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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-16 · 434 added, 376 removed, 501 unchanged (62% of the section changed)

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Please also see “Special Note Regarding Forward-Looking Statements” contained elsewhere in this Annual Report.

We are a leading end-to-end multicloud technology services company.

We are a leading end-to-end, hybrid, multicloud, and AI solutions company.

We design, build and operate our customers’ cloud environments across all major technology platforms, irrespective of technology stack or deployment model.

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

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

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

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

(1) Multicloud Services, (2) Apps & Cross Platform and (3) OpenStack Public Cloud.

Our Multicloud Services segment includes our multicloud services offerings, as well as professional services related to designing and building multicloud solutions and cloud-native applications.

Our Apps & Cross Platform segment includes managed applications, managed security and data services, as well as professional services related to designing and implementing application, security and data services.

In early 2017, we determined that our OpenStack Public Cloud offering was not core to our go-forward operations and we ceased to incentivize our sales team to promote and sell the product by the end of that year.

We continue to serve our existing OpenStack Public Cloud customer base while we focus our growth strategy and investments on our Multicloud Services and Apps & Cross Platform offerings.

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 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 8 of Part II, Financial Statements and Supplementary Data - Note 18, "Segment Reporting" for additional information about our segments.

We refer to certain supplementary Core financial measures, which reflect the results or otherwise pertain to the performance of our Multicloud Services and Apps & Cross Platform segments, in the aggregate.

Our Core financial measures exclude the results and performance of our OpenStack Public Cloud segment.

We generate revenue primarily through the sale of consumption-based contracts for our services offerings, which are recurring in nature.

We also generate revenue from the sale of professional services related to designing and building customer solutions, which are non-recurring in nature.

Arrangements within our Multicloud Services offerings generally have a fixed term, typically from 12 to 36 months, with a monthly recurring fee based on the computing resources provided to and utilized by the customer, the complexity of the underlying infrastructure and the level of support we provide.

Our other primary sources of revenue are for public cloud services within our Multicloud Services, our Apps & Cross Platform and our OpenStack Public Cloud offerings.

Arrangements within our Private Cloud segment generally have a fixed term, typically from 12 to 36 months, with a monthly recurring fee based on the computing resources provided to and utilized by the customer, the complexity of the underlying infrastructure and the level of support we provide.

Our other primary sources of revenue are for services within our Public Cloud segment and legacy OpenStack business.

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

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

On August 7, 2020, we completed the IPO, in which we issued and sold 33,500,000 shares of our common stock at a public offering price of $21.00 per share.

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

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

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

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

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

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

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

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

The Hosted Exchange email business, reported in our Private Cloud segment, is a managed email solution provided to small and medium businesses and represented approximately 1% of our total annu al revenue.

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

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

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

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

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

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

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

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

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

Public Cloud, Private Cloud and OpenStack Public Cloud.

During the years ended December 31, 2022 and 202 3, we recorded $5.9 million and $5.2 million, respective ly, 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 maintain cybersecurity insurance commensurate with the size of our business, and a significant portion of the incremental costs related to the Hosted Exchange incident have been covered by insurance.

However, the timing of insurance reimbursements have differed from the timing of recognition of the related expenses.

During the year ended December 31, 2023, we recorded $10.0 million of loss recovery insurance proceeds received or expected to be received related to the Hosted Exchange incident.

Subsequent Events

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

Impact of COVID-19

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

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

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

The full extent to which COVID-19 and its variants may impact our financial condition or results of operations over the medium to long term, therefore, remains uncertain.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.

Russia and Ukraine Conflict

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

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

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

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

Key Factors Affecting Our Performance

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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.

Our success depends to a significant extent on our ability to continue 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 by Broadcom.

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

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Business Mix Shift

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

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

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

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

Shift in Capital Intensity

In recent years, the mix of our 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 8%, 7% and 5% of our revenue for the years ended December 31, 2020, 2021 and 2022, respectively.

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

Human Capital

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

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

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

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

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, we will continue to take a workload-centric approach and both Public and Private Cloud will be the net recipients of the workloads.

The focus in Private Cloud will be to defend and expand our revenue with new solutions.

The focus in Public Cloud is on expanding segment operating margins by driving cost efficiencies and growing higher-margin services revenue.

Key Components of Statement of Operations

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

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.

Our public cloud services within the Multicloud Services segment and most of our Apps & Cross Platform and OpenStack Public Cloud services generate usage-based revenue invoiced on a monthly basis and can be canceled at any time without penalty.

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.

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Selling, general and administrative expenses (855.3) (27.4) % (767.2) (25.9) % 88.1 (10.3) %

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

Impairment of assets — — % (146.1) (4.7) % (146.1) 100.0 %

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

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

Impairment of goodwill (534.5) (17.1) % (708.8) (24.0) % (174.3) 32.6 %

Impairment of assets, net (146.1) (4.7) % (52.2) (1.8) % 93.9 (64.3) %

Loss from operations (679.0) (21.7) % (899.4) (30.4) % (220.4) 32.5 %

Other income (expense):

Interest expense (208.5) (6.7) % (221.6) (7.5) % (13.1) 6.3 %

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

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

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

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

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

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

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

Gain (loss) on investments, net

(0.2) (0.0) % 0.3 0.0 % 0.5 NM

Gain on debt extinguishment

— — % 271.3 9.2 % 271.3 100.0 %

Other expense, net (10.0) (0.3) % (5.0) (0.2) % 5.0 (50.0) %

Total other income (expense) (218.7) (7.0) % 45.0 1.5 % 263.7 NM

Loss before income taxes (897.7) (28.8) % (854.4) (28.9) % 43.3 (4.8) %

Benefit for income taxes 92.9 3.0 % 16.6 0.6 % (76.3) (82.1) %

Net loss $ (804.8) (25.8) % $ (837.8) (28.3) % $ (33.0) 4.1 %

NM = not meaningful.

Revenue increased $113 million, or 3.7%, to $3,122 million in 2022 from $3,010 million in 2021.

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

After re moving the impact from foreign currency fluctuations, on a constant currency basis, revenue increased 5.2% year-over-year.

Revenue decreased $165 million, or 5.3%, to $2,957 million in 2023 from $3,122 million in 2022.

