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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-01 · 256 added, 221 removed, 621 unchanged (43% of the section changed)

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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 Fanatical Customer Experience.

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

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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 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.

Onica was integrated into our Multicloud Services segment and contributed $21 million in revenue to our results in 2019 for the month and a half following its acquisition.

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 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.

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.

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

We recorded total charges of $50.5 million and $5.2 million for the years ended December 31, 2021 and December 31, 2022, respectively, related to this restructuring plan.

The 2021 charges 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 10, "July 2021 Restructuring Plan." Employee related costs consisted of one-time termination benefits and certain contractual termination benefits with executives.

Other costs consisted of professional fees and non-cash charges related to a contract termination with a third-party.

The remaining $25.1 million of 2021 charges and total 2022 charges consisted primarily of one-time offshore build out costs which are not accounted for as exit and disposal costs under ASC 420.

We do not expect to incur any further expenses related to the July 2021 Restructuring Plan.

In December 2022, we experienced a ransomware incident which caused service disruptions for our Hosted Exchange customers.

The Hosted Exchange email business, reported in our Apps & Cross Platform segment, is a managed email solution provided to small and medium businesses and represented approximately 1% of our total annual revenue.

Following discovery of the incident, we engaged an industry-leading global cybersecurity firm to help investigate the incident and remediate as necessary.

The firm confirmed that the incident was quickly contained and limited solely to the Hosted Exchange email business.

We have sunset the on-premises Hosted Exchange platform and have transitioned many customers from the Hosted Exchange platform to Microsoft 365 through our reseller agreement with Microsoft.

As of December 31, 2022, we recorded $5.9 million of expenses related to the Hosted Exchange incident, including costs to investigate and remediate, legal and other professional services, and supplemental staff resources that were deployed to provide support to customers.

We expect to continue to incur legal and other professional services costs in future periods and will expense those costs as incurred.

We maintain cybersecurity insurance commensurate with the size of our business, and expect that a significant portion of the incremental costs related to the Hosted Exchange incident will be covered by insurance.

However, the timing of insurance reimbursements may differ from the timing of recognition of the related expenses.

Effective on January 1, 2023, we reorganized around a two-business unit operating model, Public Cloud and Private Cloud.

This two-business unit operating model ensures increased focus, delivery, and service quality for our customers.

Beginning in 2023, we will change our segment reporting to reflect this reorganization under three reporting segments:

Public Cloud, Private Cloud and OpenStack Public Cloud.

Subsequent Events

For a description of subsequent events, see "Subsequent Events" in Item 8 of Part II, Financial Statements and Supplementary Data - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies."

Impact of COVID-19

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 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.

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, including developing a plan to return our workforce back to the office when it is safe to do so.

However, there are remaining uncertainties as a result of COVID-19, particularly the possibility of new variant strain(s) of the virus, the potential resurgence in the spread of the virus and the pace of economic recovery.

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, therefore, remains uncertain.

Russia and Ukraine Conflict

Political and economic uncertainty surrounding the Conflict between Russia and Ukraine could have a material adverse effect on our business.

Currently, the conflict has not had a significant impact on our operations or financial performance.

However, our overall performance depends in part on worldwide economic and geopolitical conditions.

We are monitoring the situation and the potential for the conflict to spread to other countries which could adversely impact our customers and operations, and we may take actions that modify our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.

Key Factors Affecting Our Performance

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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.

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

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 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.

For example, we believe that Rackspace Fabric provides customers a unified experience across their entire cloud and security footprint, and that our Rackspace Elastic Engineering model 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.

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Our capital expenditures equaled 8%, 7% and 5% of our revenue for the years ended December 31, 2020, 2021 and 2022, respectively.

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 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.

Our acquisitions in any period may impact the comparability of our results with prior and subsequent periods.

The integration of acquisitions also requires dedication of substantial time and resources, and we may never fully realize synergies and other benefits that we expect.

Acquisition purchase price accounting, which may require significant judgment, and amortization and depreciation of acquired assets, may result in our recording post-acquisition costs that are higher or lower than the underlying, steady state operating costs of the acquired business.

Additionally, the terms of any such acquisition, particularly with respect to the treatment of deferred revenue, may adversely impact our post-acquisition recognition of revenue from the acquired business.

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

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.

