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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-26 · 340 added, 366 removed, 502 unchanged (58% of the section changed)

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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 audited consolidated financial statements and the related notes included elsewhere in this Annual Report.

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 that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions and forecasts.

The following 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 audited consolidated financial statements and the related notes included elsewhere in this Annual Report.

References to “Rackspace Technology,” “we,” “our company,” “the company,” “us,” or “our” refer to Rackspace Technology and its consolidated subsidiaries.

The following discussion contains forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions and forecasts.

Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of several factors, including those set forth under the section of this Annual Report titled “Risk Factors” and elsewhere in this Annual Report.

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We serve our customers with a unique combination of proprietary technology resulting from over $1 billion of investment and services expertise from a team of highly skilled consultants and engineers.

And we provide our customers with unbiased expertise and technology solutions, delivered over the world’s leading cloud services, all wrapped in a Fanatical Experience.

And we provide our customers with unbiased expertise and technology solutions, delivered over the world’s leading cloud services, all wrapped in Fanatical Customer Experience.

We aim to be our customers’ most trusted advisor and services partner in their path to cloud transformation and to accelerate the value of their cloud investments.

We give customers the ability to make fluid decisions when choosing the right technologies, and we recommend solutions based on customers’ unique objectives and workloads, irrespective of the underlying technology stack or deployment option.

In this way, we empower our customers to harness the strength of the cloud.

Our customers are served by a family of approximately 7,200 Rackers, including some of the most qualified architects and engineers in the world.

Our Rackers are at the center of the customer experience — they maintain a hyper-focus on customer experience and satisfaction and are available to our customers 24x7x365 by phone, chat, email or web portal.

We give customers the ability to make fluid decisions when choosing the right technologies, and we recommend solutions based on customers’ unique objectives.

In this way, we empower our customers to harness the full benefits of cloud adoption.

Our team of 6,600 highly skilled Rackers, including consultants and engineers, partners with companies at every stage of their cloud transformation journey

We deliver our services to a global customer base through an integrated service delivery model.

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This footprint allows us to better serve customers based in various countries, especially multinational companies requiring cross-border solutions.

We have a strong presence with customers of all sizes, including large global enterprises, mid-market businesses and SMBs, which we define to be made up of customers with total revenue in excess of $1 billion, between $300 million and $1 billion and less than $300 million, respectively.

As of December 31, 2020, our customer base included over 1,000 enterprises, over 1,000 mid-market businesses and over 114,000 SMBs.

On November 3, 2016, Rackspace Hosting, Inc.

(now named Rackspace Technology Global, Inc., or “Rackspace Technology Global”) was acquired by Inception Parent, Inc., an indirect wholly-owned subsidiary of the company (“Inception Parent”).

Pursuant to the Merger Agreement, dated as of August 26, 2016, Rackspace Technology Global merged with a wholly-owned subsidiary of Inception Parent, with Rackspace Technology Global surviving as a wholly-owned subsidiary of Inception Parent (the "Rackspace Acquisition").

Since the Rackspace Acquisition, we have made significant changes to our business model, including through acquisitions, divestitures, corporate transformation initiatives and significant investments to adapt to changing customer needs and competitive market dynamics.

See Item 1 of Part I, Business, - Overview - "Our Transformation."

We have a strong presence with customers of all sizes, including enterprise businesses (revenue in excess of $3 billion), mid-market businesses (revenue of $300 million to $3 billion) and commercial customers (revenue less than $300 million).

On November 3, 2016, Rackspace Hosting (now named Rackspace Technology Global) was acquired by Inception Parent, an indirect wholly-owned subsidiary of the company.

Pursuant to the merger agreement, dated as of August 26, 2016, Rackspace Technology Global merged with a wholly-owned subsidiary of Inception Parent, with Rackspace Technology Global surviving as a wholly-owned subsidiary of Inception Parent.

We operate our business and report our results through three reportable segments:

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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.

Contracts for these arrangements typically operate on a consumption model and can be canceled at any time without penalty.

We sell our services through direct sales teams, third-party channel partners and via online orders.

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We offer customers the flexibility to select the best combination of resources in order to meet the requirements of their unique applications and provide the technology to seamlessly operate and manage multiple cloud computing environments.

On May 14, 2018, we acquired 100% of RelationEdge, LLC ("RelationEdge"), a full-service Salesforce Platinum Consulting Partner and digital agency that helps clients engage with their customers from lead to loyalty by improving business processes, leveraging technology and integrating creative digital marketing, for net cash consideration of $65 million, with a majority of the purchase price allocated to goodwill.

RelationEdge was integrated into our Apps & Cross Platform segment and contributed $16 million in revenue to our results in 2018 for the seven and a half months following its acquisition.

RelationEdge’s results of operations subsequent to the May 14, 2018 acquisition date are included in the accompanying consolidated financial statements.

On November 15, 2019, we acquired 100% of Onica, an AWS managed service provider of cloud-native consulting and managed services, including strategic advisory, architecture and engineering and application development services, for net cash consideration of $316 million, of which $62 million was allocated to amortizable intangible assets.

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Onica’s results of operations subsequent to the November 15, 2019 acquisition date are included in the accompanying consolidated financial statements.

Refer to Item 8 of Part II, Financial Statements and Supplementary Data - Note 15, "Acquisitions" for more detail of these acquisitions.

Refer to Item 8 of Part II, Financial Statements and Supplementary Data - Note 16, "Acquisitions" for more detail on this acquisition.

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 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 8 of Part II, Financial Statements and Supplementary Data - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies."

On July 21, 2021, we committed to the July 2021 Restructuring Plan which will drive a change in the type and location of certain positions and is expected to result in the termination of approximately 10% of our workforce.

We recorded total charges of $50.5 million for the year ended December 31, 2021 related to this restructuring plan.

This included $25.4 million for employee related costs and other costs accounted for as exit and disposal costs under ASC 420 as described in Item 8 of Part II, Financial Statements and Supplementary Data - Note 11, "July 2021 Restructuring Plan." Employee related costs consisted primarily of one-time termination benefits and certain contractual termination benefits with executives.

Other costs consisted of professional fees, asset write-offs and the impact of a contract termination with a third-party.

The remaining $25.1 million of expenses consisted primarily of one-time offshore build out costs.

We expect to incur additional expenses of approximately $15 million over the next 12 months.

After the July 2021 Restructuring Plan is implemented, we expect to realize approximately $95 to $100 million in gross annual savings compared to expense levels prior to the commencement of the plan.

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.

The outbreak of a novel strain of coronavirus, referred to as COVID-19, has spread globally, including within the U.S.

and resulted in the World Health Organization declaring the outbreak a "pandemic" in March 2020, with variant strains of the virus continuing to be identified globally.

The effects of COVID-19 and its variants continue to evolve, and the full impact and duration of the virus are unknown.

Managing COVID-19 has severely impacted 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 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.

Impact of Accounting Change on Results of Operations

We adopted Accounting Standard Codification (“ASC”) No.

606 (Revenue from Contracts with Customers) as of January 1, 2019 using the full retrospective method, which required us to restate each prior period presented.

As the consolidated financial statements prior to the Rackspace Acquisition date were presented on a different accounting basis than the consolidated financial statements subsequent to the Rackspace Acquisition, ASC 606 was only applied to the periods subsequent to the Rackspace Acquisition date.

Our results reflect the impact of the transition on our balance sheet as of January 1, 2018, the earliest period presented, and retrospective adjustments to our consolidated statements of operations and cash flows for the year ended December 31, 2018.

The most significant impact of the adoption of ASC 606 on our results of operations is related to the capitalization of costs to obtain and fulfill a contract with a customer, such as sales commissions and implementation and set up related expenses, and their amortization over the period the related services are delivered to customers, whereas under previous guidance we expensed such costs as they were incurred.

As a result, our loss before income taxes and Adjusted EBITDA were both positively impacted by $32.8 million, $4.9 million and $7.9 million in 2018, 2019 and 2020, respectively.

We also adopted ASC No.

842 (Leases) as of January 1, 2019 using the modified retrospective method, recording the impact of the transition on our balance sheet as of January 1, 2019.

The impact of our adoption of ASC 842 resulted in a positive $1.9 million and $3.4 million impact on our loss before income taxes for the years ended 2019 and 2020, respectively, and a negative $8.9 million and $3.1 million impact on our Adjusted EBITDA for the years ended 2019 and 2020, respectively.

See “ Non-GAAP Financial Measures ” below for our presentation and reconciliation of Adjusted EBITDA.

The effects of COVID-19 and its variants and the response to the virus have negatively impacted overall economic conditions.

To date, COVID-19 and its variants have not adversely affected our results of operations or financial condition in any material respect;

however, the ultimate extent of the impact of COVID-19 and its variants on our operational and financial performance will depend on certain developments, including the duration and severity of the outbreak, the pace of economic recovery, the possible resurgence in the spread of the virus or any variant strain(s) of the virus, advances in testing, treatment, and prevention, including the efficacy and availability of vaccines, 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 worsens or the global economic recovery slows, 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.

We continue to focus on the health and safety of our employees, customers and partners and, among other things, have implemented a work-from-home policy and are limiting contact between our employees and customers while continuing to deliver Fanatical Customer Experience.

To date, the impact on our business has been limited

as most of our services were, even before the pandemic, being delivered remotely or capable of being delivered remotely and we have a diverse customer base.

The full extent to which COVID-19 and its variants 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 and its variants may not be fully reflected in our results of operations until future periods, if at all.

Key Factors Affecting Our Performance

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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, 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.

We are a certified premier consulting and managed services partner to some of the largest cloud computing platforms, including AWS, Microsoft Azure, Google Cloud, Oracle, SAP and VMware.

We believe we are unique in our ability to serve customers across major technology stacks and deployment options, all while delivering Fanatical Customer Experience.

Our existing and prospective customers are also under increasing pressure to move from on-premise or self-managed IT to the cloud to compete effectively in a digital economy and maximize the value of their cloud investments, which we believe presents an opportunity for professional services projects as well as new recurring business.

See Item 1 of Part I, Business, - Overview - "Our Transformation."

Annualized Recurring Revenue (“ARR”), which we believe is an important indicator of our market differentiation and future revenue opportunity from recurring customer contracts, was $2,374.3 million, $2,411.6 million and $2,711.1 million for the years ended December 31, 2018, 2019 and 2020, respectively.

See “ Key Operating Metrics .” We also believe that many of our prospective customers will need external support for their cloud transformations, which are non-recurring projects excluded from ARR provided through our professional services, and that our hybrid, platform-neutral approach, and ability to deliver a Fanatical Experience to customers, will continue to be key to our success in attracting and retaining customers over time.