Revenue declined primarily due to Private Cloud, partially offset by growth in Public Cloud, as discussed below.

Revenue was not materially impacted by foreign currency fluctuations as revenue on a constant currency basis also declined 5.3% .

The following table presents revenue growth by segment:

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(In millions, except %) 2022 2023 Actual Constant Currency (1)

Multicloud Services $ 2,449.1 $ 2,574.9 5.1 % 6.7 %

Apps & Cross Platform 377.6 396.9 5.1 % 5.9 %

Core Revenue 2,826.7 2,971.8 5.1 % 6.6 %

OpenStack Public Cloud 182.8 150.5 (17.7) % (16.1) %

$ 1,740.8 $ 1,747.4 0.4 % 0.4 %

Private Cloud

1,381.5 1,209.7 (12.4) % (12.5) %

Total $ 3,122.3 $ 2,957.1 (5.3) % (5.3) %

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

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

Public Cloud revenue in 2023 increased 0.4% on an actual and constant currency basis, from 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 managed public cloud services on AWS, Microsoft Azure and Google Cloud.

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

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

Offerings in this segment with the strongest growth include infrastructure resale on AWS, Microsoft Azure and Google Cloud.

Private Cloud revenue in 2023 decreased 12.4% on an actual basis, and 12.5% on a constant currency basis, from 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 increased $63 million, or 3%, to $2,328 million in 2023 from $2,265 million in 2022, primarily due to an increase in usage charges for third-party infrastructure associated with growth in these offerings.

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

We also had higher severance in the prior period.

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

Depreciation expense also decreased between periods primarily due to certain property, equipment and software reaching the end of its useful life for depreciation purposes as we shift towards faster-growing, value-added service offerings which have significantly lower capital requirements than our legacy capital-intensive revenue streams.

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

Gross Profit and Non-GAAP Gross Profit

Our consolidated gross profit was $857 million in 2022, a decrease of $80 million from $937 million in 2021.

Our Non-GAAP Gross Profit was $884 million in 2022, a decrease of $112 million from $996 million in 2021.

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

Consulting professional fees and data center costs increased primarily to support growth for certain large customers.

Personnel costs declined between periods due to lower headcount and a decrease in non-equity incentive compensation, partially offset by higher severance expense in 2023.

As a percentage of revenue, cost of revenue increased 610 basis points in 2023 to 78.7% from 72.6% in 2022, primarily driven by a 440 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.

Our gross profit was $629 million in 2023, a decrease of $228 million from $857 million in 2022.

Our gross margin was 21.3% in 2023, a decrease of 610 basis points from 27.4% in 2022.

Selling, General and Administrative Expenses

SG&A expenses decreased $88 million, or 10%, to $767 million in 2023 from $855 million in 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 lower headcount and decreases in non-equity incentive compensation and commissions, partially offset by higher severance expense.

Other non-personnel costs fluctuations include lower marketing spend, professional fees, 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, SG&A expenses decreased 150 basis points, to 25.9% in 2023 from 27.4% in 2022, for the reasons discussed above.

Loss from Operations, Segment Operating Profit, and Non-GAAP Operating Profit

Our loss from operations was $899 million in 2023 compared to $679 million in 2022.

Our Non-GAAP Operating Profit was $183 million in 2023, a decrease of $180 million from $364 million in 2022.

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

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

Our consolidated gross margin was 27.4% in 2022, a decrease of 370 basis points from 31.1% in 2021.

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

The table below presents a reconciliation of loss from operations to Non-GAAP Operating Profit.

Year Ended December 31,

(In millions) 2022 2023

Total consolidated gross profit $ 936.8 $ 856.9

Loss from operations $ (679.0) $ (899.4)

Share-based compensation expense 69.5 65.4

Other compensation expense (1)

Purchase accounting impact on expense (2)

Restructuring and transformation expenses (3)

Hosted Exchange incident expenses — 0.2

Non-GAAP Gross Profit $ 996.4 $ 884.2

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

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

(3) Adjustment for the impact of business transformation and optimization activities, as well as associated severance, facility closure costs and lease termination expenses.

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

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

Special bonuses and other compensation expense (a)

Transaction-related adjustments, net (b)

Restructuring and transformation expenses (c)

Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage 5.9 (4.8)

Impairment of goodwill 534.5 708.8

UK office closure (d)

Impairment of assets, net 146.1 52.2

Amortization of intangible assets (e)

Non-GAAP Operating Profit $ 363.8 $ 183.4

(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 $5.2 million for the year ended December 31, 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) 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.

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:

Year Ended December 31, Year-Over-Year Comparison

(In millions, except %) 2022 2023

Segment gross profit:

Segment operating profit:

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

Multicloud Services $ 793.4 32.4 % $ 701.7 27.3 % $ (91.7) (11.6) %

Apps & Cross Platform 135.9 36.0 % 139.2 35.1 % 3.3 2.4 %

OpenStack Public Cloud 67.1 36.7 % 43.3 28.8 % (23.8) (35.5) %

Non-GAAP Gross Profit $ 996.4 $ 884.2 $ (112.2) (11.3) %

Multicloud Services gross profit decreased by 12% in 2022 from 2021.

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

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

Apps & Cross Platform gross profit increased 2% in 2022 from 2021.

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

OpenStack Public Cloud gross profit decreased 35% in 2022 from 2021 due to customer churn.

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

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

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

Selling, General and Administrative Expenses

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

We also had lower severance expense between periods.

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

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

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

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

$ 124.9 7.2 % $ 90.4 5.2 % $ (34.5) (27.6) %

Private Cloud

493.9 35.8 % 340.8 28.2 % (153.1) (31.0) %

Total consolidated segment operating profit 618.8 431.2 (187.6) (30.3) %

Corporate functions

(255.0) (247.8) 7.2 (2.8) %

Non-GAAP Operating Profit

$ 363.8 $ 183.4 $ (180.4) (49.6) %

Public Cloud operating profit decreased 28% in 2023 from 2022.

Segment operating profit as a percentage of segment revenue decreased by 200 basis points, reflecting a 3% increase in segment operating expenses as segment revenue growth remained relatively flat.

The increase in costs was mainly driven by higher third-party infrastructure costs due to the increase in revenue, partially offset by a decrease in personnel costs.