Human Capital

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

Key Operating Metrics

The following table and discussion present and summarize our key operating performance indicators, which management uses as measures of our current and future business and financial performance:

Year Ended December 31,

(In millions, except %) 2019 2020 2021

Bookings $ 700.7 $ 1,126.1 $ 1,030.5

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.

“Recurring customer contracts” are any contracts entered into on a multi-year or month-to-month basis, but excluding any professional services contracts for consulting, advisory or project-based work.

Bookings for any period may reflect orders that we perform in the same period, orders that remain outstanding as of the end of the period and the annualized value of recurring month-to-month contracts entered into during the period, even if the terms of such contracts do not require the contract to be renewed.

Bookings include net upgrades by existing customers within the same workload, but exclude net downgrades by such customers within that workload.

Any customer that contracts for a new workload is considered a new customer and the entire value of the contract or upgrade is recorded in Bookings, irrespective of whether the same customer canceled or downgraded other workloads.

Bookings also do not include the impact of any known contract non-renewals or service cancellations by our customers, except for positive net upgrades by existing customers.

In cases where a new or upgrading customer enters into a multi-year contract, Bookings include only the annualized contract value.

Bookings do not include usage-based fees in excess of contracted minimum commitments until actually incurred.

We use Bookings to measure the amount of new business generated in a period, which we believe is an important indicator of new customer acquisition and our ability to cross-sell new services to existing customers.

Bookings are also used by management as a factor in determining performance-based compensation for our sales force.

While we believe Bookings, in combination with other metrics, is an indicator of our near-term future revenue opportunity, it is not intended to be used as a projection of future revenue.

Our calculation of Bookings may differ from similarly titled metrics presented by other companies.

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 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 ARR by annualizing our actual revenue from existing recurring customer contracts (as defined under “Bookings” above) for the most recently completed fiscal quarter.

ARR is not adjusted for the impact of any known or projected future customer cancellations, service upgrades or downgrades or price increases or decreases.

We use ARR as a measure of our revenue trend and an indicator of our future revenue opportunity from existing recurring customer contracts, assuming zero cancellations.

The amount of actual revenue that we recognize over any 12-month period is likely to differ from ARR at the beginning of that period, sometimes significantly.

This may occur due to new Bookings, higher or lower professional services revenue, subsequent changes in our pricing, service cancellations, upgrades or downgrades and acquisitions or divestitures.

For the avoidance of doubt, ARR for any period ending December 31 is calculated by annualizing our actual revenue from existing recurring customer contracts for the fourth quarter in that year.

Our calculation of ARR may differ from similarly titled metrics presented by other companies.

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.

Key Components of Statement of Operations

A substantial amount of our revenue, particularly within our Multicloud Services segment, is generated pursuant to contracts that typically have a fixed term (typically from 12 to 36 months).

A substantial amount of our revenue, particularly from our private cloud services within our Multicloud Services segment, is generated pursuant to contracts that typically have a fixed term (typically from 12 to 36 months).

Our customers generally have the right to cancel their contracts by providing us with written notice prior to the end of the fixed term, though most of our contracts provide for termination fees in the event of cancellation prior to the end of their term, typically amounting to the outstanding value of the contract.

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Employee related costs and other costs incurred, as discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 10, " 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 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.

Our income tax benefit and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future taxes to be paid.

To date, we have recorded consolidated tax benefits, reflecting our net losses, though certain of our non-U.S.

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Selling, general and administrative expenses (906.8) (30.1) % (855.3) (27.4) % 51.5 (5.7) %

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

Impairment of goodwill (52.4) (1.7) % (534.5) (17.1) % (482.1) NM

Impairment of assets — — % (146.1) (4.7) % (146.1) 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

Loss from operations (2.5) (0.1) % (679.0) (21.7) % (676.5) NM

Other income (expense):

Interest expense (205.1) (6.8) % (208.5) (6.7) % (3.4) 1.7 %

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

Loss on investments, net (3.0) (0.1) % (0.2) (0.0) % 2.8 (93.3) %

Debt modification and extinguishment costs (37.5) (1.2) % — — % 37.5 (100.0) %

Other expense, net (1.0) (0.0) % (10.0) (0.3) % (9.0) NM

Total other income (expense) (246.6) (8.2) % (218.7) (7.0) % 27.9 (11.3) %

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

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) %

Loss before income taxes (249.1) (8.3) % (897.7) (28.8) % (648.6) NM

Benefit for income taxes 30.8 1.0 % 92.9 3.0 % 62.1 NM

Net loss $ (218.3) (7.3) % $ (804.8) (25.8) % $ (586.5) NM

NM = not meaningful.

