Ended September 30, | % Change | ||||||||||||||||||||||
| (In millions, except %) | 2019 | 2020 | Actual | Constant Currency (1) | |||||||||||||||||||
| Multicloud Services | $ | 1,352.6 | $ | 1,569.0 | 16.0 | % | 16.1 | % | |||||||||||||||
| Apps & Cross Platform | 238.2 | 245.3 | 3.0 | % | 3.0 | % | |||||||||||||||||
| Core Revenue | 1,590.8 | 1,814.3 | 14.1 | % | 14.1 | % | |||||||||||||||||
| OpenStack Public Cloud | 220.2 | 176.6 | (19.8) | % | (19.7) | % | |||||||||||||||||
| Total | $ | 1,811.0 | $ | 1,990.9 | 9.9 | % | 10.0 | % | |||||||||||||||
(1) Refer to "Non-GAAP Financial Measures" in this section for further explanation and reconciliation.
Multicloud Services revenue in the nine months ended September 30, 2020 increased 16%, on an actual and constant currency basis, from the nine months ended September 30, 2019, reflecting the positive impact of the November 2019 acquisition of Onica. Underlying growth was driven by both the acquisition of new customers and increased spend by existing customers, partially offset by cancellations by existing customers.
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Apps & Cross Platform revenue in the nine months ended September 30, 2020 increased 3%, on an actual and constant currency basis, from the nine months ended September 30, 2019, due to growth in our offerings for managed security and management of productivity and collaboration applications, partially offset by a decrease in professional services revenue.
OpenStack Public Cloud revenue in the nine months ended September 30, 2020 decreased 20%, on an actual and constant currency basis, from the nine months ended September 30, 2019 due to customer churn.
Cost of Revenue
Cost of revenue increased $200 million, or 19%, to $1,254 million in the nine months ended September 30, 2020 from $1,054 million in the nine months ended September 30, 2019, primarily due to a $203 million increase in usage charges for third-party infrastructure associated with growth in these offerings and the impact of an increased volume of larger, multi-year customer contracts which typically have a larger infrastructure component and lower margins. Personnel costs increased $37 million, primarily due to the addition of former Onica employees. These increases were partially offset by a $23 million decrease in depreciation expense primarily related to certain property, equipment and software reaching the end of its useful life for depreciation purposes as we shift towards faster-growing, value-added service offerings which have significantly lower capital requirements than our legacy capital-intensive revenue streams. Depreciation expense was also impacted by the modification of certain leases in June 2020 which resulted in a change of classification from operating leases to finance leases and an increase in deprecation expense. We also had year-over-year expense reductions of $16 million in data center and license expenses as a result of initiatives to lower our cost structure, which included the consolidation of data center facilities and reviewing and optimizing our vendor license spending, as well as a decrease in data center costs related to the lease modifications discussed above.
As a percentage of revenue, cost of revenue increased 480 basis points in the nine months ended September 30, 2020 to 63.0% from 58.2% in the nine months ended September 30, 2019, driven by a 930 basis point increase in usage charges for third-party infrastructure and a 40 basis point increase in personnel costs, partially offset by a 250 basis point decrease related to data center and license expenses and a 220 basis point reduction in depreciation expense.
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Gross Profit and Adjusted Consolidated and Segment Adjusted Gross Profit
Our consolidated gross profit was $737 million in the nine months ended September 30, 2020, a decrease of $20 million from $757 million in the nine months ended September 30, 2019. Our Adjusted Consolidated Gross Profit was $763 million in the nine months ended September 30, 2020, a decrease of $12 million from $775 million in the nine months ended September 30, 2019. Adjusted Consolidated Gross Profit is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more information. Our consolidated gross margin was 37.0% in the nine months ended September 30, 2020, a decrease of 480 basis points from 41.8% in the nine months ended September 30, 2019.
The table below presents our segment adjusted gross profit and gross margin for the periods indicated, and the change in gross profit between periods:
| Nine Months Ended September 30, | Year-Over-Year Comparison | ||||||||||||||||||||||||||||||||||
| (In millions, except %) | 2019 | 2020 | |||||||||||||||||||||||||||||||||
| Adjusted gross profit by segment: | Amount | % of Segment Revenue | Amount | % of Segment Revenue | Amount | % Change | |||||||||||||||||||||||||||||
| Multicloud Services | $ | 572.9 | 42.4 | % | $ | 600.0 | 38.2 | % | $ | 27.1 | 4.7 | % | |||||||||||||||||||||||
| Apps & Cross Platform | 88.2 | 37.0 | % | 84.8 | 34.6 | % | (3.4) | (3.9) | % | ||||||||||||||||||||||||||
| OpenStack Public Cloud | 114.2 | 51.9 | % | 78.3 | 44.3 | % | (35.9) | (31.4) | % | ||||||||||||||||||||||||||
| Adjusted Consolidated Gross Profit | 775.3 | 763.1 | (12.2) | (1.6) | % | ||||||||||||||||||||||||||||||
| Less: | |||||||||||||||||||||||||||||||||||
| Share-based compensation expense | (4.1) | (8.6) | |||||||||||||||||||||||||||||||||
Other compensation expense (1) | (1.5) | (4.9) | |||||||||||||||||||||||||||||||||
Purchase accounting impact on revenue (2) | 0.2 | — | |||||||||||||||||||||||||||||||||
Purchase accounting impact on expense (2) | (7.3) | (4.7) | |||||||||||||||||||||||||||||||||
Restructuring and transformation expenses (3) | (5.8) | (7.9) | |||||||||||||||||||||||||||||||||
| Total consolidated gross profit | $ | 756.8 | $ | 737.0 | |||||||||||||||||||||||||||||||
| (1) | Adjustments for retention bonuses, mainly in connection with restructuring and transformation projects, and the related payroll tax. | ||||
| (2) | Adjustment for the impact of purchase accounting from the Rackspace Acquisition on revenue and expenses. | ||||
| (3) | Adjustment for the impact of business transformation and optimization activities, as well as associated severance, facility closure costs and lease termination expenses. | ||||
Multicloud Services adjusted gross profit increased by 5% in the nine months ended September 30, 2020 from the nine months ended September 30, 2019. Segment adjusted gross profit as a percentage of segment revenue decreased by 420 basis points, reflecting a 24% increase in segment cost of revenue and a 16% increase in segment revenue. The increase in costs was mainly driven by higher third-party infrastructure costs and the addition of former Onica employees’ personnel costs. Partially offsetting the increase was lower depreciation and data center costs.
