Rackspace Technology, Inc. 10-Q

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management ' s Discussion and Analysis of Financial Condition and Results of Operations ( " MD&A " ) is intended to help readers understand our results of operations, financial condition and cash flows and should be read in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report") and with the audited consolidated financial statements and the related notes included in our Annual Report. References to " Rackspace Technology, " " we, " " our company, " " the company, " " us, " or " our " refer to Rackspace Technology, Inc. and its consolidated subsidiaries. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See " Special Note Regarding Forward-Looking Statements " contained elsewhere in this Quarterly Report. Overview We are a leading end-to-end, hybrid multicloud technology services company. We design, build and operate our customers' cloud environments across all major technology platforms, irrespective of technology stack or deployment model. We partner with our customers at every stage of their cloud journey, enabling them to modernize applications, build new products and adopt innovative technologies. On July 21, 2021, we committed to an internal restructuring plan (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 $1.0 million and $5.2 million for the three and nine months ended September 30, 2022, respectively, related to this restructuring plan which are not accounted for as exit and disposal costs under ASC 420, consisting primarily of one-time offshore build out costs. In December 2022, we experienced a ransomware incident which caused service disruptions for our Hosted Exchange customers. The Hosted Exchange email business 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. During the three and nine months ended September 30, 2023, we recorded $0.1 million and $5.0 million, respectively, 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. During the three and nine months ended September 30, 2023, we recorded $5.4 million of loss recovery insurance proceeds received or expected to be received related to the Hosted Exchange incident. 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 changed our segment reporting to reflect this reorganization under two reportable segments: Public Cloud and Private Cloud. We have reflected this change in all historical comparative periods presented within this MD&A. Our Public Cloud segment is a services-centric, capital-light model providing value-added cloud solutions through managed services, Elastic Engineering and professional services offerings for customer environments hosted on the Amazon Web Services ("AWS"), Microsoft Azure and Google Cloud public cloud platforms . Our Private Cloud segment is a technology-forward, capital-intensive model providing managed service offerings for customer environments hosted in one of our data centers as well as in those owned by customers or by third parties such as colocation providers. Private Cloud also includes our legacy OpenStack Public Cloud business that we ceased to actively market to customers in 2017 . See Item 1 of Part I, Financial Statements - Note 14, "Segment Reporting," for additional information about our segments. - 33 - Table of Contents Key Factors Affecting Our Performance We believe our combination of proprietary technology, automation capabilities and technical expertise creates a value proposition for our customers that is hard to replicate for both competitors and in-house IT departments. Our continued success depends to a significant extent on our ability to meet the challenges presented by our highly competitive and dynamic market, including the following key factors: Differentiating Our Service Offerings in a Competitive Market Environment Our success depends to a significant extent on our ability to differentiate, expand and upgrade our service offerings in line with developing customer needs, while deepening our relationships with leading public cloud service providers and establishing new relationships, including with sales partners. We are a certified premier consulting and managed services partner to some of the largest cloud computing platforms, including AWS, 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 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. Customer Relationships and Retention Our success greatly depends on our ability to retain and develop opportunities with our existing customers and to attract new customers. We operate in a growing but competitive and evolving market environment, requiring innovation to differentiate us from our competitors. We believe that our integrated cloud service portfolio and our differentiated customer experience and technology are keys to retaining and growing revenue from existing customers as well as acquiring new customers. For example, we believe that 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. Business Mix Shift The mix of revenue has shifted in recent years, from our Private Cloud offerings to infrastructure resale and services within Public Cloud. Private Cloud offerings are generally hosted on our own infrastructure and deliver higher segment operating margins, but also require a higher level of capital expenditures. Conversely, Public Cloud segment operating margins are lower, driven by high volumes of infrastructure resale revenue which come at significantly lower margins. However, Public Cloud requires significantly less capital expenditures. Going forward, the focus in Public Cloud is on expanding segment operating margins by driving cost efficiencies and growing services revenue, which are expected to come at higher margins than infrastructure resale. Shift in Capital Intensity In recent years, the mix of our consolidated revenues has shifted from high capital intensity service offerings to low capital intensity service offerings and we expect this mix shift to continue. Historically, we primarily offered managed hosting and OpenStack Public Cloud services to our customers, which required us to deploy servers and equipment to ensure adequate capacity for new customers and, in certain cases, on behalf of customers at the start or during the performance of a contract, resulting in a high level of anticipatory and success-based capital expenditures. Today, the vast majority of our revenue is derived from service offerings, such as managed public cloud services, application services and professional services, which have significantly lower success-based capital requirements because they allow us to leverage our partners ' infrastructure or technology to make our capital expenditures more efficient. As a result, we have recently experienced and expect to continue to experience changes in our capital expenditures requirements. Our capital expenditures equaled 4% of our revenue for both the three months ended September 30, 2022 and 2023 and 4% and 6% of our revenue for the nine months ended September 30, 2022 and 2023, respectively. While we saw an increase in capital expenditures for the nine months ended September 30, 2023, we expect to return to our historical capital intensity levels over the longer term. - 34 - Table of Contents Key Components of Statement of Operations Revenue A substantial amount of our revenue, particularly within our Private Cloud segment, is generated pursuant to contracts that typically have a fixed term (typically from 12 to 36 months). Our customers generally have the right to cancel their contracts by providing us with written notice prior to the end of the fixed term, though most of our contracts provide for termination fees in the event of cancellation prior to the end of their term, typically amounting to the outstanding value of the contract. These contracts include a monthly recurring fee, which is determined based on the computing resources utilized and provided to the customer, the complexity of the underlying infrastructure and the level of support we provide. Most of our services within our Public Cloud segment and legacy OpenStack business generate usage-based revenue invoiced on a monthly basis and can be canceled at any time without penalty. We also generate revenue from usage-based fees and fees from professional services earned from customers using our hosting and other services. We typically recognize revenue on a daily basis, as services are provided, in an amount that reflects the consideration to which we expect to be entitled in exchange for our services. Our usage-based arrangements generally include a variable consideration component, consisting of monthly utility fees, with a defined price and undefined quantity. Our customer contracts also typically contain service level guarantees, including with respect to network uptime requirements, that provide discounts when we fail to meet specific obligations and, with respect to certain products, we may offer volume discounts based on usage. As these variable consideration components consist of a single distinct daily service provided on a single performance obligation, we account for all of them as services are provided and earned. Cost of revenue Cost of revenue consists primarily of usage charges for third-party infrastructure and personnel costs (including salaries, bonuses, benefits and share-based compensation) for engineers, developers and other employees involved in the delivery of services to our customers. Cost of revenue also includes depreciation of servers, software and other systems infrastructure, data center rent and other infrastructure maintenance and support costs, including software license costs and utilities. Cost of revenue is driven mainly by demand for our services, our service mix and the cost of labor in a given geography. Selling, general and administrative expenses (SG&A) Selling, general and administrative expenses consist primarily of personnel costs (including salaries, bonuses, commissions, benefits and share-based compensation) for our sales force, executive team and corporate administrative and support employees, including our human resources, finance, accounting and legal functions. SG&A also includes research and development costs, repair and maintenance of corporate infrastructure, facilities rent, third-party advisory fees (including audit, legal and management consulting costs), marketing and advertising costs and insurance, as well as the amortization of related intangible assets and certain depreciation of fixed assets. SG&A also includes transaction costs related to acquisitions and financings along with costs related to integration and business transformation initiatives which may impact the comparability of SG&A between periods. Income taxes Our income tax benefit (provision) and deferred tax assets and liabilities reflect management's best assessment of estimated current and future taxes to be paid. We are under certain domestic and foreign tax audits. Due to the complexity involved with certain tax matters, there is the possibility that the various taxing authorities may disagree with certain tax positions filed on our income tax returns. We believe we have made adequate provision for all uncertain tax positions. See Item 1 of Part I, Financial Statements - Note 11, "Taxes." - 35 - Table of Contents Results of Operations We discuss our historical results of operations, and the key components of those results, below. Past financial results are not necessarily indicative of future results. Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2023 The following table sets forth our results of operations for the specified periods, as well as changes between periods and as a percentage of revenue for those same periods (totals in table may not foot due to rounding): Three Months Ended September 30, Year-Over-Year Comparison 2022 2023 (In millions, except %) Amount % Revenue Amount % Revenue Amount % Change Revenue $ 787.6 100.0 % $ 732.4 100.0 % $ (55.2) (7.0) % Cost of revenue (580.5) (73.7) % (580.4) (79.2) % 0.1 — % Gross profit 207.1 26.3 % 152.0 20.8 % (55.1) (26.6) % Selling, general and administrative expenses (219.9) (27.9) % (177.3) (24.2) % 42.6 (19.4) % Impairment of goodwill (405.2) (51.4) % (165.7) (22.6) % 239.5 (59.1) % Impairment of assets, net (58.7) (7.5) % (48.4) (6.6) % 10.3 (17.5) % Loss from operations (476.7) (60.5) % (239.4) (32.7) % 237.3 (49.8) % Other income (expense): Interest expense (52.3) (6.6) % (56.5) (7.7) % (4.2) 8.0 % Loss on investments, net (0.1) (0.0) % — — % 0.1 (100.0) % Gain on debt extinguishment — — % 55.4 7.6 % 55.4 100.0 % Other expense, net (6.0) (0.8) % (2.6) (0.4) % 3.4 (56.7) % Total other income (expense) (58.4) (7.4) % (3.7) (0.5) % 54.7 (93.7) % Loss before income taxes (535.1) (67.9) % (243.1) (33.2) % 292.0 (54.6) % Benefit for income taxes 23.4 3.0 % 16.5 2.3 % (6.9) (29.5) % Net loss $ (511.7) (65.0) % $ (226.6) (30.9) % $ 285.1 (55.7) % Revenue Revenue decreased $55 million, or 7.0%, to $732 million in the three months ended September 30, 2023 from $788 million in the three months ended September 30, 2022. Revenue declined due to Private Cloud and Public Cloud, as discussed below. After removing the impact of foreign currency fluctuations, on a constant currency basis, revenue decreased 7.7% year-over-year. The following table presents revenue growth by segment: Three Months Ended September 30, % Change (In millions, except %) 2022 2023 Actual Constant Currency (a) Public Cloud $ 445.0 $ 432.8 (2.7) % (3.1) % Private Cloud 342.6 299.6 (12.5) % (13.8) % Total $ 787.6 $ 732.4 (7.0) % (7.7) % (a) Refer to " Non-GAAP Financial Measures " in this section for further explanation and reconciliation. - 36 - Table of Contents Public Cloud revenue in the three months ended September 30, 2023 decreased 3% on an actual and constant currency basis, from the three months ended September 30, 2022. The decline was due to macro-economic pressures which caused a tightening of customer discretionary spend and optimizations. Private Cloud revenue in the three months ended September 30, 2023 decreased 13% on an actual basis and 14% on a constant currency basis, from the three months ended September 30, 2022, due to customers rolling off old generation private cloud offerings, expected decline in legacy OpenStack offerings, and the impact from the December 2022 Hosted Exchange ransomware incident. Cost of Revenue Cost of revenue was flat between periods due to the following drivers. Consulting professional fees and data center costs increased primarily to support growth for certain large customers. In addition, there was an increase in usage charges for third-party infrastructure. The increase in expense was offset by a decline in personnel costs primarily due to a reduction in headcount between periods and lower non-equity incentive compensation, partially offset by higher severance expense. As a percentage of revenue, cost of revenue increased 550 basis points in the three months ended September 30, 2023 to 79.2% from 73.7% in the three months ended September 30, 2022, primarily driven by a 390 basis point increase in usage charges for third-party infrastructure. Higher data center and professional fees also contributed to the increase in basis points between periods. Gross Profit Our gross profit was $152 million in the three months ended September 30, 2023, a decrease of $55 million from $207 million in the three months ended September 30, 2022. Our consolidated gross margin was 20.8% in the three months ended September 30, 2023, a decrease of 550 basis points from 26.3% in the three months ended September 30, 2022. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $43 million, or 19%, to $177 million in the three months ended September 30, 2023 from $220 million in the three months ended September 30, 2022. Contributing to the reduction in expense was a wind down of certain business optimization initiatives between periods. In addition, personnel costs declined due to a reduction in salaries driven by lower headcount and decreases in share-based compensation, non-equity incentive compensation, and commissions expense. Other non-personnel costs fluctuations include lower professional fees, driven by insurance proceeds recorded in the current period related to the December 2022 Hosted Exchange ransomware incident, and a reduction in depreciation and amortization expense between periods. As a percentage of revenue, selling, general and administrative expenses decreased 370 basis points, to 24.2% in the three months ended September 30, 2023 from 27.9% in the three months ended September 30, 2022, for the reasons discussed above. Loss from Operations, Segment Operating Profit, and Non-GAAP Operating Profit Our loss from operations was $239 million in the three months ended September 30, 2023, an increase of $237 million from $477 million loss from operations in the three months ended September 30, 2022. Our Non-GAAP Operating Profit was $46 million in the three months ended September 30, 2023, a decrease of $34 million from $80 million in the three months ended September 30, 2022. Non-GAAP Operating Profit is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information. - 37 - Table of Contents The table below presents a reconciliation of loss from operations to Non-GAAP Operating Profit. Three Months Ended September 30, (In millions) 2022 2023 Loss from operations $ (476.7) $ (239.4) Share-based compensation expense 19.4 17.2 Special bonuses and other compensation expense (a) 2.4 3.3 Transaction-related adjustments, net (b) 2.4 1.6 Restructuring and transformation expenses (c) 26.1 14.3 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — (5.3) Impairment of goodwill 405.2 165.7 Impairment of assets, net 58.7 48.4 Amortization of intangible assets (d) 42.0 39.7 Non-GAAP Operating Profit $ 79.5 $ 45.5 (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. Beginning in the second quarter of 2023, includes expense related to the one-time grant of long-term incentive bonuses as a component of our annual compensation award process. (b) Includes legal, professional, accounting and other advisory fees related to acquisitions, certain one-time compliance costs related to being a public company, integration costs of acquired businesses, purchase accounting adjustments, 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, certain facility closure costs, and lease termination expenses. This amount also includes total charges of $1.0 million for the three months ended September 30, 2022 related to the July 2021 Restructuring Plan which are not accounted for as exit and disposal costs under ASC 420, including one-time offshore build out costs. (d) All of our intangible assets are attributable to acquisitions, including the Rackspace Acquisition in 2016. Our segment operating profit and segment operating margin for the periods indicated, and the change between periods is shown in the table below: Three Months Ended September 30, Year-Over-Year Comparison (In millions, except %) 2022 2023 Segment operating profit: Amount % of Segment Revenue Amount % of Segment Revenue Amount % Change Public Cloud $ 28.1 6.3 % $ 21.6 5.0 % $ (6.5) (23.1) % Private Cloud 116.2 33.9 % 84.9 28.3 % (31.3) (26.9) % Total consolidated segment operating profit 144.3 106.5 (37.8) (26.2) % Corporate functions (64.8) (61.0) 3.8 (5.9) % Non-GAAP Operating Profit $ 79.5 $ 45.5 $ (34.0) (42.8) % Public Cloud operating profit decreased 23% in the three months ended September 30, 2023 from the three months ended September 30, 2022. Segment operating profit as a percentage of segment revenue decreased by 130 basis points, reflecting a 3% decrease in segment revenue, partially offset by a 1% decrease in segment operating expenses. Private Cloud operating profit decreased 27% in the three months ended September 30, 2023 from the three months end ed September 30, 2022. Segment operating profit as a percentage of segment revenue decreased by 560 basis points, due to a 13% decrease in segment revenue, partially offset by a 5% decrease in segment operating expenses. The decrease in costs was mainly driven by a reduction in personnel costs. - 38 - Table of Contents Centralized corporate functions that provide services to the segments in areas such as accounting, information technology, marketing, legal and human resources are not allocated to the segments and are included in "corporate functions" in the table above. This expense decreased 6% i n the three months ended September 30, 2023 from the three months ended September 30, 2022 primarily due to a reduction in depreciation and amortization expense between periods. For more information about our segment operating profit , see Item 1 of Part I, Financial Statements - Note 14, "Segment Reporting." Impairment of Goodwill We performed an interim goodwill impairment analysis as of September 30, 2023 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, overall change in economic climate, changes in the industry and competitive environment, market capitalization, and earnings quality and sustainability. As a result, we determined that the carrying value of our Private Cloud reporting unit exceeded its fair value and recorded an impairment of goodwill of $166 million in the three months ended September 30, 2023. 