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Multicloud Services revenue in 2022 increased 5% on an actual basis, and 7% on a constant currency basis, from 2021.

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 .

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

Offerings in this segment with the strongest growth include managed public cloud services on AWS, Microsoft Azure and Google Cloud.

Apps & Cross Platform revenue in 2022 increased 5% on an actual basis, and 6% on a constant currency basis, from 2021, d riven by growth in professional services across our SaaS applications and data services offerings, partially offset by the discontinuation of a non-core line of business in 2021.

OpenStack Public Cloud revenue in 2022 decreased 18% on an actual basis, and 16% on a constant currency basis, from 2021 due to customer churn.

Cost of Revenue

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 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.

Cost of revenue increased $193 million, or 9%, to $2,265 million in 2022 from $2,073 million in 2021, primarily due to an increase in usage charges for third-party infrastructure associated with growth in these offerings.

The increase in expense 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.

We also had higher severance in the prior period.

In addition, there were year-over-year data center expense reductions as a result of initiatives to lower our cost structure, which included the consolidation of data center facilities.

Depreciation expense also decreased between periods primarily due 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.

As a percentage of revenue, cost of revenue increased 370 basis points in 2022 to 72.6% from 68.9% in 2021, primarily driven by a 640 basis point increase in usage charges for third-party infrastructure, partially offset by a decrease related to personnel costs, data center, and depreciation expense.

Gross Profit and Non-GAAP Gross Profit

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Restructuring and transformation expenses (3)

Hosted Exchange incident expenses — 0.2

Non-GAAP Gross Profit $ 996.4 $ 884.2

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Segment gross profit as a percentage of segment revenue decreased by 510 basis points, reflecting a 13% increase in segment cost of revenue and a 5% 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 2% in 2022 from 2021.

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.

Segment gross profit as a percentage of segment revenue decreased by 90 basis points, reflecting a 7% increase in segment cost of revenue and a 5% increase in segment revenue.

OpenStack Public Cloud gross profit decreased 35% in 2022 from 2021 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.

Segment gross profit as a percentage of segment revenue decreased by 790 basis points, reflecting an 18% decrease in segment revenue, partially offset by a 7% decrease in segment cost of revenue.

The aggregate amount of costs reflected in consolidated gross profit but excluded from Non-GAAP Gross Profit was $27.3 million in 2022, a decrease of $32.3 million from $59.6 million in 2021, primarily driven by lower restructuring and transformation expenses and share-based compensation.

For more information about our segment gross profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 17, "Segment Reporting."

Selling, General and Administrative Expenses

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.

SG&A expenses decreased $52 million, or 6%, to $855 million in 2022 from $907 million in 2021, due to a decline in personnel costs from cost savings as a result of shifting roles to lower-cost locations as part of our continued focus on business optimization initiatives.

We also had lower severance expense between periods.

The prior period included $25 million of restructuring charges related to the July 2021 Restructuring Plan accounted for as exit and disposal costs under ASC 420, of which $14 million were personnel related costs.

There were also reductions in costs related to other business optimization and integration initiatives compared to the prior period, as well as lower amortization expense related to certain intangible assets reaching the end of their useful life.

These reductions in expense were partially offset by an increase in travel expense as a result of the easing of COVID-19 restrictions and costs incurred in 2022 related to the Hosted Exchange incident.

As a percentage of revenue, SG&A expenses decreased 270 basis points, to 27.4% in 2022 from 30.1% in 2021, 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.

During the third quarter of 2022, we experienced a sustained decline in our stock price resulting in our market capitalization being less than the carrying value of our combined reporting units.

We performed an interim goodwill impairment analysis as of September 1, 2022 based on our assessment of several events and circumstances that affect the significant inputs used to determine the fair value of our reporting units, including the significance of the amount of excess carrying value over fair value, consistency of operating margins and cash flows, budgeted-to-actual performance from prior year, overall change in economic climate, changes in the industry and competitive environment, and earnings quality and sustainability.

In addition, as of September 1, 2022, we lowered our projected operating results primarily due to product mix shifts and market concerns related to inflation and other macroeconomic factors.