Private Cloud operating profit decreased 31% in 2023 from 2022.

Segment operating profit as a percentage of segment revenue decreased by 760 basis points, due to a 12% decrease in segment revenue, partially offset by a 2% decrease in segment operating expenses.

The decrease in costs was mainly driven by a reduction in personnel costs.

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 abov e.

This expense decreased 3% in 2023 primarily due to a decline in depreciation expense as certain property, equipment, and software reached the end of its useful life.

For more information about our segment operating profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 18, "Segment Reporting."

Impairment of Goodwill

We recorded a total of $709 million and $535 million in non-cash goodwill impairment charges in 2023 and 2022, respectively.

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 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.

As of October 1, 2023, we reassessed our reporting units and combined our Private Cloud and OpenStack Public Cloud reporting units into a new Private Cloud reporting unit.

We completed a quantitative goodwill impairment analysis as of October 1, 2023, subsequent to the aforementioned change.

The results of the quantitative goodwill impairment analysis indicated no impairment to goodwill.

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

1 unchanged sentence

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

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

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 during the third quarter of 2022.

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

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

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

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

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

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

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

Impairment of Assets

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

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

Impairment of Assets, Net

We recorded a total of $52 million and $146 million in net asset impairment charges in 2023 and 2022, respectively.

We 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 third quarter of 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 third quarter of 2022, consisting of a $21 million impairment of our indefinite-lived trade name intangible asset and a $38 million impairment of OpenStack Public Cloud long-lived assets.

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

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

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

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

The property's previous carrying amount of $83 million was written down to its estimated fair value, less estimated cost to sell, of $12 million, resulting in a $71 million impairment charge recorded in the fourth quarter of 2022.

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

There were no such impairments in 2021.

During 2023, we recorded a $5 million net increase in the estimated fair value, less estimated cost to sell, of our corporate headquarters.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 5 , " Property, Equipment and Software, net " and Note 6, "Goodwill and Intangible Assets" for further discussion.

Gain on Sale of Land

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

Debt Modification and Extinguishment Costs

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

Interest Expense

Interest expense increased $13 million, or 6%, to $222 million in 2023 from $209 million in 2022 , due primarily to rising interest rates and the impact on our variable-rate Term Loan Facility, partially offset by debt repurchases during 2023, as discussed below.

Gain on Debt Extinguishment

We recorded a $228 million gain on debt extinguishment in 2023 related to repurchases of $352 million principal amount of 5.375% Senior Notes.

In addition, we repurchased $36 million principal amount of 3.50% Senior Secured Notes and $56 million principal amount of the Term Loan Facility, which resulted in an $18 million and $26 million gain on debt extinguishment, respectively.

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

Other Expense, Net

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

The decrease in other expense, net to $5 million in 2023 from $10 million in 2022 is primarily related to foreign currency transaction gains, partially offset by costs incurred in 2023 related to the Receivables Purchase Facility entered into in September 2023.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 3, "Sale of Receivables" for further discussion regarding the Receivables Purchase Facility.

Benefit for Income Taxes

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

Our income tax benefit decreased by $76 million to $17 million in 2023 from $93 million in 2022.

Our effective tax rate decreased from 10.3% in 2022 to 1.9% in 2023.

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

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

The decrease in the effective tax rate year-over-year is primarily due to the tax impact associated with the goodwill impairments recorded in 2023 as well as changes in the valuation allowance.

The majority of the goodwill impairments recorded in 2023 were nondeductible for income tax purposes.

The difference between the effective tax rate and the statutory rate in 2023 is primarily due to the tax impact associated with the goodwill impairments recorded during the year, 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 changes in the valuation allowance.

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

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

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

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

Impairment of assets, net

— — % (146.1) (4.7) % (146.1) 100.0 %

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

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

Loss from operations

(2.5) (0.1) % (679.0) (21.7) % (676.5) NM

Other income (expense):

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

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

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

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

Loss on investments, net

(3.0) (0.1) % (0.2) (0.0) % 2.8 (93.3) %

Debt modification costs and loss on debt extinguishment

(37.5) (1.2) % — — % 37.5 (100.0) %

Other expense, net

(1.0) (0.0) % (10.0) (0.3) % (9.0) NM

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

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

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

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

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

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

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

NM = not meaningful.

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

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

Revenue increased $113 million, or 3.7%, to $3,122 million in 2022 from $3,010 million in 2021 primarily due to growth in Public Cloud, partially offset by a decline in Private Cloud, as discussed below.

After re moving the impact from foreign currency fluctuations, on a constant currency basis, revenue increased 5.2% year-over-year.

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(In millions, except %) 2021 2022 Actual Constant Currency (1)

Multicloud Services $ 2,141.5 $ 2,449.1 14.4 % 13.2 %

Apps & Cross Platform 336.6 377.6 12.2 % 11.6 %

Core Revenue 2,478.1 2,826.7 14.1 % 13.0 %

OpenStack Public Cloud 229.0 182.8 (20.2) % (21.3) %

$ 1,471.3 $ 1,740.8 18.3 % 19.2 %

Private Cloud

1,538.2 1,381.5 (10.2) % (8.2) %

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

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

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

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

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

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

Apps & Cross Platform revenue in 2021 increased 12%, on an actual and constant currency basis, from 2020, due to growth in our offerings for managed security and management of productivity and collaboration applications, partially offset by a decrease in professional services revenue .

OpenStack Public Cloud revenue in 2021 decreased 20% on an actual basis, and 21% on a constant currency basis, from 2020 due to customer churn.

Public Cloud revenue in 2022 increased 18% on an actual basis and 19% on a constant currency basis, from 2021.

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 2022 decreased 10% on an actual basis and 8% on a constant currency basis, from 2021, due to customers rolling off old generation private cloud offerings and expected decline in legacy OpenStack offerings.

Cost of Revenue

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

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

Depreciation expense also decreased between periods primarily related to certain property, equipment and software reaching the end of its useful life for depreciation purposes as we shift towards faster-growing, value-added service offerings which have significantly lower capital requirements than our legacy capital-intensive revenue streams.