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, supply chain disruption issues and other macroeconomic factors. As a result, we determined that the carrying value of our former Multicloud Services reporting unit exceeded its fair value and recorded an impairment of goodwill of $405 million in the three months ended September 30, 2022. Impairment of Assets, Net We also evaluated our indefinite-lived intangible asset for impairment as of September 30, 2023. As a result of this evaluation, we recorded a $57 million impairment of our indefinite-lived intangible asset in the three months ended September 30, 2023. Similarly, 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 in the three months ended September 30, 2022, consisting of a $21 million impairment of our indefinite-lived intangible asset and a $38 million impairment of OpenStack Public Cloud long-lived assets. In addition, in the three months ended September 30, 2023, we recorded a $9 million increase in the estimated fair value, less estimated cost to sell, of our corporate headquarters which was classified as held for sale under GAAP as of December 31, 2022. See I tem 1 of Part I, Financial Statements - Note 5, "Property, Equipment and Software, net" for more information. Interest Expense Interest expense increased $4 million, or 8%, to $57 million in the three months ended September 30, 2023 from $52 million in the three months ended September 30, 2022, due primarily to rising interest rates and the impact on our variable-rate Term Loan Facility. Gain on Debt Extinguishment We recorded a $55 million gain on debt extinguishment in the three months ended September 30, 2023 related to repurchases of $85 million principal amount of 5.375% Senior Notes. We did not record a gain on debt extinguishment in the three months ended September 30, 2022. - 39 - Table of Contents Other Expense, Net Other expense, net decreased to $3 million in the three months ended September 30, 2023 from $6 million in the three months ended September 30, 2022 primarily due to foreign currency transaction gains, partially offset by $5 million of expense recorded in the current period related to the executed Receivables Facility. Benefit for Income Taxes Our income tax benefit decreased to $17 million in the three months ended September 30, 2023 from $23 million in the three months ended September 30, 2022. Our effective tax rate increased to 6.8% in the three months ended September 30, 2023 from 4.4% in the three months ended September 30, 2022. The increase in the effective tax rate year-over-year and the difference between the effective tax rate and the statutory rate for the three months ended September 30, 2023 is primarily due to the tax impact associated with changes in the valuation allowance, geographic distribution of profits, the tax effects from nondeductible share-based compensation, executive compensation that is nondeductible under IRC Section 162(m), and the tax impact associated with the goodwill impairment recorded in the third quarter of 2023, the majority of which was nondeductible for income tax purposes. - 40 - Table of Contents Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2023 The following table sets forth our results of operations for the specified periods, as well as changes between periods and as a percentage of revenue for those same periods (totals in table may not foot due to rounding): Nine Months Ended September 30, Year-Over-Year Comparison 2022 2023 (In millions, except %) Amount % Revenue Amount % Revenue Amount % Change Revenue $ 2,335.3 100.0 % $ 2,237.4 100.0 % $ (97.9) (4.2) % Cost of revenue (1,678.2) (71.9) % (1,762.7) (78.8) % (84.5) 5.0 % Gross profit 657.1 28.1 % 474.7 21.2 % (182.4) (27.8) % Selling, general and administrative expenses (645.0) (27.6) % (601.7) (26.9) % 43.3 (6.7) % Impairment of goodwill (405.2) (17.3) % (708.8) (31.7) % (303.6) 74.9 % Impairment of assets, net (58.7) (2.5) % (48.4) (2.2) % 10.3 (17.5) % Loss from operations (451.8) (19.3) % (884.2) (39.5) % (432.4) 95.7 % Other income (expense): Interest expense (152.9) (6.5) % (170.7) (7.6) % (17.8) 11.6 % Gain (loss) on investments, net (0.4) (0.0) % 0.2 0.0 % 0.6 NM Gain on debt extinguishment — — % 163.1 7.3 % 163.1 100.0 % Other expense, net (15.5) (0.7) % (0.3) (0.0) % 15.2 (98.1) % Total other income (expense) (168.8) (7.2) % (7.7) (0.3) % 161.1 (95.4) % Loss before income taxes (620.6) (26.6) % (891.9) (39.9) % (271.3) 43.7 % Benefit for income taxes 29.8 1.3 % 26.1 1.2 % (3.7) (12.4) % Net loss $ (590.8) (25.3) % $ (865.8) (38.7) % $ (275.0) 46.5 % NM = not meaningful. Revenue Revenue decreased $98 million, or 4.2%, to $2,237 million in the nine months ended September 30, 2023 from $2,335 million in the nine months ended September 30, 2022. Revenue declined primarily due to Private Cloud, partially offset by growth in Public Cloud, as discussed below. After re moving the impact from foreign currency fluctuations, on a constant currency basis, revenue decreased 4.0% year-over-year. The following table presents revenue growth by segment: Nine Months Ended September 30, % Change (In millions, except %) 2022 2023 Actual Constant Currency (a) Public Cloud $ 1,284.1 $ 1,312.3 2.2 % 2.3 % Private Cloud 1,051.2 925.1 (12.0) % (11.8) % Total $ 2,335.3 $ 2,237.4 (4.2) % (4.0) % (a) Refer to " Non-GAAP Financial Measures " in this section for further explanation and reconciliation. Public Cloud revenue in the nine months ended September 30, 2023 increased 2% on an actual and constant currency basis, from the nine months ended September 30, 2022. 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 infrastructure resale on AWS, Microsoft Azure and Google Cloud. Private Cloud revenue in the nine months ended September 30, 2023 decreased 12% on an actual and constant currency basis, from the nine months ended September 30, 2022, due to customers rolling off old generation private cloud offerings, expected decline in legacy OpenStack offerings, and the impact from the December 2022 Hosted Exchange ransomware incident. - 41 - Table of Contents Cost of Revenue Cost of revenue increased $85 million, or 5%, to $1,763 million in the nine months ended September 30, 2023 from $1,678 million in the nine months ended September 30, 2022, primarily due to an increase in usage charges for third-party infrastructure associated with growth in these offerings. Consulting professional fees and data center costs increased primarily to support growth for certain large customers. In addition, license expense increased as a result of increased usage between periods. Personnel costs increased slightly due to higher severance expense in the nine months ended September 30, 2023, partially offset by lower salaries as a result of headcount reduction and a decrease in non-equity incentive compensation. As a percentage of revenue, cost of revenue increased 690 basis points in the nine months ended September 30, 2023 to 78.8% from 71.9% in the nine months ended September 30, 2022, primarily driven by a 450 basis point increase in usage charges for third-party infrastructure. Higher personnel, data center, professional fees, and license costs also contributed to the increase in basis points between periods. Gross Profit Our gross profit was $475 million in the nine months ended September 30, 2023, a decrease of $182 million from $657 million in the nine months ended September 30, 2022. Our consolidated gross margin was 21.2% in the nine months ended September 30, 2023, a decrease of 690 basis points from 28.1% in the nine months ended September 30, 2022. Selling, General and Administrative Expenses Selling, general and administrative expenses were $602 million in the nine months ended September 30, 2023 compared to $645 million in the nine months ended September 30, 2022. Contributing to the reduction in expense was a wind down of certain business optimization initiatives between periods. In addition, personnel costs declined between periods due to a reduction in salaries driven by lower headcount and decreases in share-based compensation, non-equity incentive compensation, and commissions, partially offset by higher severance expense. Other non-personnel costs fluctuations include lower marketing spend and depreciation and amortization expense, offset by higher office rent. The increase in office rent includes $12 million of expense recognized for a UK office that we exited in the second quarter of 2023, prior to the lease end date. As a percentage of revenue, selling, general and administrative expenses decreased 70 basis points, to 26.9% in the nine months ended September 30, 2023 from 27.6% in the nine months ended September 30, 2022 for the reasons discussed above. Loss from Operations, Segment Operating Profit, and Non-GAAP Operating Profit Our loss from operations was $884 million in the nine months ended September 30, 2023, a decrease of $432 million from $452 million loss from operations in the nine months ended September 30, 2022. Our Non-GAAP Operating Profit was $135 million in the