Apps & Cross Platform adjusted gross profit decreased by 4% in the nine months ended September 30, 2020 from the nine months ended September 30, 2019. Segment adjusted gross profit as a percentage of segment revenue decreased by 240 basis points, reflecting a 7% increase in segment cost of revenue and a 3% increase in segment revenue. The increase in cost of revenue was driven by the segment’s higher business volume as well as investments to support more service-oriented offerings and higher third-party infrastructure costs.
OpenStack Public Cloud adjusted gross profit decreased 31% in the nine months ended September 30, 2020 from the nine months ended September 30, 2019 due to customer churn. Segment adjusted gross profit as a percentage of segment revenue decreased by 760 basis points, reflecting a 20% decrease in segment revenue, partially offset by a 7% decrease in segment cost of revenue.
The aggregate amount of costs reflected in consolidated gross profit but excluded from segment adjusted gross profit was $26.1 million in the nine months ended September 30, 2020, an increase of $7.6 million from $18.5 million in the nine months ended September 30, 2019, reflecting higher restructuring and transformation expenses, share-based compensation and other compensation expense, partially offset by lower purchase accounting adjustments. For more information about our segment adjusted gross profit, see Item 1 of Part I, Financial Statements - Note 16, "Segment Reporting."
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $28 million, or 4%, to $708 million in the nine months ended September 30, 2020 from $680 million in the nine months ended September 30, 2019, due to costs related to business transformation initiatives, integrating Onica, and costs incurred related to the IPO, including incremental costs to operate as a public company, partially offset by a reduction in management consulting fees as the agreements were terminated in connection with the IPO. Personnel costs increased $7 million due to an increase in share-based compensation expense and commissions expense, driven by bookings growth, including the impact of the Onica acquisition, partially offset by higher severance expense during the prior year period related to business optimization initiatives and lower expense in the current year period related to our obligations to settle share-based awards in connection with the Rackspace Acquisition. Share-based compensation expense increased $30 million primarily related to the recognition of expense for certain awards that became probable of vesting during the third quarter of 2020, as further discussed in Item 1 of Part I, Financial Statements - Note 9, "Share-Based Compensation and Settlement of Share-Based Awards. Additionally, travel costs declined $7 million resulting from COVID-19 travel restrictions.
As a percentage of revenue, selling, general and administrative expenses decreased 200 basis points, to 35.5% in the nine months ended September 30, 2020 from 37.5% in the nine months ended September 30, 2019, for the reasons discussed above, including a 130 bps reduction in personnel costs, and further impacted by our revenue growth while other SG&A expenses decreased.
Gain on Sale
In March 2019, we recorded a $2 million gain related to the payment of a promissory note receivable that was issued in conjunction with the sale of our Mailgun business in February 2017.
Interest Expense
Interest expense decreased $62 million to $209 million in the nine months ended September 30, 2020 from $271 million in the nine months ended September 30, 2019, primarily due to the January 2020 designation of certain of our interest rate swap agreements as cash flow hedges, as further discussed in Item 1 of Part I, Financial Statements - Note 11, "Derivatives." In the nine months ended September 30, 2019, we recorded $61 million of interest expense related to the change in the fair value of interest rate swaps compared to $9 million recorded to interest expense in the nine months ended September 30, 2020.
Gain on Investments, Net
Gain on investments was $1 million in the nine months ended September 30, 2020 compared to $121 million in the nine months ended September 30, 2019, driven by the unrealized gain on our CrowdStrike investment of $119 million, as further discussed in Item 1 of Part I, Financial Statements - Note 6, "Investments."
Gain (Loss) on Extinguishment of Debt
In the nine months ended September 30, 2020 we recorded a $37 million loss on debt extinguishment related to the repurchase of $515 million principal amount of our 8.625% Senior Notes through a tender offer. We recorded a $10 million gain on debt extinguishment in the nine months ended September 30, 2019 related to repurchases of $74 million principal amount of 8.625% Senior Notes. See Item 1 of Part I, Financial Statements - Note 7, "Debt" for further discussion.
Other Income (Expense), Net
The $2 million change in other income (expense), net is primarily related to foreign currency transaction gains, partially offset by changes in the fair value of foreign currency derivatives, as further discussed in Item 1 of Part I, Financial Statements - Note 11, "Derivatives."
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Benefit for Income Taxes
Our income tax benefit increased by $27 million to $33 million in the nine months ended September 30, 2020 from $7 million in the nine months ended September 30, 2019. Our effective tax rate increased from 10.5% in the nine months ended September 30, 2019 to 15.5% in the nine months ended September 30, 2020. The increase in the effective tax rate year-over-year and the difference between the effective tax rate for the nine months ended September 30, 2020 and the statutory rate are primarily due to the geographic distribution of profits, as well as executive compensation that is nondeductible under IRC Section 162(m) as a result of the IPO.
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Non-GAAP Financial Measures
We track several non-GAAP financial measures to monitor and manage our underlying financial performance. The following discussion includes the presentation of constant currency revenue, Adjusted Consolidated Gross Profit, Adjusted Net Income (Loss), Adjusted EBIT, Adjusted EBITDA and Adjusted Earnings Per Share (“EPS”), which are non-GAAP financial measures that exclude the impact of certain costs, losses and gains that are required to be included in our profit and loss measures under GAAP. Although we believe these measures are useful to investors and analysts for the same reasons they are useful to management, as discussed below, these measures are not a substitute for, or superior to, U.S. GAAP financial measures or disclosures. Other companies may calculate similarly-titled non-GAAP measures differently, limiting their usefulness as comparative measures. We have reconciled each of these non-GAAP measures to the applicable most comparable GAAP measure throughout this MD&A.
Constant Currency Revenue
We use constant currency revenue as an additional metric for understanding and assessing our growth excluding the effect of foreign currency rate fluctuations on our international business operations. Constant currency information compares results between periods as if exchange rates had remained constant period over period and is calculated by translating the non-U.S. dollar income statement balances for the most current period to U.S. dollars using the average exchange rate from the comparative period rather than the actual exchange rates in effect during the respective period. We also believe this is an important metric to help investors evaluate our performance in comparison to prior periods.