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

We also had year-over-year expense reductions in data center and license expenses as a result of initiatives to lower our cost structure, which included the consolidation of data center facilities and optimizing our vendor license spending.

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

Gross Profit and Non-GAAP Gross Profit

Our consolidated gross profit was $937 million in 2021, a decrease of $48 million from $984 million in 2020.

Our Non-GAAP Gross Profit was $996 million in 2021, a decrease of $30 million from $1,026 million in 2020.

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

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

We also had higher severance in the prior period.

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

Our gross profit was $857 million in 2022, a decrease of $80 million from $937 million in 2021.

Our gross margin was 27.4% in 2022, a decrease of 370 basis points from 31.1% in 2021.

Selling, General and Administrative Expenses

We also had lower severance expense between periods.

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

Loss from Operations, Segment Operating Profit, and Non-GAAP Operating Profit

Our loss from operations was $679 million in 2022 compared to $3 million in 2021.

Our Non-GAAP Operating Profit was $364 million in 2022, a decrease of $120 million from $484 million in 2021.

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

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

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

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

The table below presents a reconciliation of loss from operations to Non-GAAP Operating Profit.

Year Ended December 31,

(In millions) 2021 2022

Total consolidated gross profit $ 984.4 $ 936.8

Loss from operations $ (2.5) $ (679.0)

Share-based compensation expense 75.4 69.5

Other compensation expense (1)

Purchase accounting impact on expense (2)

Restructuring and transformation expenses (3)

Non-GAAP Gross Profit $ 1,026.0 $ 996.4

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

(3) Adjustment for the impact of business transformation and optimization activities, as well as associated severance, facility closure costs and lease termination expenses.

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

Special bonuses and other compensation expense (a)

Transaction-related adjustments, net (b)

Restructuring and transformation expenses (c)

Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — 5.9

Impairment of goodwill 52.4 534.5

Impairment of assets, net — 146.1

Gain on sale of land (19.9) —

Amortization of intangible assets (d)

Non-GAAP Operating Profit $ 484.1 $ 363.8

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

In addition, it includes total charges of $25.1 million and $5.2 million for the years ended December 31, 2021 and 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.

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:

Year Ended December 31, Year-Over-Year Comparison

(In millions, except %) 2021 2022

Segment gross profit:

Segment operating profit:

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

Multicloud Services $ 810.2 37.8 % $ 793.4 32.4 % $ (16.8) (2.1) %

Apps & Cross Platform 115.5 34.3 % 135.9 36.0 % 20.4 17.7 %

OpenStack Public Cloud 100.3 43.8 % 67.1 36.7 % (33.2) (33.1) %

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

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

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

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

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

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

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

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

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

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

Selling, General and Administrative Expenses

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

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

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

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

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 10, "July 2021 Restructuring Plan" for additional information regarding the current period restructuring charges.

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

$ 120.1 8.2 % $ 124.9 7.2 % $ 4.8 4.0 %

Private Cloud

604.3 39.3 % 493.9 35.8 % (110.4) (18.3) %

Total consolidated segment operating profit 724.4 618.8 (105.6) (14.6) %

Corporate functions (240.3) (255.0) (14.7) 6.1 %

Non-GAAP Operating Profit

$ 484.1 $ 363.8 $ (120.3) (24.9) %

Public Cloud operating profit increased by 4% in 2022 from 2021.

Segment operating profit as a percentage of segment revenue decreased by 100 basis points, reflecting a 20% increase in segment operating expenses, partially offset by an 18% increase in segment revenue.

The increase in costs was mainly driven by higher third-party infrastructure costs due to the increase in revenue.

Private Cloud operating profit decreased 18% in 2022 from 2021.

Segment operating profit as a percentage of segment revenue decreased by 350 basis points, due to a 10% decrease in segment revenue, partially offset by a 5% reduction in segment operating expenses.

The decrease in costs was mainly driven by declines in personnel costs from cost savings as a result of shifting roles to lower-cost locations as part of our continued focus on business optimization initiatives.

This expense increased 6% in 2022 primarily due to costs incurred in 2022 related to the Hosted Exchange incident and an increase in travel expense as a result of the easing of COVID-19 restrictions.

For more information about our segment operating profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 18, "Segment Reporting."

Impairment of Goodwill

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

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

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

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

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

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

There was no such impairment in 2020.

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

Impairment of Assets, Net

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

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

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

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

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

There were no such impairments in 2021.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 5, " Property, Equipment and Software, net " and Note 6, "Goodwill and Intangible Assets" for further discussion.

Gain on Sale of Land

Interest Expense

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

Debt Modification and Extinguishment Costs

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

Debt Modification Costs and Loss on Debt Extinguishment

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

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

Other Expense, Net

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

Benefit for Income Taxes

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

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

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

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

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

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

2 unchanged sentences

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 EPS, which are non-GAAP financial measures that exclude the impact of certain costs, losses and gains that are required to be included in our profit and loss measures under GAAP.

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

12 unchanged sentences

Revenue in Constant Currency Actual Constant Currency

Multicloud Services $ 2,449.1 $ 2,574.9 $ 37.6 $ 2,612.5 5.1 % 6.7 %

Apps & Cross Platform 377.6 396.9 3.1 400.0 5.1 % 5.9 %

OpenStack Public Cloud 182.8 150.5 2.9 153.4 (17.7) % (16.1) %

$ 1,740.8 $ 1,747.4 $ 0.4 $ 1,747.8 0.4 % 0.4 %

Private Cloud

1,381.5 1,209.7 (1.2) 1,208.5 (12.4) % (12.5) %

Total $ 3,122.3 $ 2,957.1 $ (0.8) $ 2,956.3 (5.3) % (5.3) %

3 unchanged sentences

Revenue in Constant Currency Actual Constant Currency

Multicloud Services $ 2,141.5 $ 2,449.1 $ (23.9) $ 2,425.2 14.4 % 13.2 %

Apps & Cross Platform 336.6 377.6 (2.1) 375.5 12.2 % 11.6 %

OpenStack Public Cloud 229.0 182.8 (2.6) 180.2 (20.2) % (21.3) %

Public Cloud $ 1,471.3 $ 1,740.8 $ 13.0 $ 1,753.8 18.3 % 19.2 %

Private Cloud 1,538.2 1,381.5 30.6 1,412.1 (10.2) % (8.2) %

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

1 unchanged sentence

Non-GAAP Gross Profit

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

We define Non-GAAP Gross Profit as our consolidated gross profit, adjusted to exclude the impact of share-based compensation expense and other non-recurring or unusual compensation items, purchase accounting-related effects, certain business transformation-related costs, and costs related to the Hosted Exchange incident.