ARR, which we believe is an important indicator of our market differentiation and future revenue opportunity from recurring customer contracts, was $2,411.6 million, $2,711.1 million and $2,984.9 million for the years ended December 31, 2019, 2020 and 2021, respectively.

See “ Key Operating Metrics .” We also believe that many of our prospective customers will need external support for their cloud transformations, which are non-recurring projects excluded from ARR provided through our professional services, and that our hybrid, platform-neutral approach, and ability to deliver Fanatical Customer Experience to customers, will continue to be key to our success in attracting and retaining customers over time.

Customer Relationships and Retention

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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.

For example, we believe that the Rackspace Fabric provides customers a unified experience across their entire cloud and security footprint, and that our Rackspace Elastic Engineering model, announced in April 2021, helps customers embrace a cloud native approach with on-demand access to a dedicated team of highly skilled cloud architects and engineers.

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.

Business Mix Shift

The mix of revenue within our Multicloud Services segment has shifted in recent years, from mature offerings such as managed hosting and colocation to managed public cloud services.

Since the mature offerings are hosted on our own infrastructure, these offerings carry a higher gross margin, but also a higher burden on the company for operating expenses and capital expenditures.

Conversely, as managed public cloud services are hosted on third-party infrastructure, these services carry a lower gross margin, but also a correspondingly lower operating expense and capital expenditure burdens.

As a result, despite the difference in gross margins between the mature offerings and the growth offerings, the operating margins for the different classes of offerings is relatively similar.

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.

In recent years, the mix of our consolidated 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 managed 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 managed public cloud 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 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%, 8% and 7% of our revenue for the years ended December 31, 2019 2020 and 2021, respectively.

While there is some variability in capital expenditures from quarter to quarter due to timing of purchases, we expect to maintain current capital intensity levels over the longer term.

Business Transformation

Since the Rackspace Acquisition, we have invested in multiple high growth service offerings, including multicloud services, professional services, managed security and data services.

In this process, we established one of the broadest partner ecosystems across the technology industry.

We have also invested heavily in proprietary technology and automation tools for both us and our customers.

We invested in a professional services-driven go-to-market, providing holistic multicloud solutions to meet our customers’ objectives which aim to evolve those solutions over the full lifecycle of their cloud journey.

Several experienced professionals joined our management team in mid-2019, including Kevin Jones (CEO) and Subroto Mukerji (COO).

In October 2020, we announced the hiring of our new CFO, Amar Maletira.

Our efforts have enabled us to improve our underlying operating cost efficiencies and expand our revenue opportunities.

This transformation has benefited our financial model as well.

Today, we benefit from a subscription-based model (including both long-term and month-to-month subscriptions) that accounted for 95% of our revenue in 2020.

Over 90% of our revenue in 2020 came from our Core Segments, which we expect to continue to drive our growth.

For example, on a constant currency basis, assuming the RelationEdge and Onica acquisitions were consummated on January 1, 2018, we estimate that our constant currency Core Revenue would have increased by 9% in 2020 compared to 2019, and by 5% in 2019 compared to 2018.

Additionally, our capital intensity, which we define as total capital expenditures as a percentage of total revenue, has decreased from 16% for the twelve months ended September 30, 2016, to 8% for the year ended December 31, 2020.

While there is some variability in capital expenditures from quarter to quarter due to timing of purchases, we expect to maintain or lower current capital intensity levels over the longer term.

Mergers and Acquisitions

We have completed and substantially integrated four acquisitions since 2017, including Onica, an AWS cloud services company that we acquired in the fourth quarter of 2019.

We have completed and substantially integrated five acquisitions since 2017, including Onica, an AWS cloud services company that we acquired in the fourth quarter of 2019.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 16, "Acquisitions." We routinely evaluate potential acquisitions that align with our growth strategy.

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Additionally, our acquired businesses or assets may not perform as we expect, which could adversely affect our results of operations.

Human Capital

Our ability to be successful and to execute on our strategies depends on our ability to hire and retain qualified employees.

Like others in our industry, we are realizing higher than historical levels of voluntary attrition.

As a result, we are accelerating our best shoring efforts and expanding the geographic reach of our recruiting pool.

The company continues to enhance and develop programs to attract, retain and develop top talent.

Key Operating Metrics

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Bookings $ 700.7 $ 1,126.1 $ 1,030.5

Annualized Recurring Revenue (ARR) $ 2,374.3 $ 2,411.6 $ 2,711.1

2018 2019 2020

Core Quarterly Net Revenue Retention Rate

First Quarter 100 % 99 % 98 %

Second Quarter 99 % 98 % 99 %

Third Quarter 99 % 99 % 100 %

Fourth Quarter 99 % 98 % 101 %

Quarterly Net Revenue Retention Rate

First Quarter 98 % 98 % 98 %

Second Quarter 98 % 98 % 98 %

Third Quarter 98 % 99 % 100 %

Fourth Quarter 98 % 98 % 100 %

Annualized Recurring Revenue $ 2,411.6 $ 2,711.1 $ 2,984.9

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.

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Our Bookings were $700.7 million, $1,126.1 million and $1,030.5 million for the years ended December 31, 2019, 2020 and 2021, respectively.

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.

The decrease in Bookings from 2020 to 2021 is the result of the company’s focus in 2021 on growing revenue and profitability with the new customers onboarded in 2019 and 2020.

Sales activities were previously heavily weighted towards new customer acquisition, and in particular infrastructure sales, which drives higher dollar bookings.

While we continue to acquire new customers, we also aim to deepen relationships with these customers through high-margin services bookings.

In addition, we are investing in initiatives to drive sales productivity improvements.

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.

We calculate 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.

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Our ARR was $2,411.6 million, $2,711.1 million and $2,984.9 million for the years ended December 31, 2019, 2020 and 2021, 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 Annual Report, 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.”

Key Components of Statement of Operations

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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.

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 monthly 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.

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Cost of revenue

Cost of revenue consists primarily of usage charges for third-party infrastructure, 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 software license costs and utilities.

Cost of revenue consists primarily of usage charges for third-party 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 depreciation of servers, software and other systems infrastructure, data center rent and other infrastructure maintenance and support costs, including 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.

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.

Selling, general and administrative expenses

SG&A 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 R&D 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.

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 .

Employee related costs and other costs incurred, as discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 11, " July 2021 Restructuring Plan, " are also included within SG&A.

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.

however, we also expect certain of our other recurring SG&A costs to increase due to the expansion of accounting, legal, investor relations and other functions, incremental insurance coverage and other services needed to operate as a public company.

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.

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Selling, general and administrative expenses (959.7) (35.4) % (906.8) (30.1) % 52.9 (5.5) %

Gain on sale 2.1 0.1 % — — % (2.1) (100.0) %

Income from operations 101.6 4.2 % 24.7 0.9 % (76.9) (75.7) %

Impairment of goodwill — — % (52.4) (1.7) % (52.4) 100.0 %

Gain on sale of land — — % 19.9 0.7 % 19.9 100.0 %

Income (loss) from operations 24.7 0.9 % (2.5) (0.1) % (27.2) NM

Other income (expense):

Interest expense (268.4) (9.9) % (205.1) (6.8) % 63.3 (23.6) %

Gain on investments, net 99.5 4.1 % 0.7 0.0 % (98.8) (99.3) %

Gain (loss) on extinguishment of debt 9.8 0.4 % (71.5) (2.6) % (81.3) NM

Gain (loss) on investments, net 0.7 0.0 % (3.0) (0.1) % (3.7) NM

Debt modification costs and extinguishment loss (71.5) (2.6) % (37.5) (1.2) % 34.0 (47.6) %

Other income (expense), net 2.5 0.1 % (1.0) (0.0) % (3.5) NM

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Loss before income taxes (312.0) (11.5) % (249.1) (8.3) % 62.9 (20.2) %

Benefit for income taxes 20.0 0.8 % 66.2 2.4 % 46.2 NM

Benefit for income taxes 66.2 2.4 % 30.8 1.0 % (35.4) (53.5) %

Net loss $ (245.8) (9.1) % $ (218.3) (7.3) % $ 27.5 (11.2) %

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Revenue increased $302 million, or 11.2%, to $3,010 million in 2021 from $2,707 million in 2020.

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.

Revenue was positively impacted by new customer acquisition and growing customer spend in our Multicloud Services and Apps & Cross Platform segments, as discussed below.

After re moving the impact from foreign currency fluctuations, on a constant currency basis, revenue increased 10.1% year-over-year.

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 6.0% year-over-year.

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:

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(1) Refer to " Non-GAAP Financial Measures " in this section for further explanation and reconciliation.

Multicloud Services revenue in 2020 increased 17%, on an actual and constant currency basis, from 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.

Apps & Cross Platform revenue in 2020 increased 5%, on an actual and constant currency basis, from 2019 , due to growth in our offerings for management of productivity and collaboration applications, partially offset by a decrease in professional services revenue .

OpenStack Public Cloud revenue in 2020 decreased 20%, on an actual and constant currency basis, from 2019 due to customer churn.

Multicloud Services revenue in 2021 increased 14% on an actual basis, and 13% on a constant currency basis, from 2020.

Underlying growth was primarily driven by both the acquisition of new customers and increased spend by existing customers, partially offset by cancellations by existing customers.

Growth offerings such as managed public cloud services and Rackspace Services for VMware Cloud represented approximately 75% of the Multicloud Services segment in 2021, and revenue from these growth offerings increased 30% in 2021 compared to 2020.

This growth was partially offset by a decrease in revenue from mature offerings such as managed hosting and colocation services.

Apps & Cross Platform revenue in 2021 increased 12%, on an actual and constant currency basis, from 2020, 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 2021 decreased 20% on an actual basis, and 21% on a constant currency basis, from 2020 due to customer churn.

Cost of Revenue

Cost of revenue increased $296 million, or 21%, to $1,723 million in 2020 from $1,427 million in 2019, primarily due to an 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 also increased, primarily due to the addition of former Onica employees and an increase in share-based compensation expense related to restricted stock granted to all eligible employees upon completion of the IPO, partially offset by a reduction in non-equity incentive bonus expense.

The increase in third-party infrastructure and personnel costs was partially offset by a 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.

Cost of revenue increased $350 million, or 20%, to $2,073 million in 2021 from $1,723 million in 2020, primarily due to an increase in usage charges for third-party infrastructure associated with growth in these offer ings and the impact of an increased volume of larger, multi-year customer contracts which typically have a larger infrastructure component and lower margins.