As a result, we determined that the carrying value of our Multicloud Services reporting unit exceeded its fair value and recorded an impairment of goodwill of $405 million during the third quarter of 2022.

The results of our annual goodwill impairment test as of October 1, 2022 did not indicate any impairments of goodwill.

During the fourth quarter of 2022, subsequent to our annual goodwill impairment analysis, we experienced a decline in our market capitalization following a ransomware incident in early December which caused service disruptions on our Hosted Exchange email business.

We therefore determined it appropriate to perform an interim quantitative assessment of our reporting units as of December 31, 2022.

As a result, we determined that the carrying value of our Apps & Cross Platform reporting unit exceeded its fair value and recorded an impairment of goodwill of $129 million during the fourth quarter of 2022.

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 fully impaired its goodwill by recording 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.

Impairment of Assets

We also evaluated our indefinite-lived intangible asset and long-lived assets for impairment as of September 1, 2022.

As a result of these evaluations, we recorded total impairment charges of $59 million during the third quarter of 2022, consisting of a $21 million impairment of our indefinite-lived trade name intangible asset and a $38 million impairment of OpenStack Public Cloud long-lived assets.

As of December 31, 2022, we recorded an additional $12 million impairment of our indefinite-lived trade name intangible asset.

In addition, as of December 31, 2022, our corporate headquarters property was classified as held for sale.

The property's previous carrying amount of $83 million was written down to its estimated fair value, less estimated cost to sell, of $12 million, resulting in a $71 million impairment charge.

We also wrote-off the remaining $5 million net book value of the related property tax abatement asset in connection with the held for sale classification.

There were no such impairments in 2021.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 4 , " Property, Equipment and Software, net " and 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 $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.

Debt Modification and Extinguishment Costs

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

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 6, "Debt" for further discussion.

Other Expense, Net

The increase in other expense, net to $10 million in 2022 from $1 million in 2021 is primarily related to foreign currency transaction losses.

Benefit for Income Taxes

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

Our income tax benefit increased by $62 million to $93 million in 2022 from $31 million in 2021.

Our effective tax rate decreased from 12.4% in 2021 to 10.3% in 2022.

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.

The decrease in the effective tax rate year-over-year is primarily due to the tax impact associated with the goodwill impairments, the geographic distribution of profits and tax effects from nondeductible share-based compensation.

The difference between the effective tax rate for 2022 and the statutory tax rate is primarily due to the tax impact associated with the goodwill impairments, the geographic distribution of profits, executive compensation that is nondeductible under IRC Section 162(m) and tax effects from nondeductible share-based compensation.

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

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

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) %

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) %

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

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

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.

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.

Gross Profit and Non-GAAP Gross Profit

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Other compensation expense (1)

Purchase accounting impact on revenue (2)

Purchase accounting impact on expense (2)

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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.

(2) Adjustment for the impact of purchase accounting from the Rackspace Acquisition on revenue and expenses.

(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:

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

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.

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 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.

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 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.

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.

For more information about our segment gross profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 17, "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.

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.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 15, "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 Holdings LLC integration, IPO related expenses, and management consulting fees as the agreements were terminated in connection with the IPO.

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 10, "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 fully impaired its goodwill by recording a goodwill impairment charge of $52 million.

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

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 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.

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 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.

Debt Modification and Extinguishment Costs

In 2020, we recorded $72 million of debt modification and extinguishment costs 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 6, "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 17, "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 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.

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

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Total $ 3,009.5 $ 3,122.3 $ 43.6 $ 3,165.9 3.7 % 5.2 %

(a) The effect of foreign currency is calculated by translating current period results using the average exchange rate from the prior comparative period.

Year Ended December 31, 2020 Year Ended December 31, 2021 % Change

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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 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.

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Following the Rackspace Acquisition, we acquired several businesses, sold businesses and investments that we deemed to be non-core and launched multiple integration and business transformation initiatives intended to improve the efficiency of people and operations and identify recurring cost savings and new revenue growth opportunities.

We believe that these transactions and activities resulted in costs, which have historically been substantial, and that may not be indicative of, or are not related to, our core operating results, including interest related to the incurrence of additional debt to finance acquisitions and third party legal, advisory and consulting fees and severance, retention bonus and other internal costs that we believe would not have been incurred in the absence of these transactions and activities and are also may not be indicative of, or related to, our core operating results.

We define 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.