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

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:

Year Ended December 31,

(In millions) 2021 2022 2023

Gross profit $ 936.8 $ 856.9 $ 628.8

Share-based compensation expense 16.7 11.6 9.1

Special bonuses and other compensation expense (a)

Purchase accounting impact on expense (b)

Restructuring and transformation expenses (c)

35.5 10.9 16.9

Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — 0.2 0.3

Non-GAAP Gross Profit $ 996.4 $ 884.2 $ 661.7

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.

Adjustment for the impact of purchase accounting from the Rackspace Acquisition on expenses.

Adjustment for the impact of business transformation and optimization activities, as well as associated severance, certain facility closure costs and lease termination expenses.

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

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

We define Non-GAAP Net Income (Loss) as net income (loss) adjusted to exclude the impact of non-cash charges for share-based compensation, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, management fees, the amortization of acquired intangible assets, goodwill and asset impairment charges, and certain other non-operating, non-recurring or non-core gains and losses, as well as the tax effects of these non-GAAP adjustments.

We define Non-GAAP Operating Profit as income (loss) from operations adjusted to exclude the impact of non-cash charges for share-based compensation, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, management fees, the amortization of acquired intangible assets, goodwill and asset impairment charges, and certain other non-operating, non-recurring or non-core gains and losses.

We define Adjusted EBITDA as net income (loss) adjusted to exclude the impact of non-cash charges for share-based compensation, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, management fees, certain other non-operating, non-recurring or non-core gains and losses, interest expense, income taxes, depreciation and amortization, and goodwill and asset impairment charges.

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.

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, expenses for our Receivables Purchase Facility, income taxes, depreciation and amortization, and goodwill and asset impairment charges.

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

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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, Non-GAAP Operating Profit and Adjusted EBITDA to the most directly comparable GAAP financial measures:

Net loss reconciliation to Non-GAAP Net Income

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 “ Loss from Operations, Segment Operating Profit, and Non-GAAP Operating Profit ” in the year-over-year comparisons under "Results of Operations" above.

Net loss reconciliation to Non-GAAP Net Income (Loss)

Year Ended December 31,

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161.5 99.0 70.8

Hosted Exchange incident expenses — — 5.9

Management fees (d)

Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — 5.9 (4.8)

Impairment of goodwill 52.4 534.5 708.8

Impairment of assets — — 146.1

UK office closure (d)

Impairment of assets, net — 146.1 52.2

Gain on sale of land (19.9) — —

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3.0 0.2 (0.3)

Debt modification and extinguishment costs (f)

Other (income) expense, net (g)

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

37.5 — (271.3)

Other adjustments (g)

1.0 10.0 (1.0)

Amortization of intangible assets (h)

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(103.3) (133.3) (5.1)

Non-GAAP Net Income $ 151.3 $ 206.5 $ 114.9

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

Year Ended December 31,

(In millions) 2020 2021 2022

Income (loss) from operations $ 24.7 $ (2.5) $ (679.0)

Share-based compensation expense 74.5 75.4 69.5

Special bonuses and other compensation expense (a)

37.5 11.8 10.0

Transaction-related adjustments, net (b)

46.7 25.7 11.0

Restructuring and transformation expenses (c)

104.8 161.5 99.0

Hosted Exchange incident expenses — — 5.9

Management fees (d)

Impairment of goodwill — 52.4 534.5

Impairment of assets — — 146.1

Gain on sale of land — (19.9) —

Amortization of intangible assets (h)

176.3 179.7 166.8

Non-GAAP Operating Profit $ 472.9 $ 484.1 $ 363.8

Non-GAAP Net Income (Loss) $ 206.5 $ 114.9 $ (32.7)

Net loss reconciliation to Adjusted EBITDA

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161.5 99.0 70.8

Hosted Exchange incident expenses — — 5.9

Management fees (d)

Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage — 5.9 (4.8)

Impairment of goodwill 52.4 534.5 708.8

Impairment of assets — — 146.1

UK office closure (d)

Impairment of assets, net — 146.1 52.2

Gain on sale of land (19.9) — —

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3.0 0.2 (0.3)

Debt modification and extinguishment costs (f)

Other (income) expense, net (g)

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

37.5 — (271.3)

Other expense, net (j)

Interest expense 205.1 208.5 221.6

Benefit for income taxes (30.8) (92.9) (16.6)

Depreciation and amortization (j)

Depreciation and amortization (k)

421.4 387.5 366.4

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

(b) Includes legal, professional, accounting and other advisory fees related to acquisitions and the IPO, certain one-time costs related to being a first year public company, integration costs of acquired businesses, purchase accounting adjustments (including deferred revenue fair value discount), payroll costs for employees that dedicate significant time to supporting these projects and exploratory acquisition and divestiture costs and expenses related to financing activities.

(c) Includes consulting and advisory fees related to business transformation and optimization activities, payroll costs for employees that dedicate significant time to these projects, as well as associated severance, facility closure costs and lease termination expenses.

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.

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

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

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

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

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

(f) Includes gains and losses related to repurchases of 5.375% Senior Notes, 3.50% Senior Secured Notes and the Term Loan Facility, the February 2021 Refinancing Transaction and termination of the Receivables Financing Facility.

(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.

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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.

Non-GAAP Earnings Per Share

We define Non-GAAP EPS as Non-GAAP Net Income divided by our GAAP weighted average number of shares outstanding for the period on a diluted basis, after giving effect to the twelve-for-one stock split that was approved and effected by our board of directors on July 20, 2020, and further adjusted for the weighted average number of shares associated with securities which are anti-dilutive to GAAP EPS but dilutive to Non-GAAP EPS.

Management uses Non-GAAP EPS to evaluate the performance of our business on a comparable basis from period to period, including by adjusting for the impact of the issuance of shares that would be dilutive to Non-GAAP EPS.