The increase in third-party infrastructure was partially offset by a decline in personnel costs primarily due to cost savings as a result of shifting roles to lower-cost locations as part of our continued focus on business optimization initiatives, including the July 2021 Restructuring Plan.

Depreciation expense also decreased between periods 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.

Additionally, in March 2021, we completed an assessment of the useful lives of certain customer gear equipment, which resulted in a revision of certain useful lives within our policy ranges, further contributing to the reduction in depreciation expense.

We also had year-over-year expense reductions 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 optimizing our vendor license spending.

As a percentage of revenue, cost of revenue increased 510 basis points in 2020 to 63.6% from 58.5% in 2019, driven by a 1,030 basis point increase in usage charges for third-party infrastructure, partially offset by a 270 basis point decrease related to data center and license expenses and a 240 basis point reduction in depreciation expense.

As a percentage of revenue, cost of revenue increased 530 basis points in 2021 to 68.9% from 63.6% in 2020, primarily driven by a 1,270 basis point increase in usage charges for third-party infrastructure, partially offset by a decrease related to personnel costs, depreciation, data center, and license expense.

Gross Profit and Non-GAAP Gross Profit

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Our consolidated gross margin was 31.1% in 2021, a decrease of 530 basis points from 36.4% in 2020.

The table below presents our segment non-GAAP gross profit and gross margin for the periods indicated, and the change in gross profit between periods:

The table below presents a reconciliation of total consolidated gross profit to Non-GAAP Gross Profit, which represents the total of our individual segment gross profit measures.

Year Ended December 31,

(In millions) 2020 2021

Total consolidated gross profit $ 984.4 $ 936.8

Share-based compensation expense 14.5 16.7

Other compensation expense (1)

Purchase accounting impact on expense (2)

Restructuring and transformation expenses (3)

Non-GAAP Gross Profit $ 1,026.0 $ 996.4

(1) Adjustments for retention bonuses, mainly in connection with restructuring and transformation projects, and the related payroll tax, and payroll taxes associated with the exercise of stock options and vesting of restricted stock.

(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.

This amount also includes certain costs associated with the July 2021 Restructuring Plan which are not accounted for as exit and disposal costs under ASC 420, including one-time offshore build out costs.

Our segment gross profit and gross margin for the periods indicated, and the change in gross profit between periods is shown in the table below:

Year Ended December 31, Year-Over-Year Comparison

(In millions, except %) 2020 2021

Non-GAAP gross profit by segment:

Segment gross profit:

Amount % of Segment Revenue Amount % of Segment Revenue Amount % Change

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Non-GAAP Gross Profit $ 1,026.0 $ 996.4 $ (29.6) (2.9) %

Share-based compensation expense (5.7) (14.5)

Other compensation expense (1)

Purchase accounting impact on revenue (2)

Purchase accounting impact on expense (2)

Restructuring and transformation expenses (3)

(10.3) (15.3)

Total consolidated gross profit $ 1,011.2 $ 984.4

(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 non-GAAP gross profit increased by 5% in 2020 from 2019.

Segment non-GAAP gross profit as a percentage of segment revenue decreased by 450 basis points, reflecting a 26% increase in segment cost of revenue and a 17% 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 non-GAAP gross profit decreased by 3% in 2020 from 2019.

Segment non-GAAP gross profit as a percentage of segment revenue decreased by 290 basis points, reflecting a 10% increase in segment cost of revenue and a 5% 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 non-GAAP gross profit decreased 31% in 2020 from 2019 due to customer churn.

Segment non-GAAP gross profit as a percentage of segment revenue decreased by 720 basis points, reflecting a 20% decrease in segment revenue, partially offset by a 8% decrease in segment cost of revenue.

The aggregate amount of costs reflected in consolidated gross profit but excluded from segment non-GAAP gross profit was $41.6 million in 2020, an increase of $13.4 million from $28.2 million in 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 non-GAAP gross profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 19, "Segment Reporting."

Multicloud Services gross profit decreased by 2% in 2021 from 2020.

Segment gross profit as a percentage of segment revenue decreased by 540 basis points, reflecting a 24% increase in segment cost of revenue and a 14% increase in segment revenue.

The increase in costs was mainly driven by higher third-party infrastructure costs due to the increase in revenue in our growth offerings resulting in a larger proportion of these services within this segment, partially offset by lower personnel, depreciation, data center and license expense.

Apps & Cross Platform gross profit increased 18% in 2021 from 2020.

Segment gross profit as a percentage of segment revenue increased by 170 basis points, reflecting a 9% increase in segment cost of revenue and a 12% increase in segment revenue.

The increase in cost of revenue was primarily driven by the segment’s higher business volume as well as higher third-party infrastructure costs.

OpenStack Public Cloud gross profit decreased 33% in 2021 from 2020 due to customer churn.

Segment gross profit as a percentage of segment revenue decreased by 710 basis points, reflecting a 20% decrease in segment revenue, partially offset by a 10% decrease in segment cost of revenue.

The aggregate amount of costs reflected in consolidated gross profit but excluded from Non-GAAP Gross Profit was $59.6 million in 2021, an increase of $18.0 million from $41.6 million in 2020, reflecting higher restructuring and transformation expenses and share-based compensation, partially offset by lower purchase accounting adjustments and other compensation expense.

For more information about our segment gross profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 20, "Segment Reporting."

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $48 million, or 5%, to $960 million in 2020 from $912 million in 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 due to higher commissions expense, driven by bookings growth, and share-based compensation expense, partially offset by lower severance expense and non-equity incentive bonus expense in 2020.

Additionally, travel costs declined as a result of COVID-19 travel restrictions.

As a percentage of revenue, selling, general and administrative expenses decreased 200 basis points, to 35.4% in 2020 from 37.4% in 2019, for the reasons discussed above, including a 150 basis points reduction in personnel costs, and further impacted by our revenue growth while other SG&A expenses decreased.

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.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 14, "Divestitures , " included elsewhere in this Annual Report for more information on this transaction.

SG&A expenses decreased $53 million, or 6%, to $907 million in 2021 from $960 million in 2020.

The reduction was driven by costs incurred in the prior year related to Onica integration, IPO related expenses, and management consulting fees as the agreements were terminated in connection with the IPO.

This reduction was partially offset by costs incurred in 2021 related to the July 2021 Restructuring Plan including $25 million of restructuring charges accounted for as exit and disposal costs under ASC 420.

Other cost increases between periods include costs related to other business transformation initiatives and incremental costs to operate as a public company.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 11, "July 2021 Restructuring Plan" for additional information regarding the current period restructuring charges.

As a percentage of revenue, SG&A expenses decreased 530 basis points, to 30.1% in 2021 from 35.4% in 2020, for the reasons discussed above.

Impairment of Goodwill

As a result of our annual goodwill impairment test performed during the fourth quarter of 2021, we determined that the carrying amount of our OpenStack Public Cloud reporting unit exceeded its fair value and recorded a goodwill impairment charge of $52 million.

The impairment was driven by deteriorating forecasted margins and cash flows within the reporting unit primarily due to operating costs declining at a slower rate than previously anticipated even after factoring in the long term impacts of the July 2021 Restructuring Plan.

There was no such impairment in 2020.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 5, "Goodwill and Intangible Assets" for further discussion.

Gain on Sale of Land

In January 2021, we recorded a $20 million gain related to the sale of a parcel of undeveloped land in the United Kingdom adjacent to one of our existing data centers, as further discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 4, "Property, Equipment and Software, net."

Interest Expense

Interest expense decreased $62 million to $268 million in 2020 from $330 million in 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 8 of Part II, Financial Statements and Supplementary Data - Note 16, "Derivatives." In 2019, we recorded $52 million of interest expense related to the change in the fair value of interest rate swaps compared to $14 million recorded to interest expense in 2020.

Also contributing to the decrease in interest expense was the reduction in our total debt balance largely due to the repayment of $1,120 million aggregate principal amount of 8.625% Senior Notes during 2020.

Gain on Investments, Net

Gain on investments was $1 million in 2020 compared to $100 million in 2019, driven by the realized gain on our investment in CrowdStrike Holdings, Inc.

("CrowdStrike") of $97 million, as further discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 6, "Investments."

Gain (Loss) on Extinguishment of Debt

In 2020 we recorded a $72 million loss on debt extinguishment related to the repayment of $1,120 million aggregate principal amount of 8.625% Senior Notes.

We recorded a $10 million gain on debt extinguishment in 2019 related to repurchases of $77 million principal amount of 8.625% Senior Notes.

Interest expense decreased $63 million to $205 million in 2021 from $268 million in 2020, primarily driven by a reduction in total debt outstanding and lower interest rates as a result of significant debt refinancing transactions between periods.

Debt Modification Costs and Extinguishment Loss

In 2021, we recorded $37 million and $0.5 million of debt modification costs and extinguishment loss related to the February 2021 Refinancing Transaction and termination of the Receivables Financing Facility, respectively.

In 2020, we recorded $72 million of debt modification costs and extinguishment loss related to the repayment of $1,120 million aggregate principal amount of 8.625% Senior Notes.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 7, "Debt" for further discussion.

Other Income (Expense), Net

We had $3 million of other income in 2020 compared to $3 million of other expense in 2019 primarily related to foreign currency transaction gains, partially offset by changes in the fair value of foreign currency derivatives, as further discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 16, "Derivatives."

Benefit for Income Taxes

Our income tax benefit increased by $46 million to $66 million in 2020 from $20 million in 2019.

Our effective tax rate increased from 16.4% in 2019 to 21.2% in 2020.

The increase in the effective tax rate year-over-year and the difference between the effective tax rate for 2020 and the statutory rate are primarily due to the geographic distribution of profits and changes in income tax reserves, as well as executive compensation that is nondeductible under Internal Revenue Code ("IRC") Section 162(m) as a result of the IPO.

Our income tax benefit decreased by $35 million to $31 million in 2021 from $66 million in 2020.

Our effective tax rate decreased from 21.2% in 2020 to 12.4% in 2021.

The decrease in the effective tax rate year-over-year is primarily due to the geographic distribution of profits, the tax impact associated with goodwill impairment and changes in income tax reserves.

The difference between the effective rate for 2021 and the statutory rate is primarily due to the geographic distribution of profits, the tax impact associated with goodwill impairment and executive compensation that is nondeductible under IRC Section 162(m) as a result of the IPO.

For a full reconciliation of our effective tax rate to the U.S.