nine months ended September 30, 2023, a decrease of $155 million from $290 million in the nine months ended September 30, 2022. Non-GAAP Operating Profit is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information. - 42 - Table of Contents The table below presents a reconciliation of loss from operations to Non-GAAP Operating Profit. Nine Months Ended September 30, (In millions) 2022 2023 Loss from operations $ (451.8) $ (884.2) Share-based compensation expense 59.5 51.9 Special bonuses and other compensation expense (a) 8.2 9.7 Transaction-related adjustments, net (b) 9.6 4.1 Restructuring and transformation expenses (c) 74.3 63.0 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — (0.4) Impairment of goodwill 405.2 708.8 Impairment of assets, net 58.7 48.4 Amortization of intangible assets (d) 126.4 121.6 UK office closure (e) — 12.1 Non-GAAP Operating Profit $ 290.1 $ 135.0 (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. Beginning in the second quarter of 2023, includes expense related to the one-time grant of long-term incentive bonuses as a component of our annual compensation award process. (b) Includes legal, professional, accounting and other advisory fees related to acquisitions, certain one-time compliance costs related to being a public company, integration costs of acquired businesses, purchase accounting adjustments, 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. This amount also includes total charges of $5.2 million for the nine months ended September 30, 2022 related to the July 2021 Restructuring Plan which are not accounted for as exit and disposal costs under ASC 420, including one-time offshore build out costs. (d) All of our intangible assets are attributable to acquisitions, including the Rackspace Acquisition in 2016. (e) Expense recognized related to the closure of a UK office that we exited in the second quarter of 2023 prior to the lease end date. Our segment operating profit and segment operating margin for the periods indicated, and the change between periods is shown in the table below: Nine Months Ended September 30, Year-Over-Year Comparison (In millions, except %) 2022 2023 Segment operating profit: Amount % of Segment Revenue Amount % of Segment Revenue Amount % Change Public Cloud $ 92.5 7.2 % $ 63.1 4.8 % $ (29.4) (31.8) % Private Cloud 385.7 36.7 % 264.6 28.6 % (121.1) (31.4) % Total consolidated segment operating profit 478.2 327.7 (150.5) (31.5) % Corporate functions (188.1) (192.7) (4.6) 2.4 % Non-GAAP Operating Profit $ 290.1 $ 135.0 $ (155.1) (53.5) % Public Cloud operating profit decreased 32% in the nine months ended September 30, 2023 from the nine months ended September 30, 2022. Segment operating profit as a percentage of segment revenue decreased by 240 basis points, reflecting a 5% increase in segment operating expenses, partially offset by a 2% increase in segment revenue. The increase in costs was mainly driven by higher third-party infrastructure costs due to the increase in revenue with additional increases in customer licenses. Private Cloud operating profit decreased 31% in the nine months ended September 30, 2023 from the nine months ended September 30, 2022. Segment operating profit as a percentage of segment revenue decreased by 810 basis points, due to a 12% decrease in segment revenue, partially offset by a 1% decrease in segment operating expenses. - 43 - Table of Contents Centralized corporate functions that provide services to the segments in areas such as accounting, information technology, marketing, legal and human resources are not allocated to the segments and are included in "corporate functions" in the tabl e above. This expense increased 2% in the nine months ended September 30, 2023 from the nine months ended September 30, 2022 primarily due to increases in payroll costs and professional fees, partially offset by a decrease in depreciation and amortization expense between periods. For more information about our segment operating profit, see Item 1 of Part I, Financial Statements - Note 14, "Segment Reporting." Impairment of Goodwill We recorded a total of $709 million in non-cash goodwill impairment charges in the nine months ended September 30, 2023. Due to the change in our segment reporting as a result of the business reorganization as of January 1, 2023, we completed a quantitative goodwill impairment analysis both prior and subsequent to the aforementioned change. The results of the quantitative goodwill impairment analysis performed as of December 31, 2022 prior to the change indicated an impairment within our former Apps & Cross Platform reporting unit, and we recorded a non-cash impairment charge of $129 million in the fourth quarter of 2022 as described in our Annual Report. The results of the quantitative goodwill impairment analysis performed as of January 1, 2023 subsequent to the change indicated an impairment within our Private Cloud reporting unit, and we recorded a non-cash impairment charge of $271 million in the first quarter of 2023. During the first quarter of 2023, 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. As of March 31, 2023, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our reporting units, including the significance of the amount, if any, of excess carrying value over fair value, consistency of operating margins and cash flows, budgeted-to-actual performance for the first three months of the year, overall change in economic climate, changes in the industry and competitive environment, and earnings quality and sustainability. 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 units as of March 31, 2023. The results of this quantitative goodwill impairment analysis indicated an impairment within our Private Cloud reporting unit, and we recorded an additional non-cash impairment charge of $272 million in the first quarter of 2023. We performed an interim goodwill impairment analysis as of September 30, 2023 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, overall change in economic climate, changes in the industry and competitive environment, market capitalization and earnings quality and sustainability. As a result, we determined that the carrying value of our Private Cloud reporting unit exceeded its fair value and recorded a non-cash impairment of goodwill of $166 million in the third quarter of 2023. 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, supply chain disruption issues and other macroeconomic factors. As a result, we determined that the carrying value of our former Multicloud Services reporting unit exceeded its fair value and recorded an impairment of goodwill of $405 million in the third quarter of 2022. See "Critical Accounting Policies and Estimates" in this section and Item 1 of Part I, Financial Statements - Note 6, "Goodwill and Intangible Assets" for further discussion. - 44 - Table of Contents Impairment of Assets, Net We also evaluated our indefinite-lived intangible asset for impairment as of September 30, 2023. As a result of this evaluation, we recorded a $57 million impairment of our indefinite-lived intangible asset in the nine months ended September 30, 2023. Similarly, we 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 in the nine months ended September 30, 2022, consisting of a $21 million impairment of our indefinite-lived intangible asset and a $38 million impairment of OpenStack Public Cloud long-lived assets. In addition, in the nine months ended September 30, 2023, we recorded a $9 million increase in the estimated fair value, less estimated cost to sell, of our corporate headquarters wh ich was classified as held for sale under GAAP as of December 31, 2022. See I tem 1 of Part I, Financial Statements - Note 5, "Property, Equipment and Software, net" for more information. Interest Expense Interest expense increased $18 million, or 12%, to $171 million in the nine months ended September 30, 2023 from $153 million in the nine months ended September 30, 2022, due primarily to rising interest rates and the impact on our variable-rate Term Loan Facility. Gain on Debt Extinguishment We recorded a $163 million gain on debt extinguishment in the nine months ended September 30, 2023 related to repurchases of $250 million principal amount of 5.375% Senior Notes. We did not record a gain on debt extinguishment in the nine months ended September 30, 2022. Other Expense, Net Other expense, net decreased to $0.3 million in the nine months ended September 30, 2023 from $16 million in the nine months ended September 30, 2022 primarily due to foreign currency transaction gains and losses between periods. Benefit for Income Taxes Our income tax benefit decreased to $26 million in the nine months ended September 30, 2023 from $30 million in the nine months ended September 30, 2022. Our effective tax rate decreased to 2.9% in the nine months ended September 30, 2023 from 4.8% in the nine months ended September 30, 2022. The decrease in the effective tax rate year-over-year is primarily due to the tax impact associated with the goodwill impairments recorded in the first and third quarters of 2023 as well as changes in the valuation allowance. The majority of the goodwill impairments recorded in the first and third quarters of 2023 were nondeductible for income tax purposes. The difference between the effective tax rate and the statutory rate for the nine months ended September 30, 2023 is primarily due to the tax impact associated with the goodwill impairments recorded in the first and third quarters of 2023, executive compensation that is nondeductible under IRC Section 162(m), the geographic distribution of profits, tax effects from nondeductible share-based compensation as well as an increase in the valuation allowance. - 45 - Table of Contents Non-GAAP Financial Measures We track several non-GAAP financial measures to monitor and manage our underlying financial performance. The following discussion includes the presentation of constant currency revenue, Non-GAAP Gross Profit, Non-GAAP Net Income (Loss), Non-GAAP Operating Profit, Adjusted EBITDA and Non-GAAP Earnings (Loss) Per Share, which