The following tables present, by segment, actual and constant currency revenue and constant currency revenue growth rates, for and between the periods indicated:
| Three Months Ended September 30, 2019 | Three Months Ended September 30, 2020 | % Change | |||||||||||||||||||||||||||||||||
| (In millions, except %) | Revenue | Revenue | Foreign Currency Translation (a) | Revenue in Constant Currency | Actual | Constant Currency | |||||||||||||||||||||||||||||
| Multicloud Services | $ | 450.2 | $ | 542.1 | $ | (3.6) | $ | 538.5 | 20.4 | % | 19.6 | % | |||||||||||||||||||||||
| Apps & Cross Platform | 81.1 | 83.9 | (0.2) | 83.7 | 3.4 | % | 3.2 | % | |||||||||||||||||||||||||||
| OpenStack Public Cloud | 70.4 | 55.7 | (0.3) | 55.4 | (20.8) | % | (21.4) | % | |||||||||||||||||||||||||||
| Total | $ | 601.7 | $ | 681.7 | $ | (4.1) | $ | 677.6 | 13.3 | % | 12.6 | % | |||||||||||||||||||||||
| Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2020 | % Change | |||||||||||||||||||||||||||||||||
| (In millions, except %) | Revenue | Revenue | Foreign Currency Translation (a) | Revenue in Constant Currency | Actual | Constant Currency | |||||||||||||||||||||||||||||
| Multicloud Services | $ | 1,352.6 | $ | 1,569.0 | $ | 1.3 | $ | 1,570.3 | 16.0 | % | 16.1 | % | |||||||||||||||||||||||
| Apps & Cross Platform | 238.2 | 245.3 | 0.1 | 245.4 | 3.0 | % | 3.0 | % | |||||||||||||||||||||||||||
| OpenStack Public Cloud | 220.2 | 176.6 | 0.2 | 176.8 | (19.8) | % | (19.7) | % | |||||||||||||||||||||||||||
| Total | $ | 1,811.0 | $ | 1,990.9 | $ | 1.6 | $ | 1,992.5 | 9.9 | % | 10.0 | % | |||||||||||||||||||||||
| (a) | The effect of foreign currency is calculated by translating current period results using the average exchange rate from the prior comparative period. | ||||||||||||||||||||||
Adjusted Consolidated Gross Profit
Our principal measure of segment profitability is segment adjusted gross profit. We also present Adjusted Consolidated Gross Profit in this MD&A, which is the aggregate of segment adjusted gross profit, because we believe the measure is useful in analyzing trends in our underlying, recurring gross margins. We define Adjusted Consolidated Gross Profit as our consolidated gross profit, adjusted to exclude the impact of share-based compensation expense and other non-recurring or unusual compensation items, purchase accounting-related effects, and certain business transformation-related costs. For a reconciliation of our Adjusted Consolidated Gross Profit to our total consolidated gross profit, see “Gross Profit and Adjusted Consolidated and Segment Adjusted Gross Profit” above.
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Adjusted Net Income (Loss), Adjusted EBIT and Adjusted EBITDA
We present Adjusted Net Income (Loss), Adjusted EBIT and Adjusted EBITDA because they are a basis upon which management assesses our performance and we believe they are useful to evaluating our financial performance. We believe that excluding items from net income that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business.
The Rackspace Acquisition was structured as a leveraged buyout of Rackspace Technology Global, our Predecessor, and resulted in several accounting and capital structure impacts. For example, the revaluation of our assets and liabilities resulted in a significant increase in our amortizable intangible assets and goodwill, the incurrence of a significant amount of debt to partially finance the Rackspace Acquisition resulted in interest payments that reflect our high leverage and cost of debt capital, and the conversion of Rackspace Technology Global’s unvested equity compensation into a cash-settled bonus plan and obligation to pay management fees to our equityholders resulted in new cash commitments. In addition, the change in ownership and management resulting from the Rackspace Acquisition led to a strategic realignment in our operations that had a significant impact on our financial results. Following the Rackspace Acquisition, we acquired several businesses, sold businesses and investments that we deemed to be non-core and launched multiple integration and business transformation initiatives intended to improve the efficiency of people and operations and identify recurring cost savings and new revenue growth opportunities. We believe that these transactions and activities resulted in costs, which have historically been substantial, and that may not be indicative of, or are not related to, our core operating results, including interest related to the incurrence of additional debt to finance acquisitions and third party legal, advisory and consulting fees and severance, retention bonus and other internal costs that we believe would not have been incurred in the absence of these transactions and activities and are also may not be indicative of, or related to, our core operating results.
We define Adjusted Net Income (Loss) as net income (loss) adjusted to exclude the impact of non-cash charges for share-based compensation and cash charges related to the settlement of our Predecessor’s equity plan, transaction-related costs and adjustments, restructuring and transformation charges, management fees, the amortization of acquired intangible assets and certain other non-operating, non-recurring or non-core gains and losses, as well as the tax effects of these non-GAAP adjustments.
We define Adjusted EBIT as net income (loss), plus interest expense and income taxes, further adjusted to exclude the impact of non-cash charges for share-based compensation and cash charges related to the settlement of our Predecessor’s equity plan, transaction-related costs and adjustments, restructuring and transformation charges, management fees, the amortization of acquired intangible assets and certain other non-operating, non-recurring or non-core gains and losses.
We define Adjusted EBITDA as Adjusted EBIT plus depreciation and amortization.
Adjusted EBIT and Adjusted EBITDA are management’s principal metrics for measuring our underlying financial performance. Adjusted EBITDA, along with other quantitative and qualitative information, is also the principal financial measure used by management and our board of directors in determining performance-based compensation for our management and key employees.
These non-GAAP measures are not intended to imply that we would have generated higher income or avoided net losses if the Rackspace Acquisition and the subsequent transactions and initiatives had not occurred. In the future we may incur expenses or charges such as those added back to calculate Adjusted Net Income (Loss), Adjusted EBIT or Adjusted EBITDA. Our presentation of Adjusted Net Income (Loss), Adjusted EBIT and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. Other companies, including our peer companies, may calculate similarly-titled measures in a different manner from us, and therefore, our non-GAAP measures may not be comparable to similarly-tiled measures of other companies. Investors are cautioned against using these measures to the exclusion of our results in accordance with GAAP.