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 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, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, management fees, the amortization of acquired intangible assets, goodwill and asset impairment charges, 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, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, management fees, the amortization of acquired intangible assets, goodwill and asset impairment charges, 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, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, management fees, certain other non-operating, non-recurring or non-core gains and losses, interest expense, income taxes, depreciation and amortization, and goodwill and asset impairment charges.

Non-GAAP Operating Profit and Adjusted EBITDA are management’s principal metrics for measuring our underlying financial performance.

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Share-based compensation expense 74.5 75.4 69.5

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

Special bonuses and other compensation expense (a)

37.5 11.8 10.0

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104.8 161.5 99.0

Hosted Exchange incident expenses — — 5.9

Management fees (d)

Impairment of goodwill — 52.4 534.5

Impairment of assets — — 146.1

Gain on sale of land — (19.9) —

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(0.7) 3.0 0.2

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

(9.8) 71.5 37.5

Debt modification and extinguishment costs (f)

Other (income) expense, net (g)

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Share-based compensation expense 74.5 75.4 69.5

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

Special bonuses and other compensation expense (a)

37.5 11.8 10.0

3 unchanged sentences

104.8 161.5 99.0

Hosted Exchange incident expenses — — 5.9

Management fees (d)

Impairment of goodwill — 52.4 534.5

Gain on divestiture (2.1) — —

Impairment of assets — — 146.1

Gain on sale of land — (19.9) —

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Share-based compensation expense 74.5 75.4 69.5

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

Special bonuses and other compensation expense (a)

37.5 11.8 10.0

3 unchanged sentences

104.8 161.5 99.0

Hosted Exchange incident expenses — — 5.9

Management fees (d)

Impairment of goodwill — 52.4 534.5

Impairment of assets — — 146.1

Gain on sale of land — (19.9) —

1 unchanged sentence

(0.7) 3.0 0.2

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

(9.8) 71.5 37.5

Debt modification and extinguishment costs (f)

Other (income) expense, net (g)

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Adjusted EBITDA $ 762.8 $ 725.8 $ 584.5

(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.

(a) Includes expense related to 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 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.

(b) Includes legal, professional, accounting and other advisory fees related to acquisitions and the IPO, certain one-time costs related to being a first year public company, 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.

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The management consulting agreements were terminated effective August 4, 2020, and therefore no management fees have accrued or will be payable for periods after August 4, 2020.

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

(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.

(e) Includes gains and losses on investment and from dispositions.

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

(g) Reflects changes in the fair value of foreign currency derivatives and other foreign currency gains and losses.

(h) All of our intangible assets are attributable to acquisitions, including the Rackspace Acquisition in 2016.

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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.

We define Non-GAAP EPS as Non-GAAP Net Income divided by our GAAP weighted 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 weighted 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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(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.

Potential common share equivalents consist of shares issuable upon the exercise of stock options, vesting of restricted stock units (including performance-based restricted stock units) or purchases under the ESPP, as well as contingent shares associated with our acquisition of Datapipe.

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.

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As of December 31, 2022, the Revolving Credit Facility provided for up to $375 million of borrowings, none of which was drawn as of December 31, 2022.

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.

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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.

On March 3, 2022, our board of directors authorized a program to repurchase up to $75 million of shares of our common stock from time to time through open-market transactions, privately negotiated transactions, accelerated share repurchases and other transactions in accordance with applicable security laws.

During the year ended December 31, 2022, we repurchased $31 million , or 3.1 million shares, of our common stock on the open market under this program.

As of December 31, 2022, approximately $44 million of the amount authorized by the board under the current program remained available for additional purchases.

At December 31, 2022, we held $228 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $147 million was held by foreign entities.

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Senior Facilities

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.

The Term Loan Facility will mature on February 15, 2028 and the Revolving Credit Facility will mature on August 7, 2025.

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.

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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.

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.

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 secure d 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.

During 2022, 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, 2022.

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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.

The 3.50% Notes Indenture describes certain terms and conditions under which other current and future domestic subsidiaries are required to become guarantors of the 3.50% Senior Secured Notes.

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:

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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.

The reduction in capital expenditures from 2020 to 2021 and again from 2021 to 2022 is due to the continued mix shift of our revenues from high capital intensity service offerings to low capital intensity service offerings.

Additionally, the shift of internal software development work to lower cost geographies has also contributed to the decrease in capital expenditures between periods.