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Selling, general and administrative expenses (911.7) (37.4) % (959.7) (35.4) % (48.0) 5.3 %

Impairment of goodwill (295.0) (12.0) % — — % 295.0 (100.0) %

Gain on sale — — % 2.1 0.1 % 2.1 NM

Income (loss) from operations (237.2) (9.7) % 101.6 4.2 % 338.8 142.8 %

Gain on divestiture 2.1 0.1 % — — % (2.1) (100.0) %

Income from operations 101.6 4.2 % 24.7 0.9 % (76.9) (75.7) %

Other income (expense):

Interest expense (329.9) (13.5) % (268.4) (9.9) % 61.5 (18.6) %

Gain on investments, net 4.6 0.2 % 99.5 4.1 % 94.9 NM

Gain on extinguishment of debt 0.5 0.0 % 9.8 0.4 % 9.3 NM

Gain on investments, net 99.5 4.1 % 0.7 0.0 % (98.8) (99.3) %

Debt modification costs and extinguishment gain (loss) 9.8 0.4 % (71.5) (2.6) % (81.3) NM

Other income (expense), net (3.3) (0.1) % 2.5 0.1 % 5.8 NM

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Loss before income taxes (122.3) (5.0) % (312.0) (11.5) % (189.7) 155.1 %

Benefit for income taxes 29.9 1.2 % 20.0 0.8 % (9.9) (33.1) %

Benefit for income taxes 20.0 0.8 % 66.2 2.4 % 46.2 NM

Net loss $ (102.3) (4.2) % $ (245.8) (9.1) % $ (143.5) 140.3 %

NM = not meaningful.

Revenue decreased $15 million, or 0.6%, to $2,438 million in 2019 from $2,453 million in 2018.

Revenue was negatively impacted by $22 million from foreign currency translation effects in 2019, due to a stronger U.S.

dollar relative to other foreign currencies, primarily the British pound sterling.

Conversely, revenue was positively impacted by the acquisitions of RelationEdge in May 2018 and 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 of foreign currency fluctuations, on a constant currency basis, revenue increased 0.3% year-over-year.

On a constant currency basis, assuming the RelationEdge and Onica acquisitions were consummated on January 1, 2018, we estimate that our constant currency revenue would have increased b y 1.6% year-over-year.

Revenue increased $269 million, or 11.0%, to $2,707 million in 2020 from $2,438 million in 2019.

After re moving the impact from foreign currency fluctuations, on a constant currency basis, revenue increased 10.9% year-over-year.

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 6.0% year-over-year.

8 unchanged sentences

(1) Refer to " Non-GAAP Financial Measures " in this section for further explanation and reconciliation.

Multicloud Services revenue in 2019 increased 2% on an actual basis, or 3% on a constant currency basis, from 2018, reflecting the positive impact of the November 2019 acquisition of Onica, which contributed $21 million to 2019 revenue.

Multicloud Services revenue in 2020 increased 17%, on an actual and constant currency basis, from 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.

Apps & Cross Platform revenue in 2019 increased 10%, on an actual and constant currency basis, from 2018, due to the favorable full year impact of RelationEdge, which we acquired in May 2018, and growth in our offerings for managed security, professional services and management of productivity and collaboration applications.

OpenStack Public Cloud revenue in 2020 decreased 20%, on an actual and constant currency basis, from 2019 due to customer churn.

While we expect revenue from this business to continue to decline, we also saw the quarterly year-over-year rate of decline stabilize during 2019 as many large OpenStack Public Cloud customers terminated their OpenStack Public Cloud contracts with us and our remaining customer base for this offering was composed of smaller customers who tend to churn at lower rates.

Cost of Revenue

Cost of revenue decreased $19 million, or 1%, to $1,427 million in 2019 from $1,446 million in 2018, primarily driven by a decrease in depreciation expense, partially offset by an increase in infrastructure expenses related to offerings on third-party clouds.

The decrease in depreciation expense was primarily due to certain property, equipment and software reaching the end of its useful life for depreciation purposes and a decrease in our overall depreciable asset base as a result of the shift towards faster-growing, value-added service offerings which have significantly lower capital requirements than our legacy capital-intensive revenue streams.

The increase in infrastructure expenses related to offerings on third-party clouds was due to 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.

The remaining decrease in cost of revenue was driven by the execution of various initiatives in 2019 to lower our cost structure, such as consolidating data center facilities and optimizing our vendor license spending, which resulted in year-over-year decreases in these expenses.

Personnel costs were largely flat as an increase in non-equity incentive compensation expense was offset by expense recorded in the prior year related to our obligations to settle share-based awards in connection with the Rackspace Acquisition.

As a percentage of revenue, cost of revenue decreased 40 basis points in 2019 to 58.5% from 58.9% in 2018, driven by a 450 basis point decrease related to depreciation expense, partially offset by a 410 basis point increase largely related to infrastructure expense.

Gross Profit and Non-GAAP Gross Profit

Our consolidated gross profit was $1,011 million in 2019, an increase of $4 million from $1,007 million in 2018.

Our Non-GAAP Gross Profit was $1,039 million in 2019, an increase of $10 million from $1,029 million in 2018.

Our consolidated gross profit was $984 million in 2020, a decrease of $27 million from $1,011 million in 2019.

Our Non-GAAP Gross Profit was $1,026 million in 2020, a decrease of $13 million from $1,039 million in 2019.

Non-GAAP Gross Profit is a non-GAAP financial measure.

See “ Non-GAAP Financial Measures ” below for more information.

Our consolidated gross margin was 41.5% in 2019, an increase of 40 basis points from 41.1% in 2018.

The table below presents our segment non-GAAP gross profit and gross margin for the periods indicated, and the change in gross profit between periods:

Year Ended December 31, Year-Over-Year Comparison

(In millions, except %) 2018 2019

Non-GAAP gross profit by segment:

Amount % of Segment Revenue Amount % of Segment Revenue Amount % Change

Multicloud Services $ 736.6 40.8 % $ 774.7 42.3 % $ 38.1 5.2 %

Apps & Cross Platform 107.3 37.0 % 118.7 37.2 % 11.4 10.6 %

OpenStack Public Cloud 185.0 51.5 % 146.0 51.0 % (39.0) (21.1) %

Non-GAAP Gross Profit 1,028.9 1,039.4 10.5 1.0 %

Our consolidated gross margin was 36.4% in 2020, a decrease of 510 basis points from 41.5% in 2019.

The table below presents a reconciliation of total consolidated gross profit to Non-GAAP Gross Profit, which represents the total of our individual segment gross profit measures.

Year Ended December 31,

(In millions) 2019 2020

Total consolidated gross profit $ 1,011.2 $ 984.4

Share-based compensation expense 5.7 14.5

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Restructuring and transformation expenses (3)

Total consolidated gross profit $ 1,007.1 $ 1,011.2

(1) Adjustments for expense related to the cash settlement of unvested equity awards that were outstanding at the consummation of the Rackspace Acquisition, retention bonuses, mainly in connection with restructuring and transformation projects, and the related payroll tax.

Non-GAAP Gross Profit $ 1,039.4 $ 1,026.0

(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 non-GAAP gross profit increased by 5% in 2019 from 2018.

Segment non-GAAP gross profit as a percentage of segment revenue increased by 150 basis points, reflecting a 2% increase in segment revenue and a 1% decrease in segment cost of revenue.

The decrease in costs reflects savings obtained as a result of lower personnel costs, reflecting our prior period integration and transformation efforts.

The shift in capital intensity described above resulted in lower depreciation and data center costs, offset by higher third-party infrastructure costs.

Apps & Cross Platform non-GAAP gross profit increased 11% in 2019 from 2018.

Segment non-GAAP gross profit as a percentage of segment revenue remained unchanged at 37%, reflecting proportional increases in segment revenue and cost of revenue.

The increase in cost of revenue was driven by the segment’s higher business volume, reflecting the favorable full year impact of the RelationEdge acquisition.

OpenStack Public Cloud non-GAAP gross profit decreased 21% in 2019 from 2018 due to customer churn.

Segment non-GAAP gross profit as a percentage of segment revenue remained unchanged at 51%, reflecting proportional decreases in revenue and costs.

The aggregate amount of costs reflected in consolidated gross profit but excluded from segment non-GAAP gross profit was $28.2 million in 2019, an increase of $6.4 million from $21.8 million in 2018, reflecting higher restructuring and transformation costs that more than offset the decrease from cash-settled equity awards.

For more information about our segment non-GAAP gross profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 19, "Segment Reporting."

Our segment gross profit and gross margin for the periods indicated, and the change in gross profit between periods is shown in the table below:

Year Ended December 31, Year-Over-Year Comparison

(In millions, except %) 2019 2020

Segment gross profit:

Amount % of Segment Revenue Amount % of Segment Revenue Amount % Change

Multicloud Services $ 774.7 42.3 % $ 810.2 37.8 % $ 35.5 4.6 %

Apps & Cross Platform 118.7 37.2 % 115.5 34.3 % (3.2) (2.7) %

OpenStack Public Cloud 146.0 51.0 % 100.3 43.8 % (45.7) (31.3) %

Non-GAAP Gross Profit $ 1,039.4 $ 1,026.0 $ (13.4) (1.3) %

Multicloud Services gross profit increased by 5% in 2020 from 2019.

Segment gross profit as a percentage of segment revenue decreased by 450 basis points, reflecting a 26% increase in segment cost of revenue and a 17% 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 gross profit decreased by 3% in 2020 from 2019.

Segment gross profit as a percentage of segment revenue decreased by 290 basis points, reflecting a 10% increase in segment cost of revenue and a 5% 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 gross profit decreased 31% in 2020 from 2019 due to customer churn.

Segment gross profit as a percentage of segment revenue decreased by 720 basis points, reflecting a 20% decrease in segment revenue, partially offset by an 8% decrease in segment cost of revenue.

The aggregate amount of costs reflected in consolidated gross profit but excluded from Non-GAAP Gross Profit was $41.6 million in 2020, an increase of $13.4 million from $28.2 million in 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 gross profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 20, "Segment Reporting."

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $38 million, or 4%, to $912 million in 2019 from $949 million in 2018.

Contributing to this decrease was a decline in expenses for research and development activities as our business shifts towards providing cloud-centric, value-added services, such as our offerings on third-party clouds, application management and professional services that require fewer research and development activities to develop and support as compared to our historical, legacy offerings such as the OpenStack Public Cloud.

Additionally, personnel costs declined in certain administrative functions due to a decrease in employee count driven, in part, by transformation and outsourcing initiatives.

We also incurred lower expense related to our obligations to settle share-based awards in connection with the Rackspace Acquisition, a reduction in marketing activity spend and a decrease in expenses related to cost savings initiatives and closing and integrating our recent acquisitions.

These decreases were partially offset by incremental amortization expense in 2019 related to sales commissions capitalized in accordance with ASC 606 and higher severance and share-based compensation expense.