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The following table presents a reconciliation of Adjusted Net Income (Loss), Adjusted EBIT and Adjusted EBITDA to our net loss for the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Net loss | $ | (60.5) | $ | (101.2) | $ | (55.5) | $ | (182.0) | |||||||||||||||
| Share-based compensation expense | 10.5 | 40.2 | 22.8 | 56.8 | |||||||||||||||||||
Cash settled equity and special bonuses (a) | 5.9 | 5.0 | 17.6 | 19.1 | |||||||||||||||||||
Transaction-related adjustments, net (b) | 4.3 | 18.9 | 13.7 | 35.4 | |||||||||||||||||||
Restructuring and transformation expenses (c) | 16.1 | 22.6 | 42.4 | 59.7 | |||||||||||||||||||
Management fees (d) | 3.7 | 1.3 | 9.6 | 8.4 | |||||||||||||||||||
Net (gain) loss on divestiture and investments (e) | 22.1 | — | (123.4) | (0.9) | |||||||||||||||||||
Net (gain) loss on extinguishment of debt (f) | — | 37.0 | (9.5) | 37.0 | |||||||||||||||||||
Other (income) expense (g) | (1.3) | (0.7) | 1.0 | (0.4) | |||||||||||||||||||
Amortization of intangible assets (h) | 40.6 | 44.1 | 124.5 | 132.3 | |||||||||||||||||||
Tax effect of non-GAAP adjustments (i) | (17.6) | (30.8) | (16.1) | (67.7) | |||||||||||||||||||
| Adjusted Net Income | 23.8 | 36.4 | 27.1 | 97.7 | |||||||||||||||||||
| Interest expense | 80.9 | 68.3 | 270.7 | 209.2 | |||||||||||||||||||
| Benefit for income taxes | (9.2) | (18.1) | (6.5) | (33.4) | |||||||||||||||||||
Tax effect of non-GAAP adjustments (i) | 17.6 | 30.8 | 16.1 | 67.7 | |||||||||||||||||||
| Adjusted EBIT | 113.1 | 117.4 | 307.4 | 341.2 | |||||||||||||||||||
| Depreciation and amortization | 114.4 | 117.5 | 372.3 | 355.1 | |||||||||||||||||||
Amortization of intangible assets (h) | (40.6) | (44.1) | (124.5) | (132.3) | |||||||||||||||||||
| Adjusted EBITDA | $ | 186.9 | $ | 190.8 | $ | 555.2 | $ | 564.0 | |||||||||||||||
| (a) | Includes expense related to the cash settlement of unvested equity awards that were outstanding at the consummation of the Rackspace Acquisition (amounting to $3 million for the nine months ended September 30, 2019 and zero for all other periods presented), retention bonuses, mainly relating to restructuring and integration projects, and, beginning in the second quarter of 2019, senior executive signing bonuses and relocation costs. | ||||
| (b) | Includes legal, professional, accounting and other advisory fees related to the acquisition of Onica in the fourth quarter of 2019 and the IPO in the third quarter of 2020, integration costs of acquired businesses, purchase accounting adjustments (including deferred revenue fair value discount), payroll costs for employees that dedicate significant time to supporting these projects and exploratory acquisition and divestiture costs and expenses related to financing activities. | ||||
| (c) | Includes consulting and advisory fees related to business transformation and optimization activities, payroll costs for employees that dedicate significant time to these projects, as well as associated severance, facility closure costs and lease termination expenses. We assessed these activities and determined that they did not qualify under the scope of ASC 420 (Exit or Disposal costs). | ||||
| (d) | Represents historical management fees pursuant to management consulting agreements. The management consulting agreements were terminated effective August 4, 2020, and therefore no management fees have accrued or will be payable for periods after August 4, 2020. | ||||
| (e) | Includes gains and losses on investment and from dispositions, including our investment in CrowdStrike. | ||||
| (f) | Includes gains and losses on our repurchases of 8.625% Senior Notes. | ||||
| (g) | Reflects mainly changes in the fair value of foreign currency derivatives. | ||||
| (h) | All of our intangible assets are attributable to acquisitions, including the Rackspace Acquisition in 2016. | ||||
| (i) | We utilize an estimated structural long-term non-GAAP tax rate in order to provide consistency across reporting periods, removing the effect of non-recurring tax adjustments, which include but are not limited to tax rate changes, U.S. tax reform, share-based compensation, audit conclusions and changes to valuation allowances. When computing this long-term rate for 2019 and the 2020 interim period, we based it on an average of the 2019 and estimated 2020 tax rates, recomputed to remove the tax effect of non-GAAP pre-tax adjustments and non-recurring tax adjustments, resulting in a structural non-GAAP tax rate of 26%. The non-GAAP tax rate could be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix including due to acquisition activity, or other changes to our strategy or business operations. We will re-evaluate our long-term non-GAAP tax rate as appropriate. We believe that making these adjustments facilitates a better evaluation of our current operating performance and comparisons to prior periods. | ||||
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Adjusted Earnings Per Share (EPS)
We define Adjusted EPS as Adjusted Net Income divided by our GAAP average number of shares outstanding for the period on a diluted basis, after giving effect to the twelve-for-one stock split that was approved and effected on July 20, 2020 (the "Stock Split"), and further adjusted for the average number of shares associated with securities which are anti-dilutive to GAAP earnings per share but dilutive to Adjusted EPS. Management uses Adjusted EPS to evaluate the performance of our business on a comparable basis from period to period, including by adjusting for the impact of the issuance of shares that would be dilutive to Adjusted EPS. The following table reconciles Adjusted EPS to our GAAP net loss per share on a diluted basis:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except per share amounts) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Net loss attributable to common stockholders | $ | (60.5) | $ | (101.2) | $ | (55.5) | $ | (182.0) | |||||||||||||||
| Adjusted Net Income | $ | 23.8 | $ | 36.4 | $ | 27.1 | $ | 97.7 | |||||||||||||||
| Weighted average number of shares - Diluted | 165.2 | 186.7 | 165.2 | 172.6 | |||||||||||||||||||
Effect of dilutive securities (a) | 0.9 | 5.9 | 0.8 | 2.8 | |||||||||||||||||||
| Non-GAAP weighted average number of shares - Diluted | 166.1 | 192.6 | 166.0 | 175.4 | |||||||||||||||||||
| Net loss per share - Diluted | $ | (0.37) | $ | (0.54) | $ | (0.34) | $ | (1.05) | |||||||||||||||
| Adjusted EPS | $ | 0.14 | $ | 0.19 | $ | 0.16 | $ | 0.56 | |||||||||||||||
| (a) | Reflects impact of awards that would have been anti-dilutive to Net loss per share, and therefore not included in the calculation, but would be dilutive to Adjusted EPS and are therefore included in the share count for purposes of this non-GAAP measure. Potential common share equivalents consist of shares issuable upon the exercise of stock options or vesting of restricted stock, as well as contingent shares associated with our acquisition of Datapipe Parent, Inc. Certain of our potential common share equivalents are contingent on Apollo achieving pre-established performance targets based on a multiple of their invested capital ("MOIC"), which are included in the denominator for the entire period if such shares would be issuable as of the end of the reporting period assuming the end of the reporting period was the end of the contingency period. | ||||
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Liquidity and Capital Resources
Overview
We primarily finance our operations and capital expenditures with internally-generated cash from operations and, if necessary, borrowings under the Revolving Credit Facility, borrowings under our Receivables Financing Facility, and other sources of financing as described below. As of September 30, 2020, the Revolving Credit Facility provided for up to $375 million of borrowings, none of which was drawn as of September 30, 2020. As of September 30, 2020, the Receivables Financing Facility had a total borrowing capacity of $68 million, and $65 million was borrowed and outstanding. Our primary uses of cash are working capital requirements, debt service requirements and capital expenditures. Based on our current level of operations and available cash, we believe our sources will provide sufficient liquidity over at least the next twelve months. We cannot provide assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under the Revolving Credit Facility, the Receivables Financing Facility or from other sources in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. We cannot assure that we will be able to refinance any of our indebtedness, including the Senior Facilities and 8.625% Senior Notes, on commercially reasonable terms or at all. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital, and there can be no assurance that any such capital will be available to us on acceptable terms or at all.