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 2022 decreased $124 million, or 33%, from 2021.

This decrease was primarily driven by an increase in operating expense payments of $317 million, largely for third-party infrastructure costs, partially offset by an increase in cash collections of $115 million and a decrease in employee-related payments of $56 million mainly due to a shift in headcount to our offshore service centers.

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.

In addition, there was an $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.

This decrease was due to a $400 million increase in operating expense payments, largely for third-party infrastructure costs, and a $70 million increase in employee-related payments, both reflecting the impact of the Onica acquisition.

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.

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 2022 increased $29 million, or 42%, from 2021.

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

During 2022, we made an $8 million cash payment in connection with the acquisition of Just Analytics and a $15 million payment for the purchase of a convertible promissory note that matures in 2027.

These outflows in the current year period were offset by a $28 million reduction in cash purchases of property, equipment, and software year-over-year.

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 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.

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

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 for 2022 increased $55 million, or 41% from 2021.

The change was primarily driven by a $57 million reduction in proceeds from employee stock plans year-over-year.

The remaining variance includes $31 million in common stock share repurchases as part of the program authorized in March 2022, a $17 million increase in finance lease principal payments, and a $4 million increase in payments on the financing component of our interest rate swap during 2022.

These drivers were partially offset by a $51 million reduction in net payments related to long-term debt activity between periods, including debt issuance costs.

The prior year included the February 2021 Refinancing Transaction and a $65 million repayment on the now terminated Receivables Financing Facility, while the current period only includes quarterly principal payments on our Term Loan Facility.

In addition, there was a $7 million decrease in principal payments for financing obligations between periods.

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, 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.

These net cash inflows were offset by net repayments on senior notes of $627 million, reflecting the repurchase of our 8.625% Senior Notes and issuance of 5.375% Senior Notes, compared to $66 million in 8.625% Senior Notes repurchases in 2019.

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.

Off-Balance Sheet Arrangements

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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.

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

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to determine the carrying values of assets and liabilities.

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As these variable consideration components consist of a single distinct daily service provided on a single performance obligation, we account for this consideration as services are provided and earned.

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.

A substantial amount of revenue relates to fees associated with our private cloud services within the 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 consumption model and can be canceled at any time without penalty.

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Revenue is recognized net of third-party fees when we determine that our obligation is only to facilitate the customers’ purchase of third-party infrastructure.

Valuation of Accounts Receivable and Allowance for Doubtful Accounts

We record an allowance for doubtful accounts on trade accounts receivable for estimated losses resulting from uncollectible receivables.

Valuation of Accounts Receivable and Allowance for Credit Losses

We record an allowance for credit losses on trade accounts receivable for estimated losses resulting from uncollectible receivables.

When evaluating the adequacy of the allowance, we consider historical bad debt write-offs and all known facts and circumstances such as current economic conditions and trends, customer creditworthiness and specifically identified customer risks.

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Recoverability of assets is measured at the asset group level and if the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds its fair value.

As of September 1, 2022, due to the factors discussed below, we performed an interim impairment review of the recoverability of our long-lived assets by asset group.

Based on the results of the recoverability test, we determined that, as of September 1, 2022, the carrying amount of the OpenStack Public Cloud asset group’s long-lived assets exceeded the sum of the undiscounted cash flows.

Fair values of the OpenStack Public Cloud long-lived assets were determined using a combination of the income approach and the cost approach.

The income approach utilized assumptions including management’s best estimates of the expected future cash flows, risk-adjusted discount rate, and the estimated useful life of the asset group.

The cost approach utilized assumptions for the current replacement costs of similar assets adjusted for estimated depreciation and deterioration of the existing equipment and economic obsolescence.

Estimates of floor values for the property, equipment and software, net, were considered relative to potential economic support for the assets such that the concluded value did not fall below the estimated floor value of these assets.

We concluded that the carrying value of the OpenStack Public Cloud long-lived assets, including customer relationship intangibles and property, equipment and software, net, were impaired and recorded non-cash impairment charges of $38 million during the third quarter of 2022, which is included in "Impairment of assets" in our Consolidated Statements of Comprehensive Loss.

The results of our impairment reviews of the recoverability of our long-lived assets as of October 1, 2022 and December 31, 2022 did not indicate any impairments.

We capitalize the salaries and related compensation costs of employees and consultants who devote time to the development of certain internal-use software projects.