The following table reconciles Non-GAAP EPS to our GAAP net loss per share on a diluted basis:

(j) Primarily consists of foreign currency gains and losses and expense related to our Receivables Purchase Facility.

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

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:

Year Ended December 31,

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Net loss attributable to common stockholders $ (218.3) $ (804.8) $ (837.8)

Non-GAAP Net Income $ 151.3 $ 206.5 $ 114.9

Non-GAAP Net Income (Loss) $ 206.5 $ 114.9 $ (32.7)

Weighted average number of shares - Diluted 208.0 211.2 215.3

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(0.02) 0.00 0.00

Non-GAAP EPS $ 0.83 $ 0.97 $ 0.54

(a) Reflects impact of awards that would have been anti-dilutive to net loss per share, and therefore not included in the calculation, but would be dilutive to Non-GAAP EPS and are therefore included in the share count for purposes of this non-GAAP measure.

Non-GAAP Earnings (Loss) Per Share

$ 0.97 $ 0.54 $ (0.15)

(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 ESPP, as well as contingent shares associated with our acquisition of Datapipe.

Certain of our potential common share equivalents are contingent on Apollo achieving pre-established performance targets based on a MOIC, which are included in the denominator for the entire period if such shares would be issuable as of the end of the reporting period assuming the end of the reporting period was the end of the contingency period.

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

(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.

Liquidity and Capital Resources

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

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

As of December 31, 2023, the Revolving Credit Facility provided for up to $375 million of borrowings, none of which was drawn and outstanding as of December 31, 2023.

Our primary uses of cash are working capital requirements, debt service requirements and capital expenditures.

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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 Indentures, if applicable), for cash or other consideration.

On August 7, 2020, we completed the IPO, in which we issued and sold 33,500,000 shares of our common stock at a public offering price of $21.00 per share.

We received net proceeds of $667 million from sales of shares in the IPO, after deducting underwriters' discounts and commissions of $37 million, but before deducting offering expenses of $9 million.

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

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

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

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

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

No shares were repurchased during the year ended December 31, 2023 and the program authorization expired on September 30, 2023.

On September 29, 2023, indirect subsidiaries of the company entered into a revolving agreement where a bankruptcy-remote SPV 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.

At December 31, 2023, we held $197 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $117 million was held by foreign entities.

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

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

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

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

On April 26, 2023, we executed an amendment to our First Lien Credit Agreement to establish Term SOFR as the benchmark rate for determining the applicable interest rate, replacing LIBOR.

As a result of the amendment, borrowings under the Senior Facilities bear interest at an annual rate equal to an applicable margin plus, at our option, either (a) Term SOFR equal to the forward-looking term rate, based on the secured overnight financing rate as administered by the Federal Reserve Bank of New York, for the interest period relevant to such borrowing, plus a credit spread adjustment of 0.11% for an interest period of one-month's duration, 0.26% for an interest period of three-months' duration, and 0.43% for an interest period of six-months' duration, subject to a 0.75% floor, in the case of the Term Loan Facility, and a 1.00% floor, in the case of the Revolving Credit Facility, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate of Citi and (iii) adjusted Term SOFR for a one-month tenor plus 1.00%.

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

Interest 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.

The Revolving Credit Facility also includes a commitment fee equal to 0.50% per annum in respect of the unused commitments that is due quarterly.

This fee is subject to one step-down based on the net first lien leverage ratio.

During the year ended December 31, 2023, we repurchased and surrendered for cancellation $56 million aggregate principal amount of the Term Loan Facility for $30 million, excluding related fees and expenses.

As of December 31, 2023, the interest rate on the Term Loan Facility was 8.23% and the outstanding principal balance was $2,181 million.

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

We have entered into interest rate swap agreements to manage the interest rate risk associated with interest payments on the Term Loan Facility that result from fluctuations in the LIBOR rate.

We have entered into interest rate swap agreements to manage the interest rate risk associated with interest payments on the Term Loan Facility that result from fluctuations in Term SOFR.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 15, "Derivatives" for more information on the interest rate swap agreements.

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Rackspace Technology Global, our wholly-owned subsidiary, is the borrower under the Senior Facilities, and all obligations under the Senior Facilities are (i) guaranteed by Inception Parent, Rackspace Technology Global’s immediate parent company, on a limited recourse basis and secured by the equity interests of Rackspace Technology Global held by Inception Parent and (ii) guaranteed by Rackspace Technology Global’s wholly-owned domestic restricted subsidiaries and secure d by substantially all material owned assets of Rackspace Technology Global and the subsidiary guarantors, including the equity interests held by each, in each case subject to certain exceptions.

During 2022, there were no borrowings under the Revolving Credit Facility and we had no outstanding borrowings under the Revolving Credit Facility or letters of credit issued thereunder as of December 31, 2022.

During 2023, we borrowed and fully repaid $50 million under the Revolving Credit Facility.

As of December 31, 2023, we had total commitments of $375 million, no outstanding borrowings under the Revolving Credit Facility, and $3.5 million of letters of credit issued thereunder.

As such, as of December 31, 2023, we had $375 million of available commitments remaining.

3.50% Senior Secured Notes

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

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

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

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and from February 15, 2026 and thereafter, at a redemption price equal to 100.000% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date.

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

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

During the year ended December 31, 2023, we repurchased and surrendered for cancellation $36 million principal amount of 3.50% Senior Secured Notes for $18 million, including accrued interest of $0.3 million and excluding related fees and expenses.

As of December 31, 2023, $514 million aggregate principal amount of the 3.50% Senior Secured Notes remained outstanding.

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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 through maturity.

The proceeds of the 5.375% Senior Notes were used to fund the repurchase or redemption of all of our outstanding 8.625% Senior Notes and to pay related fees and expenses.

The 5.375% Senior Notes are not subject to registration rights.

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

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

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

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and from December 1, 2025 and thereafter, at a redemption price equal to 100.000% of the principal amount, plus accrued and unpaid interest, if any, to but excluding the redemption date.

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

During the year ended December 31, 2023, we repurchased and surrendered for cancellation $352 million principal amount of 5.375% Senior Notes for $124 million, including accrued interest of $3 million and excluding related fees and expenses.