From time to time, depending upon market and other conditions, as well as upon our cash balances and liquidity, we, our subsidiaries or our affiliates may acquire (and have acquired) our outstanding debt securities or our other indebtedness through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we, our subsidiaries or our affiliates may determine (or as may be provided for in the Indenture, if applicable), for cash or other consideration. In connection with our completed IPO on August 7, 2020, further discussed below, we used a portion of the net proceeds from the offering to repurchase an aggregate $515 million of the principal amount of our outstanding 8.625% Senior Notes and paid related premiums, fees and expenses. See “8.625% Senior Notes” below for more information on repurchases of debt completed during the nine months ended September 30, 2019 and September 30, 2020.
At September 30, 2020, we held $253 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $84 million was held by foreign entities.
We have entered into installment payment arrangements with certain equipment and software vendors, along with sale-leaseback arrangements for equipment and certain property leases that are considered financing obligations. We had $126 million outstanding with respect to these arrangements as of September 30, 2020. We may choose to utilize these various sources of funding in future periods.
We also lease certain equipment and real estate under operating and finance lease agreements. In June 2020, we entered into lease amendments for two of our data centers to, among other items, extend the lease term. Both lease amendments were deemed a lease modification, which resulted in a change of classification from operating leases to finance leases of $220 million. We had $555 million outstanding with respect to operating and finance lease agreements as of September 30, 2020. We may choose to utilize such leasing arrangements in future periods.
As of September 30, 2020, we had $3,408 million aggregate principal amount outstanding under our Term Loan Facility and 8.625% Senior Notes, with $375 million of borrowing capacity available under the Revolving Credit Facility. Additionally, at September 30, 2020, we had $65 million principal outstanding with $3 million in incremental borrowing capacity under the Receivables Financing Facility. Our liquidity requirements are significant, primarily due to debt service requirements.
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On August 7, 2020, we completed the IPO, in which we issued and sold 33,500,000 shares of our common stock at a public offering price of $21.00 per share. We received net proceeds of $667 million from sales of shares in the IPO, after deducting underwriters' discounts and commissions of $37 million, but before deducting offering expenses of $9 million. As noted above, we used a portion of the net proceeds from the IPO to repurchase $515 million aggregate principal amount of our outstanding 8.625% Senior Notes for aggregate cash of $557 million. Substantially all of the remaining net proceeds will be used to redeem $86 million of the outstanding principal balance of the 8.625% Senior Notes on November 16, 2020 at a price of 104.313%, plus accrued and unpaid interest, if any. The remaining amount of net proceeds following the completion of this redemption, if any, will be used for general corporate purposes.
Debt
Senior Facilities
Our First Lien Credit Agreement governs the Term Loan Facility and the Revolving Credit Facility (together, the "Senior Facilities"). The Term Loan Facility matures on November 3, 2023 and the Revolving Credit Facility was originally set to mature on November 3, 2021. On August 7, 2020, we increased the size of the Revolving Credit Facility to $375 million from $225 million and extended the maturity date to August 7, 2025.
As of September 30, 2020, the interest rate on the Term Loan Facility was 4.00%, and the outstanding principal balance was $2,803 million. We are required to make quarterly amortization payments of $7 million per quarter, with the balance due at maturity. We have entered into interest rate swap agreements to manage the interest rate risk associated with interest payments on the Term Loan Facility that result from fluctuations in the LIBOR rate. See Item 1 of Part I, Financial Statements - Note 11, "Derivatives" for more information on the interest rate swap agreements.
The Revolving Credit Facility has historically had an applicable margin of 4.00% for LIBOR loans and 3.00% for base rate loans and is subject to step-downs based on the net first lien leverage ratio. In connection with the amendment to the First Lien Credit Agreement on August 7, 2020, we reduced the applicable margin for the Revolving Credit Facility to 3.00% for LIBOR loans and 2.00% for base rate loans, with a 1.00% LIBOR “floor” applicable to LIBOR loans. The Revolving Credit Facility also includes a commitment fee equal to 0.50% per annum in respect of the unused commitments that is due quarterly. This fee is subject to one step-down based on the net first lien leverage ratio.
In addition to the quarterly amortization payments discussed above, our Senior Facilities require us to make certain mandatory prepayments, including using (i) a portion of annual excess cash flow, as defined in the First Lien Credit Agreement, to prepay the Term Loan Facility, (ii) net cash proceeds of certain non-ordinary assets sales or dispositions of property to prepay the Term Loan Facility and (iii) net cash proceeds of any issuance or incurrence of debt not permitted under the Senior Facilities to prepay the Term Loan Facility. We can make voluntary prepayments at any time without penalty, subject to customary breakage costs.
Rackspace Technology Global, our wholly-owned subsidiary, is the borrower under the Senior Facilities, and all obligations under the Senior Facilities are (i) guaranteed by Inception Parent, Rackspace Technology Global’s immediate parent company, on a limited recourse basis and secured by the equity interests of Rackspace Technology Global held by Inception Parent and (ii) guaranteed by Rackspace Technology Global’s wholly-owned domestic restricted subsidiaries and secured by substantially all material owned assets of Rackspace Technology Global and the subsidiary guarantors, including the equity interests held by each, in each case subject to certain exceptions.
Over the course of the nine months ended September 30, 2020, we borrowed and repaid an aggregate $245 million under the Revolving Credit Facility. As of September 30, 2020, we had no outstanding borrowings under the Revolving Credit Facility.
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8.625% Senior Notes
The 8.625% Senior Notes will mature on November 15, 2024 and bear interest at a fixed rate of 8.625% per year, payable semi-annually on each May 15 and November 15 through maturity. The 8.625% Senior Notes are not subject to registration rights.
Rackspace Technology Global is the issuer of the 8.625% Senior Notes, and obligations under the 8.625% Senior Notes are guaranteed on a senior unsecured basis by all of Rackspace Technology Global’s wholly-owned domestic restricted subsidiaries (as subsidiary guarantors) that guarantee the Senior Facilities. The 8.625% Senior Notes are effectively junior to the indebtedness under the Senior Facilities, to the extent of the collateral securing the Senior Facilities. The Indenture describes certain terms and conditions under which other current and future domestic subsidiaries are required to become guarantors of the 8.625% Senior Notes.