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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, (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any, and (iv) other macroeconomic factors, such as increases in interest rates that may affect the weighted average cost of capital, volatility in the equity and debt markets, or fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations.

Goodwill is tested for impairment at the reporting unit level.

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Certain assets and liabilities are shared by multiple reporting units, and thus, are allocated to each reporting unit based on the relative size of a reporting unit, primarily based on revenue.

We have three reporting units:

Multicloud Services, Apps & Cross Platform and OpenStack Public Cloud.

We have two reporting units with goodwill:

Multicloud Services and Apps & Cross Platform.

Goodwill allocated to our third reporting unit, OpenStack Public Cloud, was fully impaired during the fourth quarter of 2021.

We estimate the fair values of our reporting units and the Rackspace trade name using the discounted cash flow method and relief-from-royalty method, respectively.

These calculations require the use of significant estimates and assumptions, such as:

(i) the forecasted royalty rate;

(i) the royalty rate;

(ii) the estimation of future revenue and projected margins, which are dependent on internal cash flow forecasts;

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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.

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, including OpenStack Public Cloud.

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 of September 1, 2022, after considering all available evidence in our evaluation of goodwill impairment indicators, we determined it appropriate to perform an interim quantitative assessment of our reporting unit as of September 1, 2022.

For the interim quantitative goodwill impairment analysis performed as of September 1, 2022, we utilized the income approach to determine the fair value of our reporting units.

The income approach utilizes a discounted cash flow method which is based on the present value of projected cash flows.

The discounted cash flow models reflect our assumptions regarding revenue growth rates, projected gross profit margins, risk-adjusted discount rates, terminal period growth rate, economic and market trends and other expectations about the anticipated operating results of our reporting units.

The terminal period growth rate is selected based on economic conditions and consideration of growth rates used in the forecast period and historical performance of the reporting unit.

We utilized a range of our weighted-average cost of capital of 10.0% to 12.0% as our discount rate, which was risk-adjusted for each reporting unit.

After determining the fair value of our reporting units, we reconciled the combined fair value of the reporting units to the company's market capitalization as of September 1, 2022.

As a result of our interim goodwill impairment test performed as of September 1, 2022, we determined that the carrying amount of our Multicloud Services reporting unit exceeded its fair value and recorded a goodwill impairment charge of $405 million during the third quarter of 2022, which is included in "Impairment of goodwill" in our Consolidated Statements of Comprehensive Loss.

The impairment was driven by deteriorating forecasted margins and cash flows within this reporting unit primarily due to slower than anticipated product mix shifts.

The Apps & Cross Platform reporting unit was determined to have a fair value that exceeded its carrying value by approximately 15% and therefore no impairment was recognized.

We performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting unit by utilizing changes in assumptions that reflect reasonably likely future changes in the discount rate used in the weighted-average cost of capital calculation and the terminal growth rate.

Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of our Multicloud Services and Apps & Cross Platform reporting units of approximately $235 million and $33 million, respectively.

As of September 1, 2022, due to the factors discussed above and prior to testing our goodwill for impairment, we performed a quantitative assessment of our indefinite-lived intangible asset utilizing a relief from royalty method.

Significant estimates and assumptions included in the relief from royalty method are expectations of revenue growth rates, and selection of royalty rate and discount rate.

We utilized a royalty rate of 0.5% and a discount rate of 10.7%.

We determined the estimated fair value of the Rackspace trade name was less than its carrying value.

As a result, we recorded a $21 million non-cash impairment charge during the third quarter of 2022, which is included in "Impairment of assets" in our Consolidated Statements of Comprehensive Loss.

We performed our annual quantitative goodwill impairment test as of October 1, 2022.

For the quantitative goodwill impairment analysis performed as of October 1, 2022, we utilized the income approach to determine the fair value of our reporting units, as discussed above.

We utilized a range of our weighted-average cost of capital of 10.0% to 12.0% as our discount rate, which was risk-adjusted for each reporting unit.

After determining the fair value of our reporting units, we reconciled the combined fair value of the reporting units to the company's market capitalization as of October 1, 2022.

As a result of our goodwill impairment test performed as of October 1, 2022, we determined that the fair value exceeded the carrying amounts for each of our reporting units.

The fair value exceeded the carrying value for the Multicloud Services reporting unit by 1% and the Apps & Cross Platform reporting unit by 15%.