are non-GAAP financial measures that exclude the impact of certain costs, losses and gains that are required to be included in our profit and loss measures under GAAP. Although we believe these measures are useful to investors and analysts for the same reasons they are useful to management, as discussed below, these measures are not a substitute for, or superior to, U.S. GAAP financial measures or disclosures. Other companies may calculate similarly-titled non-GAAP measures differently, limiting their usefulness as comparative measures. We have reconciled each of these non-GAAP measures to the applicable most comparable GAAP measure throughout this MD&A. Constant Currency Revenue We use constant currency revenue as an additional metric for understanding and assessing our growth excluding the effect of foreign currency rate fluctuations on our international business operations. Constant currency information compares results between periods as if exchange rates had remained constant period over period and is calculated by translating the non-U.S. dollar income statement balances for the most current period to U.S. dollars using the average exchange rate from the comparative period rather than the actual exchange rates in effect during the respective period. We also believe this is an important metric to help investors evaluate our performance in comparison to prior periods. The following tables present, by segment, actual and constant currency revenue and constant currency revenue growth rates, for and between the periods indicated: Three Months Ended September 30, 2022 Three Months Ended September 30, 2023 % Change (In millions, except %) Revenue Revenue Foreign Currency Translation (a) Revenue in Constant Currency Actual Constant Currency Public Cloud $ 445.0 $ 432.8 $ (1.6) $ 431.2 (2.7) % (3.1) % Private Cloud 342.6 299.6 (4.2) 295.4 (12.5) % (13.8) % Total $ 787.6 $ 732.4 $ (5.8) $ 726.6 (7.0) % (7.7) % (a) The effect of foreign currency is calculated by translating current period results using the average exchange rate from the prior comparative period. Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2023 % Change (In millions, except %) Revenue Revenue Foreign Currency Translation (a) Revenue in Constant Currency Actual Constant Currency Public Cloud $ 1,284.1 $ 1,312.3 $ 1.6 $ 1,313.9 2.2 % 2.3 % Private Cloud 1,051.2 925.1 2.3 927.4 (12.0) % (11.8) % Total $ 2,335.3 $ 2,237.4 $ 3.9 $ 2,241.3 (4.2) % (4.0) % (a) The effect of foreign currency is calculated by translating current period results using the average exchange rate from the prior comparative period. - 46 - Table of Contents Non-GAAP Gross Profit We present Non-GAAP Gross Profit in this MD&A because we believe the measure is useful in analyzing trends in our underlying, recurring gross margins. We define Non-GAAP Gross Profit as gross profit, adjusted to exclude the impact of share-based compensation expense and other non-recurring or unusual compensation items, purchase accounting-related effects, certain business transformation-related costs, and costs related to the Hosted Exchange incident. The table below presents a reconciliation of gross profit to Non-GAAP Gross Profit: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2022 2023 2022 2023 Gross profit $ 207.1 $ 152.0 $ 657.1 $ 474.7 Share-based compensation expense 2.8 2.0 9.0 7.4 Other compensation expense (a) 0.4 1.2 1.6 3.3 Purchase accounting impact on expense (b) 0.6 0.6 2.1 1.9 Restructuring and transformation expenses (c) 0.8 6.2 9.2 16.0 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — — — 0.3 Non-GAAP Gross Profit $ 211.7 $ 162.0 $ 679.0 $ 503.6 (a) 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. Beginning in the second quarter of 2023, includes expense related to the one-time grant of long-term incentive bonuses as a component of our annual compensation award process. (b) Adjustment for the impact of purchase accounting from the Rackspace Acquisition on expenses. (c) Adjustment for the impact of business transformation and optimization activities, as well as associated severance, certain 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. Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA We present Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA because they are a basis upon which management assesses our performance and we believe they are useful to evaluating our financial performance. We believe that excluding items from net income that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business. The Rackspace Acquisition was structured as a leveraged buyout of Rackspace Technology Global, our predecessor, and resulted in several accounting and capital structure impacts. For example, the revaluation of our assets and liabilities resulted in a significant increase in our amortizable intangible assets and goodwill, the incurrence of a significant amount of debt to partially finance the Rackspace Acquisition resulted in interest payments that reflect our high leverage and cost of debt capital, and the conversion of Rackspace Technology Global’s unvested equity compensation into a cash-settled bonus plan and obliga tion to pay management fees to our equityholders resulted in new cash commitments. In addition, the change in ownership and management resulting from the Rackspace Acquisition led to a strategic realignment in our operations that had a significant impact on our financial results. Following the Rackspace Acquisition, we acquired several businesses, sold businesses and investments that we deemed to be non-core and launched multiple integration and business transformation initiatives intended to improve the efficiency of people and operations and identify recurring cost savings and new revenue growth opportunities. We believe that these transactions and activities resulted in costs, which have historically been substantial, and that may not be indicative of, or are not related to, our core operating results, including interest related to the incurrence of additional debt to finance acquisitions and third party legal, advisory and consulting fees and severance, retention bonus and other internal costs that we believe would not have been incurred in the absence of these transactions and activities and 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, the amortization of acquired intangible assets, goodwill and asset impairment charges, costs related to the closure of a UK office, and certain other non-operating, non-recurring or non-core gains and losses, as well as the tax effects of these non-GAAP adjustments. - 47 - Table of Contents 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, the amortization of acquired intangible assets, goodwill and asset impairment charges, costs related to the closure of a UK office, 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, costs related to the closure of a UK office, 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. Non-GAAP Operating Profit and Adjusted EBITDA, along with other quantitative and qualitative information, are also the principal financial measures used by management and our board of directors in determining performance-based compensation for our management and key employees. These non-GAAP measures are not intended to imply that we would have generated higher income or avoided net losses if the Rackspace Acquisition and the subsequent transactions and initiatives had not occurred. In the future we may incur expenses or charges such as those added back to calculate Non-GAAP Net Income (Loss), Non-GAAP Operating Profit or Adjusted EBITDA. Our presentation of Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. Other companies, including our peer companies, may calculate similarly-titled measures in a different manner from us, and therefore, our non-GAAP measures may not be comparable to similarly-titled measures of other companies. Investors are cautioned against using these measures to the exclusion of our results in accordance with GAAP. The following tables present a reconciliation of Non-GAAP Net Income (Loss) and Adjusted EBITDA to the most directly comparable GAAP financial measures. For a reconciliation of income (loss) from operations to Non-GAAP Operating Profit, see " Income (Loss) from Operations, Segment Operating Profit, and Non-GAAP Operating Profit " in the year-over-year comparison under "Results of Operations" above. Net loss reconciliation to Non-GAAP Net Income (Loss) Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2022 2023 2022 2023 Net loss $ (511.7) $ (226.6) $ (590.8) $ (865.8) Share-based compensation expense 19.4 17.2 59.5 51.9 Special bonuses and other compensation expense (a) 2.4 3.3 8.2 9.7 Transaction-related adjustments, net (b) 2.4 1.6 9.6 4.1 Restructuring and transformation expenses (c) 26.1 14.3 74.3 63.0 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — (5.3) — (0.4) Impairment of goodwill 405.2 165.7 405.2 708.8 UK office closure (d) — — — 12.1 Impairment of assets, net 58.7 48.4 58.7 48.4 Net (gain) loss on divestiture and investments (e) 0.1 — 0.4 (0.2) Gain on debt extinguishment (f) — (55.4) — (163.1) Other expense, net (g) 6.0 2.6 15.5 0.3 Amortization of intangible assets (h) 42.0 39.7 126.4 121.6 Tax effect of non-GAAP adjustments (i) (30.6) (13.6) (65.6) (16.7) Non-GAAP Net Income (Loss) $ 20.0 $ (8.1) $ 101.4 $ (26.3) - 48 - Table of Contents Net loss reconciliation to Adjusted EBITDA Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2022 2023 2022 2023 Net loss $ (511.7) $ (226.6) $ (590.8) $ (865.8) Share-based compensation expense 19.4 17.2 59.5 51.9 Special bonuses and other compensation expense (a) 2.4 3.3 8.2 9.7 Transaction-related adjustments, net (b) 2.4 1.6 9.6 4.1 Restructuring and transformation expenses (c) 26.1 14.3 74.3 63.0 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — (5.3) — (0.4) Impairment of goodwill 405.2 165.7 405.2 708.8 UK office closure (d) — — — 12.1 Impairment of assets, net 58.7 48.4 58.7 48.4 Net (gain) loss on divestiture and investments (e) 0.1 — 0.4 (0.2) Gain on debt extinguishment (f) — (55.4) — (163.1) Other expense, net (g) 6.0 2.6 15.5 0.3 Interest expense 52.3 56.5 152.9 170.7 Benefit for income taxes (23.4) (16.5) (29.8) (26.1) Depreciation and amortization (j) 96.6 90.1 296.1 279.2 Adjusted EBITDA $ 134.1 $ 95.9 $ 459.8 $ 292.6 (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. Beginning in the second quarter of 2023, includes expense related to the one-time grant of long-term incentive bonuses as a component of our annual compensation award process. (b) Includes legal, professional, accounting and other advisory fees related to acquisitions, certain one-time compliance costs related to being a public company, integration costs of acquired businesses, purchase accounting adjustments, 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, certain facility closure costs, and lease termination expenses. This amount also includes total charges of $1.0 million and $5.2 million for the three and nine months ended September 30, 2022, respectively, related to the July 2021 Restructuring Plan which are not accounted for as exit and disposal costs under ASC 420, including one-time offshore build out costs. (d) Expense recognized related to the closure of a UK office that we exited in the second quarter of 2023 prior to the lease end date. (e) Includes gains and losses on investment and from dispositions. (f) Includes gains related to repurchases of 5.375% Senior Notes. (g) Primarily consists of foreign currency gains and losses. (h) All of our intangible assets are attributable to acquisitions, including the Rackspace Acquisition in 2016. (i) We utilize an estimated structural long-term non-GAAP tax rate in order to provide consistency across reporting periods, removing the effect of non-recurring tax adjustments, which include but are not limited to tax rate changes, U.S. tax reform, share-based compensation, audit conclusions and changes to valuation allowances. When computing this long-term rate for the 2022 and 2023 interim periods, we based it on an average of the 2021 and estimated 2022 tax rates and 2022 and estimated 2023 tax rates, respectively, recomputed to remove the tax effect of non-GAAP pre-tax adjustments and non-recurring tax adjustments, resulting in a structural non-GAAP tax rate of 26% for all periods. The non-GAAP tax rate could be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix including due to acquisition activity, or other changes to our strategy or business operations. We will re-evaluate our long-term non-GAAP tax rate as appropriate. We believe that making these adjustments facilitates a better evaluation of our current operating performance and comparisons to prior periods. (j) Excludes accelerated depreciation expense related to facility closures. - 49 - Table of Contents Non-GAAP Earnings (Loss) Per Share We define Non-GAAP Earnings (Loss) Per Share as Non-GAAP Net Income (Loss) divided by our GAAP weighted average number of shares outstanding for the period on a diluted basis and further adjusted for the weighted average number of shares associated with securities which are anti-dilutive to GAAP loss per share but dilutive to Non-GAAP Earnings (Loss) Per Share. Management uses Non-GAAP Earnings (Loss) Per Share 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 Earnings (Loss) Per Share. The following table reconciles Non-GAAP Earnings (Loss) Per Share to our GAAP net loss per share on a diluted basis: Three Months Ended September 30, Nine Months Ended September 30, (In millions, except per share amounts) 2022 2023 2022 2023 Net loss attributable to common stockholders $ (511.7) $ (226.6) $ (590.8) $ (865.8) Non-GAAP Net Income (Loss) $ 20.0 $ (8.1) $ 101.4 $ (26.3) Weighted average number of shares - Diluted 210.8 216.0 210.7 214.8 Effect of dilutive securities (a) 0.2 6.4 0.5 2.9 Non-GAAP weighted average number of shares - Diluted 211.0 222.4 211.2 217.7 Net loss per share - Diluted $ (2.43) $ (1.05) $ (2.80) $ (4.03) Per share impacts of adjustments to net loss (b) 2.52 1.01 3.29 3.91 Per share impacts of shares dilutive after adjustments to net loss (a) 0.01 0.00 (0.01) 0.00 Non-GAAP Earnings (Loss) Per Share $ 0.10 $ (0.04) $ 0.48 $ (0.12) (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 Earnings (Loss) Per Share 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 units (including performance-based restricted stock units) or purchases under the Employee Stock Purchase Plan (the "ESPP"), as well as contingent shares associated with our acquisition of Datapipe Parent, Inc. Certain of our potential common share equivalents are contingent on Apollo achieving pre-established performance targets based on a multiple of their invested capital ("MOI C") , which are included in the denominator for the entire period if such shares would be issuable as of the end of the reporting period assuming the end of the reporting period was the end of the contingency period. (b) Reflects the aggregate adjustments made to reconcile Non-GAAP Net Income (Loss) to our net loss, as noted in the above table, divided by the GAAP diluted number of shares outstanding for the relevant period. - 50 - Table of Contents Liquidity and Capital Resources Overview We primarily finance our operations and capital expenditures with internally-generated cash from operations and hardware leases, and if necessary, borrowings under the Revolving Credit Facility. As of September 30, 2023, the Revolving Credit Facility provided for up to $375 million of borrowings, none of which was drawn and outstanding as of September 30, 2023. Our primary uses of cash are working capital requirements, debt service requirements and capital expenditures. Based on our current level of operations and available cash, we believe our sources will provide sufficient liquidity over at least the next twelve months. We cannot provide assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under the Revolving Credit Facility or from other sources in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. We cannot assure that we will be able to refinance any of our indebtedness, including the Senior Facilities, the 5.375% Senior Notes and the 3.50% Senior Secured Notes, on commercially reasonable terms or at all. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital, and there can be no assurance that any such capital will be available to us on acceptable terms or at all. From time to time, depending upon market and other conditions, as well as upon our cash balances and liquidity, we, our subsidiaries or our affiliates may acquire (and have acquired) our outstanding debt securities or our other indebtedness through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we, our subsidiaries or our affiliates may determine (or as may be provided for in the indenture governing the 5.375% Senior Notes (the "5.375% Notes Indenture") or the indenture governing the 3.50% Senior Secured Notes (the "3.50% Notes Indenture" and, together with the 5.375% Notes Indenture, the "Indentures"), if applicable), for cash or other consideration. On September 29, 2023, indirect subsidiaries of the company entered into a revolving agreement where a bankruptcy-remote special purpose vehicle can sell accounts receivable, based upon the face amount of eligible receivables in the collateral pool, up to an aggregate maximum limit of $300 million to a financial institution on a recurring basis in exchange for cash. As of September 30, 2023, we sold $209 million face value of receivables and collected cash proceeds of $209 million . We used $50 million of the proceeds to fully repay the outstanding borrowings under the Revolving Credit Facility. 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 nine months ended September 30, 2022 , we repurchased $31 million, or 3.1 million shares, of our common stock on the open market under this program. No shares were repurchased during the nine months ended September 30, 2023 and the program authorization expired on September 30, 2023. At September 30, 2023, we held $278 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $76 million was held by foreign entities. We have entered into installment payment arrangements with certain equipment and software vendors, along with sale-leaseback arrangements for equipment and certain property leases that are considered financing obligations. We had $58 million outstanding with respect to these arrangements as of September 30, 2023. We may choose to utilize these various sources of funding in future periods. We also lease certain equipment and real estate under operating and finance lease agreements. We had $524 million outstanding with respect to operating and finance lease agreements as of September 30, 2023. We may choose to utilize such leasing arrangements in future periods. As of September 30, 2023, we had $3,093 million aggregate principal amount outstanding under our Term Loan Facility, 5.375% Senior Notes, and 3.50% Senior Secured Notes, with $375 million of borrowing capacity available under the Revolving Credit Facility. Our liquidity requirements are significant, primarily due to debt service requirements. - 51 - Table of Contents Debt Senior Facilitie s On February 9, 2021, we amended and restated the credit agreement governing our senior secured credit facilities (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 the Revolving Credit Facility (together, 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 (together, the "February 2021 Refinancing Transaction"), to repay all borrowings under the prior term loan facility (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 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. Interest on the Term Loan Facility is due at the end of each interest period elected, not exceeding 90 days, for SOFR loans and at the end of every calendar quarter for base rate loans. As of September 30, 2023, the interest rate on the Term Loan Facility was 8.19%. We are required to make quarterly amortization payments of $5.8 million, which began on June 30, 2021. The Revolving Credit Facility includes a commitment fee equal to 0.50% per annum in respect of the unused commitments that is due quarterly. This fee is subject to one step-down based on the net first lien leverage ratio. The Senior Facilities require us to make certain mandatory prepayments under certain conditions defined in the 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. As of September 30, 2023, $2,243 million aggregate principal amount of the Term Loan Facility remained outstanding and no borrowings were outstanding under the Revolving Credit Facility. See Item 1 of Part I, Financial Statements - Note 7, "Debt," for more information regarding our Senior Facilities. We have entered into interest rate swap agreements to manage the interest rate risk associated with interest payments on the Term Loan Fac ility that result from fluctuations in Term SOFR. See Item 1 of Part I, Financial Statements - Note 12, "Derivatives," for more information on the interest rate swap agreements. 