As a percentage of revenue, selling, general and administrative expenses decreased 130 basis points, to 37.4% in 2019 from 38.7% in 2018, for the reasons discussed above.

Impairment of Goodwill

As a result of our 2018 annual goodwill impairment test performed during the fourth quarter of 2018, we determined that the carrying amount of our Multicloud Services reporting unit, exceeded its fair value and recorded a goodwill impairment charge of $295 million.

The impairment was driven by a significant decrease in forecasted revenue and cash flows and a lower long-term growth rate, as current and forecasted industry trends reflect lower demand for traditional managed hosting services.

There was no such impairment in 2019.

Personnel costs increased due to higher commissions expense, driven by Bookings growth, and share-based compensation expense, partially offset by lower severance expense and non-equity incentive bonus expense in 2020.

Additionally, travel costs declined as a result of COVID-19 travel restrictions.

Gain on Divestiture

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 divestiture of our Mailgun business in 2017.

1 unchanged sentence

Interest Expense

Interest expense increased $49 million to $330 million in 2019 from $281 million in 2018, primarily due to changes in the fair value of interest rate swaps, as further discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 16, "Derivatives."

Interest expense decreased $62 million to $268 million in 2020 from $330 million in 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 8 of Part II, Financial Statements and Supplementary Data - Note 17, "Derivatives." In 2019, we recorded $52 million of interest expense related to the change in the fair value of interest rate swaps compared to $14 million recorded to interest expense in 2020.

Gain on Investments, Net

Gain on investments was $5 million in 2018 compared to $100 million in 2019, driven by a $97 million realized gain related to the sale of our CrowdStrike investment in 2019, as further discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 6, "Investments."

Gain on Extinguishment of Debt

We recorded a $1 million and $10 million gain on debt extinguishment in 2018 and 2019, respectively, related to the repurchase of $3 million and $77 million principal amount of our 8.625% Senior Notes in 2018 and 2019, respectively.

Gain on investments was $1 million in 2020 compared to $100 million in 2019, driven by the realized gain on our investment in CrowdStrike of $97 million, as further discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 6, "Investments."

Debt Modification Costs and Extinguishment Gain (Loss)

In 2020 we recorded $72 million of debt modification costs and extinguishment loss related to the repayment of $1,120 million aggregate principal amount of 8.625% Senior Notes.

We recorded a $10 million gain on debt extinguishment in 2019 related to repurchases of $77 million principal amount of 8.625% Senior Notes.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 7, "Debt" for further discussion.

Other Income (Expense), Net

We had $13 million of other income in 2018 compared to $3 million of other expense in 2019 primarily related to changes in the fair value of foreign currency derivatives, as further discussed in Item 8 of Part II, Financial Statements and Supplementary Data- Note 16, "Derivatives," and to a lesser extent, an increase in foreign currency transaction losses.

Benefit for Income Taxes

Our income tax benefit decreased by $10 million to $20 million in 2019 from $30 million in 2018.

Our income tax benefit increased by $46 million to $66 million in 2020 from $20 million in 2019.

Our effective tax rate increased from 16.4% in 2019 to 21.2% in 2020.

The effective tax rate for 2019 was impacted by the current year global intangible low-taxed income (“GILTI”) inclusion, the impact of changes in income tax rates, changes in valuation allowances, research and development credits, changes to income tax reserves and other permanently nondeductible items.

For a full reconciliation of our effective tax rate to the U.S.

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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, Non-GAAP Gross Profit, Non-GAAP Net Income (Loss), Non-GAAP Operating Profit, Adjusted EBITDA and Non-GAAP 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.

The following discussion includes the presentation of constant currency revenue, Non-GAAP Gross Profit, Non-GAAP Net Income (Loss), Non-GAAP Operating Profit, Adjusted EBITDA and Non-GAAP 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.

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Non-GAAP Gross Profit

Our principal measure of segment profitability is segment non-GAAP gross profit.

We also present Non-GAAP Gross Profit in this MD&A, which is the aggregate of segment non-GAAP gross profit, because we believe the measure is useful in analyzing trends in our underlying, recurring gross margins.

We present Non-GAAP Gross Profit in this MD&A, which represents the total of our individual segment gross profit measures, because we believe the measure is useful in analyzing trends in our underlying, recurring gross margins.

We define Non-GAAP 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 Non-GAAP Gross Profit to our total consolidated gross profit, see “G ross Profit and Non-GAAP Gross Profit ” above.

For a reconciliation of total consolidated gross profit to Non-GAAP Gross Profit, see “G ross Profit and Non-GAAP Gross Profit ” in the year-over-year comparisons under "Results of Operations" above.

Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA

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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 Non-GAAP 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 Non-GAAP Operating Profit 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 Non-GAAP Operating Profit plus depreciation and amortization.

We define Non-GAAP 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, special bonuses and other compensation expense, 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 Non-GAAP Operating Profit as income (loss) from operations, 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, special bonuses and other compensation expense, 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 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, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, management fees, certain other non-operating, non-recurring or non-core gains and losses, interest expense, income taxes, and depreciation and amortization.

Non-GAAP Operating Profit 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.

Non-GAAP Operating Profit and Adjusted EBITDA, along with other quantitative and qualitative information, are also the principal financial measures 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.

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Investors are cautioned against using these measures to the exclusion of our results in accordance with GAAP.

The following table presents a reconciliation of Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA to our net loss for the periods indicated:

The following tables present a reconciliation of Non-GAAP Net Income, Non-GAAP Operating Profit and Adjusted EBITDA to the most directly comparable GAAP financial measures:

Net loss reconciliation to Non-GAAP Net Income

Year Ended December 31,

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Share-based compensation expense 30.2 74.5 75.4

Cash settled equity and special bonuses (a)

Cash settled equity, special bonuses and other compensation expense (a)

24.1 37.5 11.8

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Management fees (d)

15.9 16.2 8.4

Impairment of goodwill — — 52.4

Net gain on divestiture and investments (e)

Gain on sale of land — — (19.9)

Net (gain) loss on divestiture and investments (e)

(101.6) (0.7) 3.0

Net (gain) loss on extinguishment of debt (f)

Debt modification costs and extinguishment (gain) loss (f)

(9.8) 71.5 37.5

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Non-GAAP Net Income $ 62.4 $ 151.3 $ 206.5

Interest expense 281.1 329.9 268.4

Benefit for income taxes (29.9) (20.0) (66.2)

Tax effect of non-GAAP adjustments (i)

Income (loss) from operations reconciliation to Non-GAAP Operating Profit

Year Ended December 31,

(In millions) 2019 2020 2021

Income (loss) from operations $ 101.6 $ 24.7 $ (2.5)

Share-based compensation expense 30.2 74.5 75.4

Cash settled equity, special bonuses and other compensation expense (a)

24.1 37.5 11.8

Non-GAAP Operating Profit 370.3 414.3 472.9

Depreciation and amortization 609.7 496.0 466.2

Transaction-related adjustments, net (b)

22.5 46.7 25.7

Restructuring and transformation expenses (c)

54.3 104.8 161.5

Management fees (d)

Impairment of goodwill — — 52.4

Gain on divestiture (2.1) — —

Gain on sale of land — — (19.9)

Amortization of intangible assets (h)

167.5 176.3 179.7

Non-GAAP Operating Profit $ 414.3 $ 472.9 $ 484.1

Net loss reconciliation to Adjusted EBITDA

Year Ended December 31,

(In millions) 2019 2020 2021

Net loss $ (102.3) $ (245.8) $ (218.3)

Share-based compensation expense 30.2 74.5 75.4

Cash settled equity, special bonuses and other compensation expense (a)

24.1 37.5 11.8

Transaction-related adjustments, net (b)

22.5 46.7 25.7

Restructuring and transformation expenses (c)

54.3 104.8 161.5

Management fees (d)

Impairment of goodwill — — 52.4

Gain on sale of land — — (19.9)

Net (gain) loss on divestiture and investments (e)

(101.6) (0.7) 3.0

Debt modification costs and extinguishment (gain) loss (f)

(9.8) 71.5 37.5

Other (income) expense, net (g)

3.3 (2.5) 1.0

Interest expense 329.9 268.4 205.1

Benefit for income taxes (20.0) (66.2) (30.8)

Depreciation and amortization (j)

496.0 466.2 421.4

Adjusted EBITDA $ 742.8 $ 762.8 $ 725.8

(a) Includes expense related to the cash settlement of unvested equity awards that were outstanding at the consummation of the Rackspace Acquisition (amounting to $26 million and $3 million for the years ended December 31, 2018 and 2019 and zero for 2020), retention bonuses, mainly relating to restructuring and integration projects, and, beginning in 2019, senior executive signing bonuses and relocation costs.

(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 year ended December 31, 2019 and zero for all other periods), retention bonuses, mainly relating to restructuring and integration projects, and the related payroll tax, senior executive signing bonuses and relocation costs, and payroll taxes associated with the exercise of stock options and vesting of restricted stock.

The year ended December 31, 2020 also includes $13 million for one-time cash bonuses related to successful completion of the IPO.

(b) Includes legal, professional, accounting and other advisory fees related to the acquisitions of RelationEdge in 2018 and 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.

(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).

This amount also includes employee related costs and other costs related to the July 2021 Restructuring Plan of $25.4 million for the year ended December 31, 2021, which are accounted for as exit and disposal costs under ASC 420.

In addition, it includes certain costs associated with the July 2021 Restructuring Plan which are not accounted for as exit and disposal costs under ASC 420, including one-time offshore build out costs.

(d) Represents historical management fees pursuant to management consulting agreements.

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(e) Includes gains and losses on investment and from dispositions, including our investment in CrowdStrike realized in 2019.

(f) Includes gains and losses on our repurchases of 8.625% Senior Notes.

(f) Includes modification costs and extinguishment gains and losses related to repurchases of 8.625% Senior Notes, the February 2021 Refinancing Transaction and termination of the Receivables Financing Facility.

(g) Reflects mainly changes in the fair value of foreign currency derivatives.

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tax reform, share-based compensation, audit conclusions and changes to valuation allowances.

For 2018, 2019 and 2020, we used a structural non-GAAP tax rate of 27%, 26% and 26%, respectively, which reflects the removal of the tax effect of non-GAAP pre-tax adjustments and non-recurring tax adjustments on a year-over-year basis.

We used a structural non-GAAP tax rate of 26% for all periods which reflects the removal of the tax effect of non-GAAP pre-tax adjustments and non-recurring tax adjustments on a year-over-year basis.

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.

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We believe that making these adjustments facilitates a better evaluation of our current operating performance and comparisons to prior periods.