Therefore no impairment was recognized.

As of October 1, 2022, we performed a quantitative assessment of our indefinite-lived intangible asset utilizing a relief from royalty method, as discussed above.

We utilized a royalty rate of 0.5% and a discount rate of 10.7%.

We determined the estimated fair value of the Rackspace trade name was greater than its carrying value, and therefore no impairment was recognized.

During the fourth quarter of 2022, subsequent to our annual goodwill impairment analysis, we experienced decline in our market capitalization following a ransomware incident in early December which caused service disruptions on our Hosted Exchange email business which is included in our Apps & Cross Platform reporting unit.

After considering all available evidence in our evaluation of goodwill impairment indicators, including our lowered projected operating results within this reporting unit, we determined it appropriate to perform an interim quantitative assessment of our reporting units as of December 31, 2022.

For the quantitative goodwill impairment analysis performed as of December 31, 2022, we utilized the income approach to determine the fair value of our reporting units, as discussed above.

We utilized a range of our weighted-average cost of capital of 10.5% to 12.0% as our discount rate, which was risk-adjusted for each reporting unit.

After determining the fair value of our reporting units, we reconciled the combined fair value of the reporting units to the company's market capitalization as of December 31, 2022.

As a result of our goodwill impairment test performed as of December 31, 2022, we determined that the carrying amount of our Apps & Cross Platform reporting unit exceeded its fair value and recorded a goodwill impairment charge of $129 million, which is included in "Impairment of goodwill" in our Consolidated Statements of Comprehensive Loss.

The impairment was driven by a decrease in forecasted revenues, margins, and cash flows within the reporting unit primarily due to the Hosted Exchange incident and other macroeconomic factors.

The Multicloud Services reporting unit was determined to have a fair value that exceeded its carrying value by approximately 1% and therefore no impairment was recognized.

As of December 31, 2022, due to the factors discussed above and prior to testing our goodwill for impairment, we performed a quantitative assessment of our indefinite-lived intangible asset utilizing a relief from royalty method, as discussed above.

We utilized a royalty rate of 0.5% and a discount rate of 11.0%.

We determined the estimated fair value of the Rackspace trade name was less than its carrying value.

As a result, we recorded a $12 million non-cash impairment charge during the fourth quarter of 2022, which is included in "Impairment of assets" in our Consolidated Statements of Comprehensive Loss.

The fair value determination of our reporting units and our indefinite-lived intangible asset is judgmental in nature and requires the use of estimates and assumptions that are sensitive to changes.

Assumptions include estimation of the royalty rate, estimation of future revenue and projected margins, which are dependent on internal cash flow forecasts, estimation of the terminal growth rates and capital spending, and determination of discount rates.

As a result, there can be no assurance that the estimates and assumptions made for purposes of the quantitative goodwill and indefinite-lived intangible impairment tests will prove to be an accurate prediction of future results.

Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as:

(i) volatility in the equity and debt markets or other macroeconomic factors, (ii) an increase in the weighted-average cost of capital due to further increases in interest rates, (iii) decrease in future cash flows due to lower than expected sales, or (iv) fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations.

Accordingly, if our current cash flow assumptions are not realized, we experience further sustained declines in our stock price or market capitalization, or increases in costs of capital, it is possible that an additional impairment charge may be recorded in the future, which could be material.

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 fully impaired its goodwill by recording a goodwill impairment charge of $52 million for the year ended December 31, 2021.

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, 2022, the carrying amount of goodwill was $2,155.1 million.

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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.

The third-party valuation specialists used the Income Approach to estimate the value of our equity.

Within the Income Approach, the valuation specialists relied upon the Discounted Cash Flow (“DCF”) method, which focused on our estimated expected cash flow available for distribution to the equityholders.

We used the Income Approach to estimate the value of our equity.

Within the Income Approach, we rely upon the Discounted Cash Flow (“DCF”) method, which focused on our estimated expected cash flow available for distribution to the equityholders.

The DCF calculation was prepared based on detailed revenue and expense projections prepared by management as part of its annual budgeting process and reflected the financial and operational facts and circumstances specific to our company.

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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, 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.

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, goodwill impairments, or from changes in tax laws, regulations, accounting principles or interpretations thereof.

In addition, we are periodically subject to examination of our income tax returns in the U.S., U.K., India, and other countries.

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