Rackspace Technology Global may redeem the 8.625% Senior Notes at its option, in whole at any time or in part from time to time, at the following redemption prices: prior to November 15, 2020, at a redemption price equal to 106.469% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date; from November 15, 2020 to November 15, 2021, at a redemption price equal to 104.313% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date; from November 15, 2021 to November 15, 2022, at a redemption price equal to 102.156% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date; and from November 15, 2022 and thereafter, at a redemption price equal to 100.000% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date.
During the nine months ended September 30, 2019, we repurchased and surrendered for cancellation $74 million aggregate principal amount of 8.625% Senior Notes for $64 million, including accrued interest of $1 million and excluding related fees and expenses.
On August 12, 2020, Rackspace Technology Global commenced a tender offer to purchase for cash up to $600 million aggregate principal amount of the 8.625% Senior Notes. Prior to the expiration of the tender offer, holders of the 8.625% Senior Notes had validly tendered $515 million aggregate principal amount of the 8.625% Senior Notes. Rackspace Technology Global repurchased the tendered 8.625% Senior Notes for aggregate cash of $557 million, which reflected a price of 105.75% of the principal amount thereof, plus accrued and unpaid interest. Following the repurchases, Rackspace Technology Global canceled $515 million of the 8.625% Senior Notes.
The outstanding principal balance of the 8.625% Senior Notes was $605 million as of September 30, 2020.
Debt covenants
Our Term Loan Facility is not subject to a financial maintenance covenant. As of September 30, 2020, our Revolving Credit Facility included a financial maintenance covenant that limits the borrower's net first lien leverage ratio to a maximum of 5.00 to 1.00. This ratio was modified from the historical 3.50 to 1.00 ratio on August 7, 2020 in the amendment of the First Lien Credit Agreement. The net first lien leverage ratio is calculated as the ratio of (x) the total amount of the borrower’s first lien debt for borrowed money (which is currently identical to the total amount outstanding under the Senior Facilities), less the borrower’s unrestricted cash and cash equivalents, to (y) consolidated EBITDA (as defined under the First Lien Credit Agreement governing the Senior Facilities). However, this financial maintenance covenant will only be applicable and tested if the aggregate amount of outstanding borrowings under the Revolving Credit Facility and letters of credit issued thereunder (excluding $25 million of undrawn letters of credit and cash collateralized letters of credit) as of the last day of a fiscal quarter is equal to or greater than 35% of the Revolving Credit Facility commitments as of the last day of such fiscal quarter. Additional covenants in the Senior Facilities limit our subsidiaries' ability to, among other things, incur certain additional debt and liens, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates.
The Indenture contains covenants that, among other things, limit our subsidiaries' ability to incur certain additional debt, incur certain liens securing debt, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates.
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Our “consolidated EBITDA,” as defined under our debt instruments, is calculated in the same manner as our Adjusted EBITDA, presented elsewhere in this report, except that our debt instruments allow us to adjust for additional items, including certain start-up costs, and to give pro forma effect to acquisitions, including resulting synergies, and internal cost savings initiatives. In addition, under the Indenture, the calculation of consolidated EBITDA does not take into account substantially any changes in GAAP subsequent to the date of issuance, whereas under the Senior Facilities the calculation of consolidated EBITDA takes into account the impact of certain changes in GAAP subsequent to the original closing date other than with respect to capital leases.
As of September 30, 2020, we were in compliance with all covenants under the Senior Facilities and the Indenture.
Receivables Financing Facility
On March 19, 2020, Rackspace US, Inc. (“Rackspace US”), a Delaware corporation and our wholly-owned indirect subsidiary, entered into the Receivables Financing Facility. Under the Receivables Financing Facility, (i) certain of our subsidiaries sell or otherwise convey certain trade receivables and related rights (the “Conveyed Receivables”) to Rackspace US and (ii) Rackspace US then sells, contributes or otherwise conveys certain Conveyed Receivables to our wholly owned bankruptcy-remote subsidiary (the “SPV”).
The SPV may thereafter make borrowings from the lenders under the Receivables Financing Facility, which borrowings will be secured by the Conveyed Receivables. An affiliate of the administrative agent under the Receivables Financing Facility, in its capacity as a lender, has committed an amount up to $100 million under the Receivables Financing Facility. Rackspace US services and administers the Conveyed Receivables on behalf of the SPV. Rackspace Technology Global provides a performance guaranty to the administrative agent on behalf of the secured parties in respect of the obligations of the subsidiaries originating the receivables and Rackspace US, as servicer, including, without limitation, obligations to pay the purchase price and indemnity obligations.
The scheduled termination date of the Receivables Financing Facility is March 21, 2022, subject to earlier termination due to a termination event described in the agreement governing the Receivables Financing Facility.
Advances bear interest based on an index rate plus a margin. As of September 30, 2020, the interest rate on borrowings under the Receivables Financing Facility was 2.50%. The SPV is also required to pay a monthly commitment fee to each lender based on the amount of such lender’s outstanding commitment. The Receivables Financing Facility contains representations and warranties, affirmative and negative covenants and events of default that are customary for financings of this type.
As of September 30, 2020, our total borrowing capacity under the Receivables Financing Facility was $68 million and $65 million was borrowed and outstanding. The Receivables Financing Facility requires us to comply with a leverage ratio and an interest coverage ratio. We were in compliance with all applicable covenants under the Receivables Financing Facility as of September 30, 2020.
Capital Expenditures
The following table sets forth a summary of our capital expenditures for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| (In millions) | 2019 | 2020 | |||||||||
| Customer gear | $ | 94.8 | $ | 105.0 | |||||||
| Data center build outs | 4.8 | 13.2 | |||||||||
| Office build outs | 4.1 | 2.5 | |||||||||
| Capitalized software and other projects | 48.3 | 53.4 | |||||||||
| Total capital expenditures | $ | 152.0 | $ | 174.1 | |||||||
Capital expenditures were $174 million in the nine months ended September 30, 2020, compared to $152 million in the nine months ended September 30, 2019, an increase of $22 million. The majority of the increase is due to higher success-based spend to deploy customer environments and the refresh of certain data center equipment within our normal maintenance cycle.