Non-GAAP Earnings Per Share (EPS)

We define Non-GAAP EPS as Non-GAAP 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 Non-GAAP EPS.

(j) Excludes accelerated depreciation expense related to facility closures.

Non-GAAP Earnings Per Share

We define Non-GAAP EPS as Non-GAAP 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 by our board of directors on July 20, 2020, and further adjusted for the average number of shares associated with securities which are anti-dilutive to GAAP EPS but dilutive to Non-GAAP EPS.

Management uses Non-GAAP 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 Non-GAAP EPS.

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Per share impacts of adjustments to net loss (b)

1.00 2.21 2.04

Per share impacts of shares dilutive after adjustments to net loss (a)

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(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 Non-GAAP 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, vesting of restricted stock or purchase under the ESPP, 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.

Certain of our potential common share equivalents are contingent on Apollo achieving pre-established performance targets based on a 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.

(b) Reflects the aggregate adjustments made to reconcile Non-GAAP Net Income to our net loss, as noted in the above table, divided by the GAAP diluted number of shares outstanding for the relevant period.

Liquidity and Capital Resources

We primarily finance our operations and capital expenditures with internally-generated cash from operations and hardware leases, and if necessary, borrowings under our Revolving Credit Facility or Receivables Financing Facility.

We primarily finance our operations and capital expenditures with internally-generated cash from operations and hardware leases, and if necessary, borrowings under our Revolving Credit Facility.

As of December 31, 2021, the Revolving Credit Facility provided for up to $375 million of borrowings, none of which was drawn as of December 31, 2021.

As of December 31, 2020, $65 million was borrowed and outstanding under the Receivables Financing Facility.

Of this balance, approximately $15 million was classified as current debt due to a borrowing base deficit under the facility subsequent to December 31, 2020.

The amount of incremental borrowing capacity available under the Receivables Financing Facility fluctuates based on the eligibility of receivables held at a given time.

On June 29, 2021, as part of our on-going efforts to reduce debt, we entered into an agreement to voluntarily prepay and terminate the Receivables Financing Facility.

As of December 31, 2021, we had no remaining outstanding balance under the Receivables Financing Facility.

We believe our Revolving Credit Facility will provide sufficient liquidity, if needed, to cover amounts that we may have previously drawn upon under the terminated facility.

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.

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 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.

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We used a portion of the net proceeds from the IPO to repurchase $601 million aggregate principal amount of the 8.625% Senior Notes for aggregate cash of $647 million, including related premiums, fees and expenses.

The remaining amount of net proceeds will be used for general corporate purposes.

On December 1, 2020 we issued $550 million aggregate principal amount of the 5.375% Senior Notes and used a portion of the proceeds to repurchase $259 million aggregate principal amount of the 8.625% Senior Notes and pay related premiums, fees and expenses.

On December 16, 2020, we used the remaining net proceeds from the issuance of the 5.375% Senior Notes, together with cash on hand, to redeem and cancel the remaining $260 million aggregate principal amount of outstanding 8.625% Senior Notes and paid related premiums, fees and expenses.

See “ 8.625% Senior Notes ” and " 5.375% Senior Notes " below for more information on repurchases and issuances of debt completed during the year ended December 31, 2020.

The remaining amount of net proceeds were used for general corporate purposes.

On February 2, 2021, we issued 2,665,935 shares of common stock to DPH 123, LLC, an ABRY affiliate, for no additional consideration pursuant to the Agreement and Plan of Merger, dated as of September 6, 2017, (the "Datapipe Merger Agreement") in connection with our November 15, 2017 acquisition of Datapipe.

We will be required to issue additional shares of our common stock to DPH 123, LLC based on the MOIC exceeding certain thresholds as defined in the Datapipe Merger Agreement.

If the MOIC exceeds 3.0x, which is indicated by a volume weighted average trading price of our common stock over 30 consecutive trading days of more than $25.00, we will be required to issue an additional 2,665,935 shares.

At December 31, 2021, we held $273 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $137 million was held by foreign entities.

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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 $585 million outstanding with respect to operating and finance lease agreements as of December 31, 2021.

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Refer to Item 8 of Part II, Financial Statements and Supplementary Data - Note 8, "Leases" for more information regarding our operating and finance leases.

As of December 31, 2020, we had $3,346 million aggregate principal amount outstanding under our Term Loan Facility and 5.375% Senior Notes, with $375 million of borrowing capacity available under the Revolving Credit Facility.

Additionally, at December 31, 2020, we had $65 million principal outstanding under the Receivables Financing Facility.

As of December 31, 2021, we had $3,383 million aggregate principal amount outstanding under our Term Loan Facility, 5.375% Senior Notes, and 3.50% Senior Secured Notes, with $375 million of borrowing capacity available under the Revolving Credit Facility.

Our liquidity requirements are significant, primarily due to debt service requirements.

On February 9, 2021, we issued $550.0 million of 3.50% Senior Secured Notes that will mature on February 15, 2028 and bear interest at a fixed rate of 3.50% per year, payable semi-annually on each February 15 and August 15 through maturity.

The 3.50% Senior Secured Notes are not subject to registration rights.

On February 9, 2021, we amended and restated the First Lien Credit Agreement, which included a new seven-year $2,300.0 million senior secured first lien term loan facility (the "New Term Loan Facility") and the Revolving Credit Facility.

We borrowed the entire $2,300.0 million New Term Loan Facility and used the borrowings under the New Term Loan Facility, together with the proceeds from the issuance of the 3.50% Senior Secured Notes described above, to repay all borrowings under our existing Term Loan Facility, to pay related fees and expenses and for general corporate purposes.

The New Term Loan Facility will mature on February 15, 2028.

We may request one or more incremental term loan facilities up to a specified dollar amount plus additional amounts, subject to compliance with applicable leverage ratios and certain terms and conditions.

Borrowings under the New Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at our option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 0.75% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate of Citibank, N.A.

and (iii) the one-month adjusted LIBOR plus 1.00%.

The applicable margin for the New Term Loan Facility is 2.75% for LIBOR loans and 1.75% for base rate loans.

Interest is due at the end of each interest period elected, not exceeding 90 days, for LIBOR loans and at the end of every calendar quarter for base rate loans.

Beginning June 30, 2021, we will also be required to make quarterly amortization payments on the New Term Loan Facility in an annual amount equal to 1.0% of the original principal amount of the New Term Loan Facility, with the balance due at maturity on February 15, 2028.

Senior Facilities

On November 3, 2016, in conjunction with the Rackspace Acquisition, we entered into the First Lien Credit Agreement with Citibank, N.A.

(“Citi”) as the administrative agent.

The Senior Facilities originally included the Term Loan Facility in the amount of $2,000 million, which was fully drawn at closing of the Rackspace Acquisition, and an undrawn Revolving Credit Facility of $225 million (together, the "Senior Facilities").

We may request additional Revolving Credit Facility commitments, and had the right to request additional Term Loan Facility commitments, in each case, up to a specified dollar amount plus additional amounts, subject to compliance with applicable leverage ratios and certain terms and conditions.

The proceeds of the Term Loan Facility were used to partially finance the Rackspace Acquisition.

The Term Loan Facility was set to mature 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 of the Revolving Credit Facility to August 7, 2025.

On June 21, 2017, we amended the terms of the First Lien Credit Agreement to reprice the Term Loan Facility, decreasing the applicable margin to 3.00% for “LIBOR” loans and 2.00% for base rate loans.

We also raised an additional $100 million of incremental borrowings under the Term Loan Facility on the same terms as the repriced Term Loan Facility.

The proceeds of the $100 million incremental term loans were used for general corporate purposes, including permitted acquisitions, capital expenditures and transaction costs.

On November 15, 2017, in connection with the Datapipe Acquisition, we raised an additional $800 million of incremental borrowings under the Term Loan Facility.

The proceeds of the $800 million incremental term loans were used to finance a portion of the Datapipe Acquisition, repay certain of Datapipe’s existing debt obligations and pay related fees and expenses.

Borrowings under the Senior Facilities bear interest at an annual rate equal to an applicable margin plus, at our option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% floor in the case of the Term Loan Facility (and, effective upon August 7, 2020, also in the case of the Revolving Credit Facility), or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate of Citi and (iii) the one-month adjusted LIBOR plus 1.00%.

On November 3, 2016, in conjunction with the Rackspace Acquisition, we entered into the First Lien Credit Agreement with Citi as the administrative agent.

The First Lien Credit Agreement included the Prior Term Loan Facility and the Revolving Credit Facility.

As of December 31, 2020, the Prior Term Loan Facility had an outstanding principal balance of $2,796 million and was set to mature on November 3, 2023.

The Revolving Credit Facility had total commitments of $375 million, with no outstanding borrowings as of December 31, 2020, and was set to mature on August 7, 2025.

On February 9, 2021, we amended and restated the First Lien Credit Agreement, which included a new seven-year $2,300 million senior secured first lien term loan facility (the Term Loan Facility) and our existing Revolving Credit Facility, which we refer to together as the Senior Facilities.

We used the borrowings under the Term Loan Facility, together with the proceeds from the issuance of the 3.50% Senior Secured Notes described below, to repay all borrowings under the Prior Term Loan Facility, to pay related fees and expenses and for general corporate purposes.

The Term Loan Facility will mature on February 15, 2028 and the maturity date of our existing Revolving Credit Facility did not change.

We may request one or more incremental term loan facilities, one or more incremental revolving credit facilities and/or increase the commitments under the Revolving Credit Facility in an amount equal to the greater of $860 million and 1.0x Pro Forma Adjusted EBITDA (as defined in the amended First Lien Credit Agreement), plus additional amounts, subject to compliance with applicable leverage ratios and certain terms and conditions.

Borrowings under the Senior Facilities bear interest at an annual rate equal to an applicable margin plus, at our option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 0.75% floor, in the case of the Term Loan Facility and a 1.00% floor, in the case of the Revolving Credit Facility, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate of Citi and (iii) the one-month adjusted LIBOR plus 1.00%.

The applicable margin for the Term Loan Facility is 2.75% for LIBOR loans and 1.75% for base rate loans and the applicable margin for the Revolving Credit Facility is 3.00% for LIBOR loans and 2.00% for base rate loans.

Interest is due at the end of each interest period elected, not exceeding 90 days, for LIBOR loans and at the end of every calendar quarter for base rate loans.

We were required to make quarterly amortization payments on the Term Loan Facility in an annual amount equal to 1.0% of the original principal amount, including incremental borrowings since the Rackspace Acquisition, or $7 million per quarter, with the balance due at maturity.

As of December 31, 2020, the interest rate on the Term Loan Facility was 4.00%, and the outstanding principal balance was $2,796 million.