As of December 31, 2023, $198 million aggregate principal amount of the 5.375% Senior Notes remained outstanding.

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As of December 31, 2023, we were in compliance with all covenants under the Senior Facilities and the Indentures.

March 2024 Refinancing Transactions

See "Subsequent Events" in Item 8 of Part II, Financial Statements and Supplementary Data - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies" for a discussion of the public and private debt exchange and related transactions that impacted or are expected to impact the Senior Facilities, the 3.50% Senior Secured Notes and the 5.375% Senior Notes.

Capital Expenditures

The following table sets forth a summary of our capital expenditures for the periods indicated:

The following table sets forth a summary of our total capital expenditures for the periods indicated:

Year Ended December 31,

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Data center build outs (2)

15.3 12.5 4.2

Office build outs (3)

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

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

The $40 million increase in capital expenditures from 2022 to 2023 was primarily 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 has been redeployed to support other business requirements.

This gear was acquired through a finance lease.

The $61 million reduction in capital expenditures from 2021 to 2022 was due to the continued mix shift of our revenues from high capital intensity service offerings to low capital intensity service offerings.

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

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Cash provided by operating activities

$ 370.8 $ 246.7 $ 374.9

Cash used in investing activities $ (69.0) $ (97.9) $ (96.0)

Cash provided by (used in) financing activities $ 29.9 $ (132.2) $ (187.0)

Cash used in financing activities

$ (132.2) $ (187.0) $ (312.8)

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 for 2023 increased $128 million, or 52%, from 2022.

The increase in operating cash was primarily driven by $209 million of cash proceeds related to the initial sale of a portion of our receivables upon execution of the Receivables Purchase Facility in September 2023 and a $58 million decrease in payroll and payroll taxes due to lower levels of severance payouts in 2023 compared to 2022.

Partially offsetting this increase in cash was a $103 million increase in operating expense payments, largely for third-party infrastructure costs, and a $38 million increase in interest payments on debt.

Net cash provided by operating activities for 2022 decreased $124 million, or 33%, from 2021.

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

Net cash provided by operating activities for 2021 increased $254 million, or 218%, from 2020.

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

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

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

Cash Used in Investing Activities

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The largest outlays of cash are for purchases of customer gear, data center and office build-outs, and capitalized payroll costs related to internal-use software development.

Net cash used in investing activities for 2023 decreased $2 million, or 2%, from 2022.

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

These cash outflows were partially offset by a $17 million increase in cash purchases of property, equipment, and software year-over-year.

Other investing activities comprised the remainder of the variance in cash used between periods.

Net cash used in investing activities for 2022 increased $29 million, or 42%, from 2021.

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

Net cash used in investing activities for 2021 decreased $59 million, or 46%, from 2020.

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

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

Cash Provided by or Used in Financing Activities

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.

Net cash used in financing activities for 2023 increased $126 million, or 67% from 2022.

The change was driven by a $169 million increase in net payments related to long-term debt between periods as the current period includes $121 million of 5.375% Senior Note repurchases, $18 million of 3.50% Senior Secured Note repurchases, and $30 million of Term Loan Facility repurchases, while the prior period only includes quarterly principal payments on our Term Loan Facility.

In addition, there was a $13 million increase in finance lease principal payments between periods.

Partially offsetting these drivers was $31 million in common stock share repurchases during 2022 as part of the program authorized in March 2022 and a $26 million reduction in principal payments of financing obligations.

Net cash used in financing activities for 2022 increased $55 million, or 41% from 2021.

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

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

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

Net cash used in financing activities was $132 million for 2021 compared to net cash provided by financing activities of $30 million for 2020.

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

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

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

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

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

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

These entities are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

On September 29, 2023, Rackspace US and Rackspace Receivables II, LLC, a bankruptcy-remote SPV, each an indirect subsidiary of the company, entered into the Receivables Purchase Facility with PNC.

The Receivables Purchase Facility allows the SPV to sell and/or contribute accounts receivable up an aggregate maximum limit of $300 million to PNC on a revolving basis.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 3, "Sale of Receivables" for more information regarding this off-balance sheet transaction.

We have entered into various indemnification arrangements with third parties, including vendors, customers, landlords, our officers and directors, stockholders of acquired companies and third parties to whom and from whom we license technology.

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

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

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

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

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To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

Business Combinations

Mergers and acquisitions are accounted for using the acquisition method, in accordance with accounting guidance for business combinations.

Under the acquisition method, we allocate the fair value of purchase consideration to the tangible and intangible assets acquired (“identifiable assets”) and liabilities assumed based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

When determining the fair values of identifiable assets acquired and liabilities assumed, including contingent consideration when applicable, management makes significant estimates and assumptions.

Critical estimates in valuing certain intangible assets include but are not limited to discount rates and future expected cash flows from customer relationships and developed technology.

The fair value of equity and contingent consideration includes estimates and judgments related to the discount rates and future discounted cash flows based on management’s internal forecasts, timing of achievement of milestones and probability-weighted scenarios.

Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, may differ from estimates.

Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the identifiable assets acquired and liabilities assumed.

Revenue Recognition

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The totality of services provided represent a single integrated solution tailored to the customer’s specific needs.

As such, our performance obligations to our customers consist of a single integrated solution delivered as a series of distinct daily services.

As such, our performance obligations to our customers consist of a single integrated solution delivered as a series of distinct daily services delivered over the same period of time.

We 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 the services.

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

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

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

A substantial amount of revenue, particularly within our Private Cloud segment, relates to fees associated with offerings that generally have a fixed term, typically from 12 to 36 months, with a monthly recurring fee based on the computing resources utilized and provided to the customer, the complexity of the underlying infrastructure and the level of support we provide.

Contracts for our service offerings falling within our Public Cloud segment and legacy OpenStack business typically operate on a consumption model and can be canceled at any time without penalty.

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

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

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

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

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

We also performed recoverability tests of our long-lived assets in conjunction with the goodwill impairment analyses performed subsequent to September 1, 2022 which did not result in any impairment charges.

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

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

Potential impairment indicators may also include, but are not limited to, (i) the results of our most recent annual or interim impairment testing, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any, and (iv) other macroeconomic factors, such as increases in interest rates that may affect the weighted average cost of capital, volatility in the equity and debt markets, or fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations.