3.50% Senior Secured Notes due 2028 On February 9, 2021, Rackspace Technology Global issued $550 million aggregate principal amount of 3.50% Senior Secured Notes. The 3.50% Senior Secured Notes will mature on February 15, 2028 and bear interest at an annual fixed rate of 3.50%. Interest is payable semiannually on each February 15 and August 15, commencing on August 15, 2021. We may redeem some or all of the 3.50% Senior Secured Notes at our option prior to February 15, 2024 subject to certain limitations and conditions outlined in the 3.50% Notes Indenture. The 3.50% Senior Secured Notes 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. As of September 30, 2023, $550 million aggregate principal amount of the 3.50% Senior Secured Notes remained outstanding. - 52 - Table of Contents 5.375% Senior Notes due 2028 Rackspace Technology Global issued $550 million aggregate principal amount of the 5.375% Senior Notes on December 1, 2020. The 5.375% Senior Notes will mature on December 1, 2028 and bear interest at a fixed rate of 5.375% per year, payable semi-annually on each June 1 and December 1, commencing on June 1, 2021. The 5.375% Senior Notes are guaranteed on a senior unsecured basis by all of Rackspace Technology Global's wholly-owned domestic restricted subsidiaries that guarantee the Senior Facilities. During the nine months ended September 30, 2023, we repurchased and surrendered for cancellation $250 million aggregate principal amount of 5.375% Senior Notes for $87 million, including accrued interest of $2 million and excluding related fees and expenses. As of September 30, 2023, $300 million aggregate principal amount of the 5.375% Senior Notes remained outstanding. Subsequent to September 30, 2023 and through November 9, 2023, Rackspace Technology Global repurchased and surrendered for cancellation an additional $24 million aggregate principal amount of 5.375% Senior Notes for $9 million, including accrued interest of $0.4 million and excluding related fees and expenses. Debt covenants Our Term Loan Facility is not subject to a financial maintenance covenant. The Revolving Credit Facility includes a financial maintenance covenant that limits the borrower's net first lien leverage ratio to a maximum of 5.00 to 1.00. The net first lien leverage ratio is calculated as the ratio of (x) the total amount of the borrower's first lien debt for borrowed money (which is currently identical to the total amount outstanding under the Senior Facilities), less the borrower's unrestricted cash and cash equivalents, to (y) consolidated EBITDA (as defined under the First Lien Credit Agreement governing the Senior Facilities). However, this financial maintenance covenant will only be applicable and tested if the aggregate amount of outstanding borrowings under the Revolving Credit Facility and letters of credit issued thereunder (excluding $25 million of undrawn letters of credit and cash collateralized letters of credit) as of the last day of a fiscal quarter is equal to or greater than 35% of the Revolving Credit Facility commitments as of the last day of such fiscal quarter. Additional covenants in the Senior Facilities limit our subsidiaries' ability to, among other things, incur certain additional debt and liens, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates. The Indentures contain covenants that, among other things, limit our subsidiaries' ability to incur certain additional debt, incur certain liens securing debt, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. Additionally, upon the occurrence of a change of control (as defined in the Indentures), we will be required to make an offer to repurchase all of the outstanding 5.375% Senior Notes and 3.50% Senior Secured Notes, respectively, at a price in cash equal to 101.000% of the aggregate principal amount, plus accrued and unpaid interest, if any, to, but not including the purchase date. Our "consolidated EBITDA," as defined under our debt instruments, is calculated in the same manner as our Adjusted EBITDA, presented elsewhere in this report, except that our debt instruments allow us to adjust for additional items, including certain start-up costs, and to give pro forma effect to acquisitions, including resulting synergies, and internal cost savings initiatives. In addition, under the Indentures, the calculation of consolidated EBITDA does not take into account substantially any changes in GAAP subsequent to the date of issuance, whereas under the Senior Facilities the calculation of consolidated EBITDA takes into account the impact of certain changes in GAAP subsequent to the original closing date other than with respect to capital leases. As of September 30, 2023, we were in compliance with all covenants under the Senior Facilities and the Indentures. - 53 - Table of Contents Capital Expenditures The following table sets forth a summary of our capital expenditures for the periods indicated: Nine Months Ended September 30, (In millions) 2022 2023 Customer gear $ 53.7 $ 102.9 Data center build outs 2.5 2.6 Office build outs — 1.2 Capitalized software and other projects 42.8 37.1 Total capital expenditures $ 99.0 $ 143.8 Capital expenditures were $144 million in the nine months ended September 30, 2023, compared to $99 million in the nine months ended September 30, 2022, an increase of $45 million . The increase in capital expenditures was driven by purchases of customer gear originally intended to support a specific new customer. This new customer did not materialize as expected; however, the gear is fungible and will be redeployed to support other business requirements. Cash Flows The following table sets forth a summary of certain cash flow information for the periods indicated: Nine Months Ended September 30, (In millions) 2022 2023 Cash provided by operating activities $ 219.2 $ 302.7 Cash used in investing activities $ (83.5) $ (62.3) Cash used in financing activities $ (148.8) $ (191.4) Cash Provided by Operating Activities Net cash provided by operating activities results primarily from cash received from customers, offset by cash payments made for employee and consultant compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), data center costs, license costs, third-party infrastructure costs, marketing programs, interest, taxes, and other general corporate expenditures. Net cash provided by operating activities was $303 million in the nine months ended September 30, 2023 compared to $219 million in the nine months ended September 30, 2022. The increase in operating cash was primarily driven by $209 million of cash proceeds received during the nine months ended September 30, 2023 related to the sale of a portion of our receivables. Partially offsetting this increase in cash was a $92 million increase in operating expense payments, largely for third-party infrastructure costs, and a $41 million increase in interest payments on debt. Cash Used in Investing Activities Net cash used in investing activities primarily consists of capital expenditures to meet the demands of our customer base and our strategic initiatives. The largest outlays of cash are for purchases of customer gear, data center and office build outs, and capitalized payroll costs related to internal-use software development. Net cash used in investing activities decreased $21 million, or 25%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease was driven by an $8 million cash payment in connection with the acquisition of Just Analytics Pte. Ltd. and a $15 million payment for the purchase of a convertible promissory note that matures in 2027 during the nine months ended September 30, 2022. Cash 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. - 54 - Table of Contents Net cash used in financing activities increased $43 million, or 29%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The change was driven by an $85 million increase in net payments related to long-term debt between periods as the current period includes $85 million of 5.375% Senior Note repurchases, while the prior period only includes quarterly principal payments on our Term Loan Facility. In addition, there was an $11 million increase in finance lease principal payments between periods. Partially offsetting these drivers was $31 million in common stock share repurchases during the nine months ended September 30, 2022 as part of the program authorized in March 2022 and a $23 million reduction in principal payments of financing obligations. Critical Accounting Policies and Estimates Our critical accounting policies and estimates have not changed from those described in our Annual Report under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates." For a description of recent accounting pronouncements, see Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies." Goodwill and Indefinite-Lived Intangible Assets Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Our indefinite-lived intangible assets consists of our Rackspace trade name, which was recorded at fair value on our balance sheet at the date of the Rackspace Acquisition. Application of the goodwill and other indefinite-lived intangible asset impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. We test goodwill and our indefinite-lived intangible asset, the Rackspace trade name, for impairment on an annual basis as of October 1st or more frequently if events or circumstances indicate a potential impairment. 