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Cash Flows
The following table sets forth a summary of certain cash flow information for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| (In millions) | 2019 | 2020 | |||||||||
| Cash provided by operating activities | $ | 191.7 | $ | 132.7 | |||||||
| Cash used in investing activities | $ | (132.3) | $ | (92.2) | |||||||
| Cash provided by (used in) financing activities | $ | (123.6) | $ | 128.5 | |||||||
Cash Provided by Operating Activities
Net cash provided by operating activities results primarily from cash received from customers, offset by cash payments made for employee and consultant compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), data center costs, license costs, third-party infrastructure costs, marketing programs, interest, taxes, and other general corporate expenditures.
Net cash provided by operating activities decreased $59 million, or 31%, from the first nine months of 2019 compared to the first nine months of 2020. This decrease was due to a $242 million increase in operating expense payments, largely for third-party infrastructure costs, and a $36 million increase in employee-related payments, both mainly reflecting the impact of the Onica acquisition. These variances were partially offset by a $213 million increase in cash collections, primarily reflecting higher revenue levels resulting from the acquisition of Onica, and a $19 million decrease in obligations to settle share-based awards in connection with the Rackspace Acquisition, as the final payment was made during the three months ended March 31, 2019.
Cash Used in Investing Activities
Net cash used in investing activities primarily consists of capital expenditures to meet the demands of our customer base and our strategic initiatives. The largest outlays of cash are for purchases of customer gear, data center and office build-outs, and capitalized payroll costs related to internal-use software development.
Net cash used in investing activities decreased $40 million, or 30%, from the first nine months of 2019 compared to the first nine months of 2020. This change was mainly due to a $56 million decrease in cash purchases of property, equipment and software, as we increased our usage of financing arrangements in place of upfront cash payments to procure capital assets. The impact of this decrease was partially offset by the receipt of $17 million in proceeds during the first nine months of 2019 related to the repayment of a promissory note receivable in conjunction with the 2017 sale of our Mailgun business.
Cash Provided by or Used in Financing Activities
Financing activities generally include cash activity related to debt and other long-term financing arrangements (for example, finance lease obligations and financing obligations), including proceeds from and repayments of borrowings, and cash activity related to the issuance and repurchase of equity.
Net cash used in financing activities was $124 million for the first nine months of 2019 and net cash provided by financing activities was $129 million for first nine months of 2020. The change was primarily driven by proceeds of $667 million from the issuance of common stock in the IPO, not including $8 million in fees paid, and borrowings of $65 million under the Receivables Financing Facility, which remained outstanding at September 30, 2020. These cash inflows were partially offset by an increase in 8.625% Senior Notes repurchases of $482 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
Contractual Obligations
During the nine months ended September 30, 2020, we entered into contractual obligations of $196 million related to operating and finance lease arrangements and $65 million for borrowings under our Receivables Financing Facility.
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Off-Balance Sheet Arrangements
During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. These entities are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have entered into various indemnification arrangements with third parties, including vendors, customers, landlords, our officers and directors, stockholders of acquired companies and third parties to whom and from whom we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by third parties due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. Certain of these agreements require us to indemnify the other party against certain claims relating to property damage, personal injury or the acts or omissions by us, our employees, agents or representatives. These indemnification obligations are considered off-balance sheet arrangements. To date, we have not incurred material costs as a result of such obligations and have not accrued any material liabilities related to such indemnification obligations in our consolidated financial statements.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates have not changed from those described in our Prospectus, under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates." For a description of accounting pronouncements recently adopted and issued, see Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies."
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Power Prices
We are a large consumer of power. In the nine months ended September 30, 2020, we expensed approximately $31 million that was paid to utility companies to power our data centers, representing approximately 2% of our revenue. Power costs vary by geography, the source of power generation and seasonal fluctuations and are subject to certain proposed legislation that may increase our exposure to increased power costs. We have fixed price power contracts for data centers in the Dallas-Fort Worth, San Jose and London areas that allow us to procure power either on a fixed price or on a variable price basis.
Interest Rates
We are exposed to interest rate risk associated with fluctuations in interest rates on our floating-rate debt under our Senior Facilities, which includes our $375 million Revolving Credit Facility and $2,803 million outstanding under the Term Loan Facility, and under our $68 million Receivables Financing Facility. As of September 30, 2020, there were no outstanding borrowings under the Revolving Credit Facility and therefore our only variable-rate debt outstanding was the $2,803 million outstanding under the Term Loan Facility and $65 million outstanding under the Receivables Financing Facility. As of September 30, 2020, assuming the Revolving Credit Facility and Receivables Financing Facility were fully drawn, each 0.125% change in assumed blended interest rates would result in a $4 million change in annual interest expense on indebtedness under the Senior Facilities and the Receivables Financing Facility.
In December 2016, we entered into seven floating-to-fixed interest rate swap agreements to manage our risk from interest rate fluctuations associated with our floating-rate Term Loan Facility. The remaining three swap agreements in effect as of September 30, 2020 have an aggregate notional amount of $1.05 billion and mature over the next two years. On a quarterly basis, we net settle with the counterparty for the difference between the fixed rate specified in each swap agreement, ranging from 1.7625% to 1.9040%, and the variable rate based upon the three-month LIBOR as applied to the notional amount of the swap.
In December 2018, we entered into four additional floating-to-fixed interest rate swap agreements with an aggregate notional amount of $1.35 billion and a maturity date of November 3, 2023. These swap agreements are forward-starting, and as of September 30, 2020, two swaps agreements, with an aggregate notional amount of $300 million, were effective. The remaining swap agreements become effective each year thereafter to coincide with the maturity dates of the outstanding December 2016 swap agreements. On a quarterly basis, we net settle with the counterparty for the difference between the fixed rate specified in each swap agreement, ranging from 2.7350% to 2.7490%, and the variable rate based upon the three-month LIBOR as applied to the notional amount of the swap.
Foreign Currencies
We are subject to foreign currency translation risk due to the translation of the results of our subsidiaries from their respective functional currencies to the U.S. dollar, our functional currency. As a result, we discuss our revenue on a constant currency as well as actual basis, highlighting our sensitivity to changes in foreign exchange rates. See “Constant Currency Revenue.” While the majority of our customers are invoiced, and the majority of our expenses are paid, by us or our subsidiaries in their respective functional currencies, we also have exposure to foreign currency transaction gains and losses as the result of certain receivables due from our foreign subsidiaries. As such, the results of operations and cash flows of our foreign subsidiaries are subject to fluctuations in foreign currency exchange rates. In the nine months ended September 30, 2020, we recognized foreign currency transaction losses of $0.4 million within “Other income (expense), net” in our Consolidated Statements of Comprehensive Loss. As we grow our international operations, our exposure to foreign currency translation and transaction risk could become more significant.
We have in the past and may in the future enter into foreign currency hedging instruments to limit our exposure to foreign currency risk.