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.

The amendment on August 7, 2020 also extended the maturity date with respect to the Revolving Credit Facility from November 3, 2021 to August 7, 2025.

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 New Term Loan Facility, (ii) net cash proceeds of certain non-ordinary assets sales or dispositions of property to prepay the New Term Loan Facility and (iii) net cash proceeds of any issuance or incurrence of debt not permitted under the Senior Facilities to prepay the New 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.

As of December 31, 2021, the interest rate on the Term Loan Facility was 3.50% and the outstanding principal balance was $2,283 million.

We are required to make quarterly principal payments in the amount equal to 0.25% of the original principal amount of the Term Loan Facility, or $5.8 million, which began on June 30, 2021, with the balance due at maturity on February 15, 2028.

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 8 of Part II, Financial Statements and Supplementary Data - Note 17, "Derivatives" for more information on the interest rate swap agreements.

Over the course of 2020, we borrowed and repaid an aggregate $245 million under the Revolving Credit Facility.

As of December 31, 2020, we had no outstanding borrowings under the Revolving Credit Facility.

8.625% Senior Notes

On November 3, 2016, in conjunction with the Rackspace Acquisition, we completed the issuance of $1,200 million aggregate principal amount of 8.625% Senior Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and outside the United States to non-U.S.

persons pursuant to Regulation S under the Securities Act.

The 8.625% Senior Notes were set to mature on November 15, 2024 and bore interest at a fixed rate of 8.625% per year, payable semi-annually on each May 15 and November 15 through maturity.

The proceeds of the 8.625% Senior Notes were used to partially finance the Rackspace Acquisition.

The 8.625% Senior Notes were not subject to registration rights.

In December 2018, we repurchased and surrendered for cancellation $3 million aggregate principal amount of 8.625% Senior Notes for $2 million, including accrued interest and excluding related fees and expenses.

During 2019, we repurchased and surrendered for cancellation $77 million aggregate principal amount of 8.625% Senior Notes for $67 million, including accrued interest of $1 million and excluding related fees and expenses.

Between August and December 2020, Rackspace Technology Global repurchased or redeemed and cancelled the remaining aggregate principal amount of the $1,120 million outstanding 8.625% Senior Notes and paid related premiums, fees and accrued and unpaid interest for aggregate cash of $1,192 million.

We funded the repurchases and redemptions with proceeds from the IPO and the issuance of the 5.375% Senior Notes.

As of December 31, 2020, no 8.625% Senior Notes remained outstanding.

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, except in connection with a repricing event, as defined in the First Lien Credit Agreement.

During 2021, there were no borrowings under the Revolving Credit Facility and we had no outstanding borrowings under the Revolving Credit Facility or letters of credit issued thereunder as of December 31, 2021.

3.50% Senior Secured Notes

On February 9, 2021, Rackspace Technology Global issued $550 million aggregate principal amount of 3.50% Senior Secured Notes.

The 3.50% Senior Secured Notes will mature on February 15, 2028 and bear interest at an annual fixed rate of 3.50%.

Interest is payable semiannually on each February 15 and August 15, commencing on August 15, 2021.

The 3.50% Senior Secured Notes are not subject to registration rights.

As noted above, we used the net proceeds from the issuance of the 3.50% Senior Secured Notes, together with borrowings under the Term Loan Facility described above, to repay all borrowings outstanding under the Prior Term Loan Facility, to pay related fees and expenses and for general corporate purposes.

Rackspace Technology Global is the issuer of the 3.50% Senior Secured Notes, and obligations under the 3.50% Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, by all of Rackspace Technology Global’s wholly-owned domestic restricted subsidiaries (as subsidiary guarantors) that guarantee the Senior Facilities.

The 3.50% Senior Secured Notes and the related guarantees are secured by first-priority security interests in substantially all material owned assets of Rackspace Technology Global and the subsidiary guarantors, including the equity interest held by each, subject to certain exceptions, which assets also secure the Senior Facilities.

Rackspace Technology Global may redeem the 3.50% Senior Secured Notes at its option, in whole at any time or in part from time to time, at the following redemption prices:

prior to February 15, 2024, at a redemption price equal to 100.000% of the principal amount, plus the applicable premium described in the 3.50% Notes Indenture and accrued and unpaid interest, if any, to but excluding the redemption date;

from February 15, 2024 to February 14, 2025, at a redemption price equal to 101.750% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date;

from February 15, 2025 to February 14, 2026, at a redemption price equal to 100.875% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date;

and from February 15, 2026 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.

Rackspace Technology Global may also redeem prior to February 15, 2024 up to 40.0% of the aggregate principal amount of the 3.50% Senior Secured Notes with funds in an aggregate amount not to exceed the net cash proceeds from certain equity offerings at a redemption price equal to 103.500% of the principal amount of the 3.50% Senior Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

Notwithstanding the foregoing, Rackspace Technology Global may redeem during each twelve-month period, commencing with February 9, 2021, up to 10.0% of the original aggregate principal amount of the 3.50% Senior Secured Notes at a redemption price of 103.000%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

As of December 31, 2021, $550 million aggregate principal amount of the 3.50% Senior Secured Notes remained outstanding.

5.375% Senior Notes

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Rackspace Technology Global is the issuer of the 5.375% Senior Notes, and obligations under the 5.375% 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 5.375% Senior Notes are effectively junior to the indebtedness under the Senior Facilities, to the extent of the collateral securing the Senior Facilities.

The 5.375% Indenture describes certain terms and conditions under which other current and future domestic subsidiaries are required to become guarantors of the 5.375% Senior Notes.

The 5.375% Senior Notes are effectively junior to the indebtedness under the Senior Facilities and the 3.50% Senior Secured Notes, to the extent of the collateral securing the Senior Facilities and the 3.50% Senior Secured Notes.

The 5.375% Notes Indenture describes certain terms and conditions under which other current and future domestic subsidiaries are required to become guarantors of the 5.375% Senior Notes.

Rackspace Technology Global may redeem the 5.375% Senior Notes at its option, in whole at any time or in part from time to time, at the following redemption prices:

prior to December 1, 2023, at a redemption price equal to 100.000% of the principal amount, plus the applicable premium described in the 5.375% Indenture and accrued and unpaid interest, if any, to but excluding the redemption date;

from December 1, 2023 to December 1, 2024, at a redemption price equal to 102.688% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date;

from December 1, 2024 to December 1, 2025, at a redemption price equal to 101.344% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date;

prior to December 1, 2023, at a redemption price equal to 100.000% of the principal amount, plus the applicable premium described in the 5.375% Notes Indenture and accrued and unpaid interest, if any, to but excluding the redemption date;

from December 1, 2023 to November 30, 2024, at a redemption price equal to 102.688% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date;

from December 1, 2024 to November 30, 2025, at a redemption price equal to 101.344% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date;

and from December 1, 2025 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.

Rackspace Technology Global may also redeem up to 40% of the aggregate principal amount of the 5.375% Senior Notes with funds in an aggregate amount not to exceed the net cash proceeds from certain equity offerings at a redemption price equal to 105.375% of the principal amount of the 5.375% Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

Rackspace Technology Global may also redeem prior to December 1, 2023 up to 40% of the aggregate principal amount of the 5.375% Senior Notes with funds in an aggregate amount not to exceed the net cash proceeds from certain equity offerings at a redemption price equal to 105.375% of the principal amount of the 5.375% Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

As of December 31, 2021, $550 million aggregate principal amount of the 5.375% Senior Notes remained outstanding.

Debt covenants

Our New Term Loan Facility is not subject to a financial maintenance covenant.

As of December 31, 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.

Our Term Loan Facility is not subject to a financial maintenance covenant.

The 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.

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).

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The Indentures 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.

These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures.

Additionally, upon the occurrence of a change of control (as defined in the Indentures), we will be required to make an offer to repurchase all of the outstanding 5.375% Senior Notes and 3.50% Senior Secured Notes at a price in cash equal to 101.000% of the aggregate principal amount, plus accrued and unpaid interest, if any, to, but not including the purchase date.

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 Indentures, 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 December 31, 2020, we were in compliance with all covenants under the Senior Facilities and the 5.375% 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 December 31, 2020, the interest rate on borrowings under the Receivables Financing Facility was 2.37%.

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 December 31, 2020, $65 million was borrowed and outstanding under the Receivables Financing Facility.

Subsequent to December 31, 2020, the SPV repaid a portion of the Receivables Financing Facility in the amount of $15 million to cover a borrowing base deficit of approximately $14 million.

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 December 31, 2020.

As of December 31, 2021, we were in compliance with all covenants under the Senior Facilities and the Indentures.

Capital Expenditures

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(4) Includes salaries and payroll-related costs of employees and consultants who devote time to the development of certain internal-use software projects, purchased software licenses and other projects that meet the criteria for capitalization.

Capital expenditures were $203 million in 2021, compared to $225 million in 2020, a decrease of $22 million.

The decrease is due to the continued mix shift of our revenues from high capital intensity service offerings to low capital intensity service offerings.

Capital expenditures were $225 million in 2020, compared to $210 million in 2019, an increase of $15 million.

The majority of the increase is due to the refresh of certain data center equipment within our normal maintenance cycle and multi-year agreements for software and customer licenses.

Capital expenditures were $210 million in 2019, compared to $348 million in 2018, a decrease of $138 million, primarily due to the non-recurrence in 2019 of several other factors driving higher capital expenditures in 2018.

In 2018, there was incremental capital spend related to Datapipe customers, higher spend to deploy customer environments, reflecting the changed mix of Bookings, higher customer demand for new devices due to the launch of a new server line, investments in customer experience and product capabilities and integration efforts in certain data centers.

Capital expenditures in 2018 also included $61 million in upfront purchases of certain software licenses and equipment under installment payment arrangements.

The following table sets forth a summary of certain cash flow information for the periods indicated:

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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 for 2021 increased $254 million, or 218%, from 2020.

This increase was primarily driven by a $413 million increase in cash collections, primarily reflecting higher revenue levels and an increased focus on collection efforts with multiple large customers, and to a lesser extent, receiving prepayments.

In addition, there was a $88 million decrease in debt interest payments due to lower interest rates on our long-term debt following various debt repurchase and refinancing transactions during the second half of 2020 and early 2021, and a $66 million decrease in employee-related payments due to a shift in headcount to our offshore service centers.

These operating cash flow increases were partially offset by a $298 million increase in operating expense payments, largely for third-party infrastructure costs.

Net cash provided by operating activities for 2020 decreased $176 million, or 60%, from 2019.