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, (iv) a reorganization resulting in a change to our operating segments, and (v) 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. A reporting unit is an operating segment or one level below an operating segment (referred to as a component). We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. Assets and liabilities are assigned to each of our reporting units if they are employed by a reporting unit and are considered in the determination of the reporting unit fair value. 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. Subsequent to the January 1, 2023 business reorganization, we have two reporting units with goodwill: Public Cloud and Private Cloud. 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 royalty rate; (ii) the estimation of future revenue and projected margins, which are dependent on internal cash flow forecasts; (iii) estimation of the terminal growth rates and capital spending; and (iv) determination of discount rates. 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, 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. - 55 - Table of Contents For the quantitative goodwill impairment analysis, we utilize 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 rate, 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. Due to the change in our segment reporting as a result of the business reorganization as of January 1, 2023, we completed a quantitative goodwill impairment analysis both prior and subsequent to the aforementioned change. The results of the quantitative goodwill impairment analysis performed as of December 31, 2022 prior to the change indicated an impairment within our former Apps & Cross Platform reporting unit, and we recorded a non-cash impairment charge of $129 million in the fourth quarter of 2022 as described in our Annual Report. We reassigned goodwill to the updated reporting units using a relative fair value approach. The results of the quantitative goodwill impairment analysis performed as of January 1, 2023 subsequent to the change indicated an impairment within our Private Cloud reporting unit, and we recorded a non-cash impairment charge of $271 million in the first quarter of 2023. For the quantitative goodwill impairment analysis performed as of January 1, 2023, we utilized a range of our weighted-average cost of capital of 10.5% to 12% 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 January 1, 2023. As a result, we determined that the carrying amount of our Private Cloud reporting unit exceeded its fair value and recorded a goodwill impairment charge of $271 million, which is included in "Impairment of goodwill" in our Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2023. The impairment primarily resulted from reduced growth rates as compared to the former Multicloud Services reporting unit and the reallocation of certain costs between the three reporting units to reflect the going-forward operating model following the business reorganization. The Public Cloud reporting unit was determined to have a fair value that exceeded its carrying value by approximately 20% 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 units 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 Private Cloud and Public Cloud reporting units of approximately $175 million and $67 million, respectively. During the first quarter of 2023, 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. As of March 31, 2023, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our reporting units, including the significance of the amount, if any, of excess carrying value over fair value, consistency of operating margins and cash flows, budgeted-to-actual performance for the first three months of the year, overall change in economic climate, changes in the industry and competitive environment, and earnings quality and sustainability. 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 units as of March 31, 2023. The results of this quantitative goodwill impairment analysis indicated an impairment within our Private Cloud reporting unit, and we recorded an additional non-cash impairment charge of $272 million in the first quarter of 2023. For the quantitative goodwill impairment analysis performed as of March 31, 2023, we utilized a range of our weighted-average cost of capital of 10.0% to 11.5% 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 March 31, 2023. As a result, we determined that the carrying amount of our Private Cloud reporting unit exceeded its fair value and recorded a goodwill impairment charge of $272 million, which is included in "Impairment of goodwill" in our Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2023. The impairment was driven by the company's most recent cash flow projections as revised in the first quarter of 2023 which reflected current market conditions and current trends in business performance, including slower than anticipated actualization of bookings. The Public Cloud reporting unit was determined to have a fair value that exceeded its carrying value by approximately 14% and therefore no impairment was recognized. - 56 - Table of Contents We performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting units 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 Private Cloud and Public Cloud reporting units of approximately $80 million and $65 million, respectively. During the third quarter of 2023, 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. As of September 30, 2023, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our reporting units, including the significance of the amount, if any, of excess carrying value over fair value, consistency of operating margins and cash flows, budgeted-to-actual performance for the first nine months of the year, overall change in economic climate, changes in the industry and competitive environment, and earnings quality and sustainability. 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 units as of September 30, 2023. For the quantitative goodwill impairment analysis performed as of September 30, 2023, we utilized a range of our weighted-average cost of capital of 11.0% to 12.5% 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 30, 2023. As a result, we determined that the carrying amount of our Private Cloud reporting unit exceeded its fair value and recorded a goodwill impairment charge of $166 million, which is included in "Impairment of goodwill" in our Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2023. The impairment was driven by the company's cash flow projections as revised in the third quarter of 2023 to reflect current market conditions and business mix shifts. The Public Cloud reporting unit was determined to have a fair value that exceeded its carrying value by approximately 17% 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 units 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 Private Cloud and Public Cloud reporting units of approximately $65 million and $52 million, respectively. 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. 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 former Multicloud Services reporting unit exceeded its fair value and recorded a goodwill impairment charge of $405 million, which is included in "Impairment of goodwill" in our Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2022. The impairment was driven by deteriorating forecasted margins and cash flows within this reporting unit primarily due to slower than anticipated product mix shifts. Our former 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 former Multicloud Services and Apps & Cross Platform reporting units of approximately $235 million and $33 million, respectively. - 57 - Table of Contents As of January 1, 2023, March 31, 2023 and September 30, 2023, due to the factors discussed above, 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% for all periods and a discount rate of 11% as of January 1, 2023 and March 31, 2023, and a discount rate of 11.9% as of September 30, 2023. We completed the quantitative assessments of our indefinite-lived intangible asset prior to testing our goodwill for impairment as of January 1, 2023 and March 31, 2023 which did not indicate any impairment of the Rackspace trade name. The quantitative test as of September 30, 2023 indicated that the estimated fair value of the Rackspace trade name was less than its carrying value. As a result, we recorded a $57 million non-cash impairment charge which is included in "Impairment of assets, net" in our Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2023. As of September 1, 2022, prior to performing the goodwill impairment analysis, we performed a quantitative assessment of our indefinite-lived intangible asset utilizing a relief from royalty method. 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 which is included in "Impairment of assets, net" in our Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2022. 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. Long-Lived Assets We also performed recoverability tests of our long-lived assets in conjunction with the goodwill impairment analyses as of January 1, 2023, March 31, 2023, and September 30, 2023 which did not result in any impairment charges. As of September 1, 2022, prior to performing the goodwill impairment analysis, we performed a recoverability test of our long-lived assets, including finite-lived intangible assets. Based on the results of the recoverability test, we determined that, as of September 1, 2022, the fair value of the OpenStack Public Cloud asset group’s underlying assets was less than the carrying value. Fair values of the OpenStack Public Cloud long-lived assets were determined using the cost approach. 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, which is included in "Impairment of assets, net" in our Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2022. - 58 - Table of Contents