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.

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

We have two reporting units with goodwill:

Multicloud Services and Apps & Cross Platform.

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.

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(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.

(ii) the estimation of future revenue growth rates, projected gross profit margins, projected operating costs, and projected capital expenditures, which are dependent on internal cash flow forecasts;

(iii) estimation of the terminal growth rates;

and (iv) determination of the risk-adjusted 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.

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

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

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

For the quantitative goodwill impairment analysis, we utilized the income approach to determine the fair value of our reporting units.

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

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

The discounted cash flow models reflect our assumptions and considerations regarding revenue growth rates, projected gross profit margins, projected operating costs, projected capital expenditures, risk-adjusted discount rates, terminal period growth rates, and economic market trends.

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

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

We reassigned goodwill to the updated reporting units using a relative fair value approach.

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 12.0% 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 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 during the first quarter of 2023, which is included in "Impairment of goodwill" in our Consolidated Statements of Comprehensive Loss.

The impairment primarily resulted from 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.

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 during the first quarter of 2023, which is included in "Impairment of goodwill" in our Consolidated Statements of Comprehensive Loss.

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.

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.

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

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 during the third quarter of 2023, which is included in "Impairment of goodwill" in our Consolidated Statements of Comprehensive Loss.

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.

As of October 1, 2023, we reassessed our reporting unit structure and aggregated the OpenStack Public Cloud reporting unit into our Private Cloud reporting unit.

We currently have two reporting units:

Public Cloud and Private Cloud.

Due to the change in our reporting units as of October 1, 2023, we completed a quantitative goodwill impairment analysis.

As the Private Cloud and OpenStack Public Cloud reporting units are being combined into the new Private Cloud reporting unit, the goodwill of the reporting units has been combined rather than reassigned based on the relative fair values of the reporting units.

The results of the quantitative goodwill impairment analysis performed as of October 1, 2023, subsequent to the change, indicated no impairment charges to our Private Cloud or Public Cloud reporting units.

For the quantitative goodwill impairment analysis performed as of October 1, 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 October 1, 2023.

The Private and Public Cloud reporting units were determined to have a fair value that exceeded its carrying value by approximately 3% and 17%, respectively and, therefore, no impairment was recognized.

For the interim quantitative goodwill impairment analysis performed as of September 1, 2022, 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 during the third quarter of 2022, which is included in "Impairment of goodwill" in our Consolidated Statements of Comprehensive Loss.

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

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

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 Multicloud Services and Apps & Cross Platform reporting units of approximately $235 million and $33 million, respectively.

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

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

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

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

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

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.

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

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

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

For the quantitative goodwill impairment analysis performed as of October 1, 2022, we utilized a range of our weighted-average cost of capital of 10.0% to 12.0% as our discount rate, which was risk-adjusted for each reporting unit.

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

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

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

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

Therefore no impairment was recognized.

Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of our Multicloud Services and Apps & Cross Platform reporting units of approximately $236 million and $38 million, respectively.

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

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

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

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

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 $236 million and $38 million, respectively.

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

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

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

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

For the quantitative goodwill impairment analysis performed as of December 31, 2022, we utilized a range of our weighted-average cost of capital of 10.5% to 12.0% as our discount rate, which was risk-adjusted for each reporting unit.

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

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

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

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

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

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

Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of our Multicloud Services and Apps & Cross Platform reporting units of approximately $218 million and $22 million, respectively.

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

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

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

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

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 $218 million and $22 million, respectively.

As of December 31, 2023, the carrying amount of goodwill was $1,452.4 million.

Indefinite-Lived Intangible Assets

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 11.0% 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 during the third quarter of 2023 which is included in "Impairment of assets, net" in our Consolidated Statements of Comprehensive Loss

We completed the quantitative assessments of our indefinite-lived intangible asset prior to testing our goodwill for impairment as of October 1, 2023 which did not indicate any impairment of the Rackspace trade name.

As of September 1, 2022, October 1, 2022 and December 31, 2022, 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 10.7% as of September 1, 2022 and October 1, 2022, and a discount rate of 11.0% as of December 31, 2022.

We completed the quantitative assessments of our indefinite-lived intangible asset prior to testing our goodwill for impairment.

As of September 1, 2022, we determined the estimated fair value of the Rackspace trade name was less than its carrying value.

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

As of October 1, 2022, we determined the estimated fair value of the Rackspace trade name was greater than its carrying value, and therefore no impairment was recognized.

As of December 31, 2022, we determined the estimated fair value of the Rackspace trade name was less than its carrying value.

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

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

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

Assumptions include estimation of the royalty rate for the trade name, estimation of future revenue growth rates, projected gross profit margins, projected operating costs, projected capital expenditures, which are dependent on internal cash flow forecasts, estimation of the terminal growth rates and determination of risk-adjusted 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.

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

As of December 31, 2022, the carrying amount of goodwill was $2,155.1 million.

We are currently evaluating the impact of the subsequent events described in Item 8 of Part II, Financial Statements and Supplementary Data - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies" and the company’s most recently approved internal forecasts on the significant estimates and assumptions used in our most recent annual impairment testing.

After considering all available evidence in evaluating potential impairment indicators, we may determine it is appropriate to perform an interim quantitative goodwill impairment analysis during the first quarter of 2024.

It is possible that impairment charges may be recorded, which could be material.

Contingencies

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

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

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

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

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

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

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

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

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

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

A discount for lack of marketability was not applied as its impact was already reflected in the equity value through the discount rate, given that there were no differential rights attributable to different shareholders (as we have only one class of shares).

These estimates were complex, involved a number of variables, uncertainties and assumptions and the application of management’s judgment, as they were inherently subjective.

We are subject to income taxes in the U.S.

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The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.

In December 2021, the Organisation for Economic Co-operation and Development (the “OECD”) issued model rules for a new global minimum tax framework (Pillar Two).

Governments in many of the countries where we operate have issued, or are in the process of issuing, legislation on this rule.

We are currently evaluating, but do not expect this rule to have a material impact on our consolidated financial statements.

For a description of accounting pronouncements recently adopted and issued, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies."

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

What changed 10-K

Item 7. Management’s Discussion and Analysis