In November 2018, we entered into one foreign currency forward contract. Under the terms of the contract, we sold £75 million at a rate of 1.3002 British pound sterling to U.S. dollar and received $97.5 million. This contract settled on November 29, 2019 and we received a final net payment of $0.8 million.
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In November 2019, we entered into two foreign currency net-zero cost collar contracts with an aggregate notional amount of £100 million and a maturity date of November 30, 2020. Under the terms of the contracts, the British pound sterling to U.S. dollar exchange rate floats between 1.2375 and 1.3475. On March 26, 2020, we settled one of these contracts, with an aggregate notional amount of £50 million, and we received a final net payment of $1.9 million.
In March 2020, we entered into three foreign currency forward contracts to manage our exposure to movements in the British pound sterling, Euro and Mexican peso. All three contracts settled on June 30, 2020, and we made a final net payment of $1.7 million resulting from the following:
•We sold £32 million at a rate of 1.1902 British pound to U.S. dollar and received $38.1 million.
•We sold €6 million at a rate of 1.0921 Euro to U.S. dollar and received $6.6 million.
•We sold $2.1 million at a rate of 24.2040 U.S. dollar to Mexican peso and received Mex$50 million.
In June 2020, we entered into three foreign currency forward contracts to manage our exposure to movements in the British pound sterling, Euro and Mexican peso. All three contracts settled on September 30, 2020 and we made a final net payment of $1.6 million resulting from the following:
•We sold £32 million at a rate of 1.24095 British pound to U.S. dollar and received $39.7 million.
•We sold €6 million at a rate of 1.1241 Euro to U.S. dollar and received $6.7 million.
•We sold $2.2 million at a rate of 23.0330 U.S. dollar to Mexican peso and received Mex$50 million.
In September 2020, we entered into three foreign currency forward contracts to manage our exposure to movements in the British pound sterling, Euro and Mexican peso. All three contracts have a maturity date of December 31, 2020. On the maturity date, the following will occur:
•We will sell £32 million at a rate of 1.28495 British pound to U.S. dollar and receive $41.1 million.
•We will sell €6 million at a rate of 1.1684 Euro to U.S. dollar and receive $7.0 million.
•We will sell $2.2 million at a rate of 22.8340 U.S. dollar to Mexican peso and receive Mex$50 million.
See Item 1 of Part I, Financial Statements - Note 11, "Derivatives," for more information on interest rate swaps and foreign currency hedging contracts.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, as of the end of the period covered by this Quarterly Report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control
There were no changes in our internal controls over financial reporting during our most recent fiscal quarter reporting period identified in connection with management’s evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
We have contingencies resulting from various litigation, claims and commitments. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. The amount that will ultimately be paid related to these matters may differ from the recorded accruals, and the timing of such payments is uncertain.
From time to time we may be subject to various legal proceedings arising in the ordinary course of business. In addition, from time to time, third parties may bring intellectual property claims against us asserting that certain of our offerings, services and technologies infringe, misappropriate or otherwise violate the intellectual property or proprietary rights of others.
We cannot predict the impact, if any, that any of the matters described above may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in many of them, we cannot estimate the range of possible losses from them.
ITEM 1A – RISK FACTORS
We have disclosed under the heading “Risk Factors” in our Registration Statement on Form S-1 (File No. 333-239794 ), as amended, the risk factors which materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the Registration Statement and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
From January 1, 2020 through August 5, 2020 (the date of the filing of our Registration Statement on Form S-8, File No. 333-240498):
•We granted to our directors, officers, employees, consultants, and other service providers options to purchase 8,162,772, shares of our common stock with per share exercise prices ranging from $11.41 to $13.62 under the Rackspace Technology, Inc. Equity Incentive Plan (the “2017 Incentive Plan”).
•We issued to our directors, employees, consultants and other service providers an aggregate of 72,768 shares of our common stock at a per share purchase price ranging from $8.33 to $15.54 pursuant to exercises of options granted under the 2017 Incentive Plan.
•We granted to our directors and employees restricted stock units (“RSUs”) for an aggregate of 6,564 shares of our common stock under the 2017 Incentive Plan.
•Our directors and employees received an aggregate of 86,364 shares of our common stock upon the vesting of RSUs under the 2017 Incentive Plan.
•We granted to our directors restricted stock awards (“RSAs”) for an aggregate of 27,492 shares of our common stock under the 2017 Incentive Plan.
•Our directors received an aggregate of 17,460 shares of our common stock upon the vesting of RSAs under the 2017 Incentive Plan.
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The offers, sales and issuances of the securities described in the immediately preceding section were deemed to be exempt from registration either under Rule 701 promulgated under the Securities Act, in that the transactions were under compensatory benefit plans and contracts relating to compensation, or under Section 4(a)(2) in that the transactions were by an issuer and did not involve any public offering within the meaning of Section 4(a)(2). The recipients of such securities were our employees, directors, consultants or other service providers and received the securities under the 2017 Incentive Plan.
In connection with the Stock Split on July 20, 2020, we issued approximately 151,760,933 shares of common stock.
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering. All recipients had adequate access, through their relationships with us, to information about us. The offers, sales and issuances of these securities were made without any general solicitation or advertising.
Use of Proceeds
On August 7, 2020, we completed the IPO, in which we issued and sold 33,500,000 shares of our common stock at a public offering price of $21.00 per share, for an aggregate offering price of $703.5 million. All shares in the IPO were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-239794), which was declared effective by the SEC on August 4, 2020. The managing underwriters of our IPO were Goldman Sachs & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC. We incurred underwriting discounts and commissions of $36.9 million and offering expenses of $8.8 million. Thus, our net offering proceeds, after deducting underwriting discounts and commissions and other offering costs, was $657.8 million. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or any affiliates.
The net proceeds from the IPO were contributed by us as capital contributions indirectly through our subsidiaries to Rackspace Technology Global. We used a portion of the net proceeds from the IPO to repurchase and cancel $515.0 million aggregate principal amount of our outstanding 8.625% Senior Notes. Substantially all of the remaining net proceeds will be used to redeem $86.0 million of the outstanding principal balance of the 8.625% Senior Notes on November 16, 2020 at a price of 104.313%, plus accrued and unpaid interest, if any. The remaining amount of net proceeds following the completion of this redemption, if any, will be used for general corporate purposes.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5 – OTHER INFORMATION
None.
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ITEM 6 – EXHIBITS
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RACKSPACE TECHNOLOGY, INC. | ||||||||||||||
| Date: | November 10, 2020 | By: | /s/ Dustin Semach | |||||||||||
| Dustin Semach | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
| (Principal Financial and Accounting Officer) | ||||||||||||||
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