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These variances were partially offset by a $261 million increase in cash collections, primarily reflecting higher revenue levels resulting from the acquisition of Onica, a $20 million decrease in debt interest payments 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.

Net cash provided by operating activities for 2019 decreased $137 million, or 32%, from 2018.

This decrease was driven by lower cash collections in 2019 due to lower revenue, coupled with higher cash payments for operating expenses.

These higher cash payments were primarily due to increased infrastructure expense for third-party clouds reflecting growth in offerings utilizing those third-party clouds.

Other significant changes between periods included a $43 million decrease in employee-related payments due to a decline in headcount and a $27 million decrease in payments related to our obligations to settle share-based awards in connection with the Rackspace Acquisition.

Cash Used in Investing Activities

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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 for 2021 decreased $59 million, or 46%, from 2020.

This decrease was mainly due to net proceeds of $31 million from the January 2021 sale of a parcel of undeveloped land in the United Kingdom adjacent to one of our existing data centers.

There was also a $10 million decrease in acquisitions, and a $8 million decrease in purchases of property, equipment, and software.

Net cash used in investing activities for 2020 decreased $258 million, or 67%, from 2019, mainly due to lower cash payments for acquisitions.

Cash paid for the acquisition of Onica in 2019 was $316 million compared to $10 million paid for the acquisition of Bright Skies GmbH ("Bright Skies") in 2020.

Cash paid for the acquisition of Onica in 2019 was $316 million compared to $10 million paid for the acquisition of Bright Skies in 2020.

In addition, there was an $82 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 these decreases was partially offset by the receipt of $110 million in proceeds related to the sale of equity investments in 2019, including $107 million from the sale of our CrowdStrike investment, and the receipt of $17 million in proceeds in 2019 related to the repayment of a promissory note receivable issued in conjunction with the 2017 sale of our Mailgun business.

Net cash used in investing activities for 2019 increased $38 million, or 11%, from 2018, mainly due to higher cash payments for acquisitions.

Cash paid for the acquisition of RelationEdge in 2018 was $65 million compared to $316 million paid for the acquisition of Onica in 2019.

This was partially offset by a $96 million decrease in cash purchases of property, equipment and software and the receipt of $110 million in proceeds related to the sale of equity investments in 2019, including $107 million from the sale of our CrowdStrike investment.

In addition, we received $17 million in proceeds in 2019 related to the repayment of a promissory note receivable issued 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 $132 million for 2021 compared to net cash provided by financing activities of $30 million for 2020.

The change was primarily driven by net proceeds of $658 million from the IPO, including $9 million in offering fees paid, for 2020, partially offset by a $526 million decrease in net debt activity.

Net payments for long-term debt activity were $599 million during 2020, which included $1,177 million of 8.625% Senior Notes repurchases, $29 million of repayments on our Prior Term Loan Facility, and $9 million in debt issuance costs paid, offset by proceeds from the issuance of our 5.375% Senior Notes, and borrowings of $65 million under the Receivables Financing Facility that remained outstanding at year-end.

Net payments for long-term debt activity were $74 million during 2021, reflecting the refinancing of our Prior Term Loan Facility, a $65 million repayment related to the termination of our Receivables Financing Facility, and $35 million in debt issuance costs paid.

In addition, there was a $30 million increase in proceeds from employee stock plans, a $27 million increase in payments for finance leases and the first three payments for the financing component of our interest rate swaps totaling $13 million during 2021, offset by proceeds from financing obligations of $21 million during 2020.

Net cash provided by financing activities was $30 million for 2020 compared to net cash used in financing activities of $79 million for 2019.

The change was primarily driven by net proceeds of $658 million from the IPO, which was comprised of $667 million in proceeds from the issuance of common stock, net of $9 million in offering fees paid.

The change was primarily driven by net proceeds of $658 million from the IPO, including $9 million in offering fees paid.

In addition, we received proceeds of $31 million from employee stock plans and borrowed $65 million under our Receivables Financing Facility in 2020.

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In addition, there was a $42 million decrease in proceeds from other financing obligations and a $32 million increase in payments for other financing obligations in 2020 from 2019.

Net cash used in financing activities for 2019 increased $26 million, or 47%, from 2018.

The change was primarily driven by $66 million in repurchases of our 8.625% Senior Notes in 2019, an increase of $20 million in principal payments for financing obligations, and equity-related cash activity, which included $3 million of proceeds in 2018 compared to $5 million of payments in 2019.

This was partially offset by $63 million in proceeds received in 2019 in conjunction with financing obligations related to equipment sale-leaseback arrangements.

Additionally, we borrowed a total gross amount of $225 million under the Revolving Credit Facility over the course of the fourth quarter of 2019, primarily in connection with the closing of the Onica Acquisition.

As of December 31, 2019, we had fully repaid these borrowings with a combination of the proceeds received from financing obligations, proceeds received from the sale of our CrowdStrike investment and internally-generated cash.

Off-Balance Sheet Arrangements

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See Item 8 of Part II, Financial Statements and Supplementary Data - Note 10, "Commitments and Contingencies" for more information related to these indemnification arrangements.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures.

We consider accounting policies that require significant management judgment and estimates to be critical accounting policies.

We consider accounting estimates that require significant management judgment to be critical accounting estimates.

We review our estimates and judgments on an ongoing basis, including those related to business combinations, revenue recognition, allowance for doubtful accounts, property, equipment and software and definite-lived intangible assets, goodwill and indefinite-lived intangible assets, contingencies, share-based compensation and income taxes.

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Our largest source of revenue relates to fees associated with certain arrangements within our Multicloud Services offerings that generally have a fixed term, typically from 12 to 36 months with a monthly recurring fee based on the computing resources utilized and provided to the customer, the complexity of the underlying infrastructure and the level of support we provide.

Contracts for our service offerings falling within our Apps & Cross Platform and OpenStack Public Cloud segments and public cloud service offerings within our Multicloud Services segment typically operate on a month-to-month basis and can be canceled at any time without penalty.

Contracts for our service offerings falling within our Apps & Cross Platform and OpenStack Public Cloud segments and public cloud service offerings within our Multicloud Services segment typically operate on a consumption model and can be canceled at any time without penalty.

We also provide customers with professional services for the design and implementation of application, security and data services.

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Arrangements can contain multiple performance obligations that are distinct, which are accounted for separately.

Each performance obligation is recognized as services are provided based on their standalone selling price (“SSP”).

Each performance obligation is recognized as services are provided based on their SSP.

Judgment is required to determine the SSP for each of our distinct performance obligations.

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These events or circumstances could include a significant change in the business climate, regulatory environment, established business plans, operating performance indicators or competition.

Potential impairment indicators may also include, but are not limited to, (i) the results of our most recent annual or interim impairment testing, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, and (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any.

Goodwill is tested for impairment at the reporting unit level.

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The discount rates used are based on our weighted average cost of capital and are adjusted for risks and uncertainties inherent in our business and in our estimation of future cash flows.

As part of the goodwill impairment test, we also consider our market capitalization in assessing the reasonableness of the combined fair values estimated for our reporting units.

The estimates and assumptions used to calculate the fair value of our reporting units and the Rackspace trade name from year to year are based on operating results, market conditions, and other factors.

Changes in these estimates and assumptions could produce materially different results.

As a result of our annual goodwill impairment test performed during the fourth quarter of 2018, we determined that the carrying amount of our Multicloud Services reporting unit exceeded its fair value and recorded a goodwill impairment charge of $295 million, resulting in a decrease of approximately 16% in the goodwill allocated to this reporting unit.

The impairment was driven by a significant decrease in forecasted revenue and cash flows and a lower long-term growth rate, as current and forecasted industry trends reflected lower demand for traditional managed hosting services.

The results of our goodwill impairment test for the years ended December 31, 2019 and 2020 did not indicate any impairments of goodwill.

The results of our goodwill impairment test for the year ended December 31, 2020 did not indicate any impairments of goodwill.

As of December 31, 2021, the carrying amount of goodwill was $2,706.8 million.

Contingencies

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Share-Based Compensation

We account for share-based awards under the recognition and measurement provisions of ASC 718 (Compensation—Stock Compensation).

We account for share-based awards under the recognition and measurement provisions of ASC No.

718, Compensation—Stock Compensation .

Share-based compensation cost is measured at the grant date based on the fair value of the underlying common stock and is recognized as expense over the requisite service period.

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Determining the grant date fair value of share-based awards with performance vesting conditions and the probability of such awards vesting requires judgment.

Prior to the completion of our IPO on August 7, 2020, there had been no public market for our common stock since the Rackspace Acquisition in 2016.

Prior to the completion of the IPO on August 7, 2020, there had been no public market for our common stock since the Rackspace Acquisition in 2016.

The estimated fair value of our common stock was determined by our board of directors as of the grant date of each option grant, with input from management, including consideration of our most recent third-party valuations of our common stock, which were completed periodically throughout the fiscal year.

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Significant assumptions impacting the DCF calculation also included expected future capital expenditures, our long-term growth rate, and the applicable discount rate.

For purposes of capturing the dilution from outstanding options, the valuation utilized the Option-Pricing Method (“OPM”).

The OPM depended on key assumptions regarding the volatility and time to a liquidity event but did not require explicit estimates of the possible future outcomes.

For purposes of capturing the dilution from outstanding options, the valuation utilized the Option-Pricing Method.

The Option-Pricing Method depended on key assumptions regarding the volatility and time to a liquidity event but did not require explicit estimates of the possible future outcomes.

The input and assumptions used in this calculation were total equity value, time to liquidity, expected volatility and dividends, which were all determined by management.

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To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

Our effective tax rates may differ from the statutory rate for various reasons, including differences due to the tax impact of foreign operations, research and development tax credits, state taxes, contingency reserves for uncertain tax positions, certain benefits realized related to share-based compensation, executive compensation that is nondeductible under IRC Section 162(m), changes in the valuation of our deferred tax assets or liabilities, or from changes in tax laws, regulations, accounting principles or interpretations thereof.

In addition, we are subject to the continuous examination of our income tax returns by the U.S.

Internal Revenue Service (the “IRS”), Her Majesty’s Revenue and Customer and other tax authorities.

Our effective tax rates may differ from the statutory rate for various reasons, including differences due to the tax impact of foreign operations, R&D tax credits, state taxes, contingency reserves for uncertain tax positions, certain benefits realized related to share-based compensation, executive compensation that is nondeductible under IRC Section 162(m), changes in the valuation of our deferred tax assets or liabilities, or from changes in tax laws, regulations, accounting principles or interpretations thereof.

In addition, we are frequently subject to examination of our income tax returns by the IRS, Her Majesty’s Revenue and Customer and other tax authorities.

We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis