Rackspace Technology, Inc. 10-Q

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management ' s Discussion and Analysis of Financial Condition and Results of Operations ( " MD&A " ) is intended to help readers understand our results of operations, financial condition and cash flows and should be read in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report") and with the audited consolidated financial statements and the related notes included in our Annual Report. References to " Rackspace Technology, " " we, " " our company, " " the company, " " us, " or " our " refer to Rackspace Technology, Inc. and its consolidated subsidiaries. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See " Special Note Regarding Forward-Looking Statements " contained elsewhere in this Quarterly Report. Overview We are a leading end-to-end, hybrid, multicloud, 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. We partner with our customers at every stage of their cloud journey, enabling them to modernize applications, build new products, and adopt innovative technologies. We operate our business and report our results through two reportable segments: Public Cloud and Private Cloud. 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 1 of Part I, Financial Statements - Note 13, "Segment Reporting," for additional information about our segments. - 34 - Table of Contents Key Factors Affecting Our Performance We believe our combination of proprietary technology, automation capabilities and technical expertise creates a value proposition for our customers that is hard to replicate for both competitors and in-house IT departments. Our continued success depends to a significant extent on our ability to meet the challenges presented by our highly competitive and dynamic market, including the following key factors: Differentiating Our Service Offerings in a Competitive Market Environment Our success depends to a significant extent on our ability to 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. Our existing and prospective customers are also under increasing pressure to move from on-premise or self-managed IT to the cloud to compete effectively in a digital economy and maximize the value of their cloud investments, which we believe presents an opportunity for professional services projects as well as new recurring business. Customer Relationships and Retention Our success greatly depends on our ability to retain and develop opportunities with our existing customers and to attract new customers. We operate in a growing but competitive and evolving market environment, requiring innovation to differentiate us from our competitors. We believe that our integrated cloud service portfolio and our differentiated customer experience and technology are keys to retaining and growing revenue from existing customers as well as acquiring new customers. For example, we believe that Rackspace Fabric provides customers a unified experience across their entire cloud and security footprint, and that our Rackspace Elastic Engineering model helps customers embrace a cloud native approach with on-demand access to a dedicated team of highly skilled cloud architects and engineers. These offerings differentiate us from legacy IT service providers that operate under long-term fixed and project-based fee structures often tethered to their existing technologies with less automation. Business Mix Shift The mix of revenue has shifted in recent years, from our Private Cloud offerings to infrastructure resale and services within Public Cloud. Private Cloud offerings are generally hosted on our own infrastructure and deliver higher segment operating margins, but also require a higher level of capital expenditures. Conversely, Public Cloud segment operating margins are lower, driven by high volumes of infrastructure resale revenue which come at significantly lower margins. However, Public Cloud requires significantly less capital expenditures. Going forward, 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. - 35 - Table of Contents Key Components of Statement of Operations Revenue A substantial amount of our revenue, particularly within our Private Cloud segment, is generated pursuant to contracts that typically have a fixed term (typically from 12 to 36 months). Our customers generally have the right to cancel their contracts by providing us with written notice prior to the end of the fixed term, though most of our contracts provide for termination fees in the event of cancellation prior to the end of their term, typically amounting to the outstanding value of the contract. These contracts include a monthly recurring fee, which is determined based on the computing resources utilized and provided to the customer, the complexity of the underlying infrastructure and the level of support we provide. Most of our services within our Public Cloud segment and legacy OpenStack business generate usage-based revenue invoiced on a monthly basis and can be canceled at any time without penalty. We also generate revenue from usage-based fees and fees from professional services earned from customers using our hosting and other services. We typically recognize revenue on a daily basis, as services are provided, in an amount that reflects the consideration to which we expect to be entitled in exchange for our services. Our usage-based arrangements generally include a variable consideration component, consisting of monthly utility fees, with a defined price and undefined quantity. Our customer contracts also typically contain service level guarantees, including with respect to network uptime requirements, that provide discounts when we fail to meet specific obligations and, with respect to certain products, we may offer volume discounts based on usage. As these variable consideration components consist of a single distinct daily service provided on a single performance obligation, we account for all of them as services are provided and earned. Cost of revenue Cost of revenue consists primarily of usage charges for third-party infrastructure and personnel costs (including salaries, bonuses, benefits and share-based compensation) for engineers, developers and other employees involved in the delivery of services to our customers. Cost of revenue also includes depreciation of servers, software and other systems infrastructure, data center rent and other infrastructure maintenance and support costs, including software license costs and utilities. Cost of revenue is driven mainly by demand for our services, our service mix and the cost of labor in a given geography. Selling, general and administrative expenses (SG&A) Selling, general and administrative expenses consist primarily of personnel costs (including salaries, bonuses, commissions, benefits and share-based compensation) for our sales force, executive team and corporate administrative and support employees, including our human resources, finance, accounting and legal functions. SG&A also includes research and development costs, repair and maintenance of corporate infrastructure, facilities rent, third-party advisory fees (including audit, legal and management consulting costs), marketing and advertising costs and insurance, as well as the amortization of related intangible assets and certain depreciation of fixed assets. SG&A also includes transaction costs related to acquisitions and financings along with costs related to integration and business transformation initiatives which may impact the comparability of SG&A between periods. Income taxes Our income tax benefit (provision) and deferred tax assets and liabilities reflect management's best assessment of estimated current and future taxes to be paid. To date, we have recorded consolidated tax benefits, reflecting our net losses, though certain of our non-U.S. subsidiaries have incurred corporate tax expense according to the relevant taxing jurisdictions.We are under certain domestic and foreign tax audits. Due to the complexity involved with certain tax matters, there is the possibility that the various taxing authorities may disagree with certain tax positions filed on our income tax returns. We believe we have made adequate provision for all uncertain tax positions. See Item 1 of Part I, Financial Statements - Note 10, "Taxes." - 36 - Table of Contents Results of Operations We discuss our historical results of operations, and the key components of those results, below. Past financial results are not necessarily indicative of future results. Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2024 The following table sets forth our results of operations for the specified periods, as well as changes between periods and as a percentage of revenue for those same periods (totals in table may not foot due to rounding): Three Months Ended March 31, Year-Over-Year Comparison 2023 2024 (In millions, except %) Amount % Revenue Amount % Revenue Amount % Change Revenue $ 758.7 100.0 % $ 690.8 100.0 % $ (67.9) (8.9) % Cost of revenue (589.1) (77.6) % (558.0) (80.8) % 31.1 (5.3) % Gross profit 169.6 22.4 % 132.8 19.2 % (36.8) (21.7) % Selling, general and administrative expenses (207.5) (27.4) % (192.4) (27.9) % 15.1 (7.3) % Impairment of goodwill (543.1) (71.6) % (573.2) (83.0) % (30.1) 5.5 % Impairment of assets, net — — % (20.0) (2.9) % (20.0) 100.0 % Loss from operations (581.0) (76.6) % (652.8) (94.5) % (71.8) 12.4 % Other income (expense): Interest expense (56.9) (7.5) % (43.7) (6.3) % 13.2 (23.2) % Gain on investments, net 0.1 0.0 % 0.1 0.0 % — — % Debt modification costs and gain on debt extinguishment 12.8 1.7 % 56.7 8.2 % 43.9 NM Other income (expense), net 2.1 0.3 % (5.6) (0.8) % (7.7) NM Total other income (expense) (41.9) (5.5) % 7.5 1.1 % 49.4 NM Loss before income taxes (622.9) (82.1) % (645.3) (93.4) % (22.4) 3.6 % Benefit for income taxes 10.9 1.4 % 4.7 0.7 % (6.2) (56.9) % Net loss $ (612.0) (80.7) % $ (640.6) (92.7) % $ (28.6) 4.7 % NM = not meaningful. Revenue Revenue decreased $68 million, or 8.9%, to $691 million in the three months ended March 31, 2024 from $759 million in the three months ended March 31, 2023 . Revenue declined due to decreases in both Private Cloud and Public Cloud revenue, as discussed below. After removing the impact of foreign currency fluctuations, on a constant currency basis, revenue decreased 9.3% year-over-year. The following table presents revenue growth by segment: Three Months Ended March 31, % Change (In millions, except %) 2023 2024 Actual Constant Currency (a) Public Cloud $ 443.5 $ 422.4 (4.7) % (4.9) % Private Cloud 315.2 268.4 (14.9) % (15.5) % Total $ 758.7 $ 690.8 (8.9) % (9.3) % (a) Refer to " Non-GAAP Financial Measures " in this section for further explanation and reconciliation. - 37 - Table of Contents Public Cloud revenue in the three months ended March 31, 2024 decreased 5% on an actual and constant currency basis, from the three months ended March 31, 2023. The decline was due to macro-economic pressures which caused a tightening of customer discretionary spend and optimizations, along with continued cyclical headwinds in IT services. Private Cloud revenue in the three months ended March 31, 2024 decreased 15% on an actual basis and 16% on a constant currency basis, from the three months ended March 31, 2023, due to customers rolling off old generation private cloud offerings and expected decline in legacy OpenStack offerings. Cost of Revenue Cost of revenue decreased $31 million, or 5%, to $558 million in the three months ended March 31, 2024 from $589 million in the three months ended March 31, 2023. The decrease in cost of revenue was primarily due to a decline in personnel costs associated with a reduction in headcount between periods and lower severance expense. Also contributing to the reduction in cost of revenue was an increase in the useful life of certain customer gear assets, as discussed in Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies", which resulted in a decline in depreciation expense between periods. Increased usage charges for third-party infrastructure partially offset these reductions. As a percentage of revenue, cost of revenue increased 320 basis points in the three months ended March 31, 2024 to 80.8% from 77.6% in the three months ended March 31, 2023 as the decline in revenue growth outpaced the decrease in cost of revenue. Usage charges for third-party infrastructure drove a 510 basis point increase. Higher data center and license expense also contributed to the increase between periods. The decrease in personnel costs and depreciation expense, discussed above, partially offset the increase. Gross Profit Our gross profit was $133 million in the three months ended March 31, 2024, a decrease of $37 million from $170 million in the three months ended March 31, 2023. Our gross margin was 19.2% in the three months ended March 31, 2024, a decrease of 320 basis points from 22.4% in the three months ended March 31, 2023. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $15 million, or 7%, to $192 million in the three months ended March 31, 2024 from $208 million in the three months ended March 31, 2023. The decrease was due to a decline in personnel costs associated with a reduction in salaries driven by lower headcount and decreases in severance and commissions expense. Other non-personnel costs fluctuations included lower professional fees and a reduction in depreciation and amortization expense between periods. The first quarter of 2024 includes a $9 million early termination fee associated with the sale of our corporate headquarters, which partially offset the previously mentioned expense reductions. As a percentage of revenue, selling, general and administrative expenses increased 50 basis points, to 27.9% in the three months ended March 31, 2024 from 27.4% in the three months ended March 31, 2023 as the decline in revenue growth outpaced the decrease in selling, general and administrative expenses. Loss from Operations, Segment Operating Profit, and Non-GAAP Operating Profit Our loss from operations was $653 million in the three months ended March 31, 2024 compared to $581 million in the three months ended March 31, 2023. Our Non-GAAP Operating Profit was $16 million in the three months ended March 31, 2024, a decrease of $34 million from $51 million in the three months ended March 31, 2023. Non-GAAP Operating Profit is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information. - 38 - Table of Contents The table below presents a reconciliation of loss from operations to Non-GAAP Operating Profit. Three Months Ended March 31, (In millions) 2023 2024 Loss from operations $ (581.0) $ (652.8) Share-based compensation expense 15.2 12.8 Special bonuses and other compensation expense (a) 2.2 3.1 Transaction-related adjustments, net (b) 1.3 1.0 Restructuring and transformation expenses (c) 25.6 20.0 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage 3.2 0.2 Impairment of goodwill 543.1 573.2 Impairment of assets, net — 20.0 Amortization of intangible assets (d) 40.9 38.7 Non-GAAP Operating Profit $ 50.5 $ 16.2 (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. The first quarter of 2024 also includes a $9.0 million MEIA early termination fee associated with the sale of our corporate headquarters. (d) All of our intangible assets are attributable to acquisitions, including the Rackspace Acquisition in 2016. Our segment operating profit and segment operating margin for the periods indicated, and the change between periods is shown in the table below: Three Months Ended March 31, Year-Over-Year Comparison (In millions, except %) 2023 2024 Segment operating profit: Amount % of Segment Revenue Amount % of Segment Revenue Amount % Change Public Cloud $ 23.4 5.3 % $ 9.3 2.2 % $ (14.1) (60.3) % Private Cloud 94.0 29.8 % 71.7 26.7 % (22.3) (23.7) % Total consolidated segment operating profit 117.4 81.0 (36.4) (31.0) % Corporate functions (66.9) (64.8) 2.1 (3.1) % Non-GAAP Operating Profit $ 50.5 $ 16.2 $ (34.3) (67.9) % Public Cloud operating profit decreased 60% in the three months ended March 31, 2024 from the three months ended March 31, 2023. Segment operating profit as a percentage of segment revenue decreased by 310 basis points, reflecting a 5% decrease in segment revenue, partially offset by a 2% decrease in segment operating expenses primarily due to lower personnel costs. Private Cloud operating profit decreased 24% in the three months ended March 31, 2024 from the three months ended March 31, 2023. Segment operating profit as a percentage of segment revenue decreased by 310 basis points, due to a 15% decrease in segment revenue, partially offset by an 11% decrease in segment operating expenses. The decrease in costs was mainly driven by a reduction in personnel costs. - 39 - Table of Contents Centralized corporate functions that provide services to the segments in areas such as accounting, information technology, marketing, legal and human resources are not allocated to the segments and are included in "corporate functions" in the table above. This expense decreased 3% in the three months ended March 31, 2024 from the three months ended March 31, 2023 primarily due to a reduction in depreciation and amortization expense between periods. For more information about our segment operating profit , see Item 1 of Part I, Financial Statements - Note 13, "Segment Reporting." Impairment of Goodwill We recorded a total of $543 million and $573 million in non-cash goodwill impairment charges in the three months ended March 31, 2023 and 2024, respec tively. In connection with the debt refinancing transactions that were completed in March and April 2024, as further described in Item 1 of Part I, Financial Statements - Note 7, "Debt", we updated our internal forecasts. As of February 29, 2024, we assessed our Board approved 2024 internal budget along with 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 our current and forecasted operating margins and cash flows, budgeted-to-actual performance, timing of the expected effects of our strategic initiatives, overall change in economic climate, changes in the industry and competitive environment, changes to our risk-adjusted discount rates 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 February 29, 2024. The results of this goodwill impairment analysis indicated an impairment of goodwill within our Public Cloud and Private Cloud reporting units of $385 million and $188 million, respectively, recorded in the first quarter of 2024. 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. Impairment of Assets, Net We evaluated our indefinite-lived intangible asset for impairment as of February 29, 2024. As a result of this evaluation, we recorded a $20 million impairment of our indefinite-lived intangible asset in the three months ended March 31, 2024. There w as no such impairment in the three months ended March 31, 2023 . Interest Expense Interest expense decreased $13 million, or 23%, to $44 million in the three months ended March 31, 2024 from $57 million in the three months ended March 31, 2023, due primarily to debt repurchases between periods. Debt Modification Costs and Gain on Debt Extinguishment We recorded $57 million of debt modification costs and gain on debt extinguishment in the three months ended March 31, 2024 related to the March 2024 Refinancing Transactions. - 40 - Table of Contents We recorded a $13 million gain on debt extinguishment in the three months ended March 31, 2023 r elated to repurchases of $23 million principal amount of 5.375% Senior Notes. For more information about the March 2024 Refinancing Transactions, see Item 1 of Part I, Financial Statements - Note 7, "Debt." Other Income (Expense), Net We had $6 million of other expense and $2 million of other income in the three months ended March 31, 2024 and March 31, 2023, respectively, primarily due to costs incurred in the three months ended March 31, 2024 related to the accounts receivable purchase agreement entered into in September 2023 and the impact of foreign currency losses. Benefit for Income T axes Our income tax benefit decreased to $5 million in the three months ended March 31, 2024 from $11 million in the three months ended March 31, 2023. Our effective tax rate decreased to 0.7% in the three months ended March 31, 2024 from 1.7% in the three months ended March 31, 2023. The decrease in the effective tax rate year-over-year is primarily due to the tax impact associated with changes in the valuation allowance, geographic distribution of profits, the tax impact associated with goodwill impairments recorded in both the first quarter of 2024 and the first quarter of 2023, the majority of which were nondeductible for income tax purposes, and the income tax benefit of $51 million related to the March 2024 Refinancing Transactions discussed above. The difference between the effective tax rate and the statutory rate for the three months ended March 31, 2024 is primarily due to the tax impact associated with changes in the valuation allowance, the tax impact associated with the goodwill impairment recorded in the first quarter of 2024, and the impact of the March 2024 Refinancing Transactions. - 41 - Table of Contents Non-GAAP Financial Measures We track several non-GAAP financial measures to monitor and manage our underlying financial performance. The following discussion includes the presentation of constant currency revenue, Non-GAAP Gross Profit, Non-GAAP Net Income (Loss), Non-GAAP Operating Profit, Adjusted EBITDA and Non-GAAP Earnings (Loss) Per Share, which are non-GAAP financial measures that exclude the impact of certain costs, losses and gains that are required to be included in our profit and loss measures under GAAP. Although we believe these measures are useful to investors and analysts for the same reasons they are useful to management, as discussed below, these measures are not a substitute for, or superior to, U.S. GAAP financial measures or disclosures. Other companies may calculate similarly-titled non-GAAP measures differently, limiting their usefulness as comparative measures. We have reconciled each of these non-GAAP measures to the applicable most comparable GAAP measure throughout this MD&A. Constant Currency Revenue We use constant currency revenue as an additional metric for understanding and assessing our growth excluding the effect of foreign currency rate fluctuations on our international business operations. Constant currency information compares results between periods as if exchange rates had remained constant period over period and is calculated by translating the non-U.S. dollar income statement balances for the most current period to U.S. dollars using the average exchange rate from the comparative period rather than the actual exchange rates in effect during the respective period. We also believe this is an important metric to help investors evaluate our performance in comparison to prior periods. The following table presents, by segment, actual and constant currency revenue and constant currency revenue growth rates, for and between the periods indicated: Three Months Ended March 31, 2023 Three Months Ended March 31, 2024 % Change (In millions, except %) Revenue Revenue Foreign Currency Translation (a) Revenue in Constant Currency Actual Constant Currency Public Cloud $ 443.5 $ 422.4 $ (0.7) $ 421.7 (4.7) % (4.9) % Private Cloud 315.2 268.4 (2.1) 266.3 (14.9) % (15.5) % Total $ 758.7 $ 690.8 $ (2.8) $ 688.0 (8.9) % (9.3) % (a) The effect of foreign currency is calculated by translating current period results using the average exchange rate from the prior comparative period. - 42 - Table of Contents Non-GAAP Gross Profit We present Non-GAAP Gross Profit in this MD&A because we believe the measure is useful in analyzing trends in our underlying, recurring gross margins. We define Non-GAAP Gross Profit as gross profit, adjusted to exclude the impact of share-based compensation expense and other non-recurring or unusual compensation items, purchase accounting-related effects, certain business transformation-related costs, and costs related to the Hosted Exchange incident. The table below presents a reconciliation of gross profit to Non-GAAP Gross Profit: Three Months Ended March 31, (In millions) 2023 2024 Gross profit $ 169.6 $ 132.8 Share-based compensation expense 2.8 1.9 Special bonuses and other compensation expense (a) 0.7 0.9 Purchase accounting impact on expense (b) 0.6 0.6 Restructuring and transformation expenses (c) 4.7 4.9 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage 0.3 — Non-GAAP Gross Profit $ 178.7 $ 141.1 (a) Adjustments for retention bonuses, mainly in connection with restructuring and transformation projects, and the related payroll tax, and payroll taxes associated with the exercise of stock options and vesting of restricted stock. Beginning in the second quarter of 2023, includes expense related to the one-time grant of long-term incentive bonuses as a component of our annual compensation award process. (b) Adjustment for the impact of purchase accounting from the Rackspace Acquisition on expenses. (c) Adjustment for the impact of business transformation and optimization activities, as well as associated severance, certain facility closure costs and lease termination expenses. Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA We present Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA because they are a basis upon which management assesses our performance and we believe they are useful to evaluating our financial performance. We believe that excluding items from net income that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business. The Rackspace Acquisition was structured as a leveraged buyout of Rackspace Technology Global, our predecessor, and resulted in several accounting and capital structure impacts. For example, the revaluation of our assets and liabilities resulted in a significant increase in our amortizable intangible assets and goodwill, the incurrence of a significant amount of debt to partially finance the Rackspace Acquisition resulted in interest payments that reflect our high leverage and cost of debt capital, and the conversion of Rackspace Technology Global’s unvested equity compensation into a cash-settled bonus plan and obliga tion to pay management fees to our equityholders resulted in new cash commitments. In addition, the change in ownership and management resulting from the Rackspace Acquisition led to a strategic realignment in our operations that had a significant impact on our financial results. Following the Rackspace Acquisition, we acquired several businesses, sold businesses and investments that we deemed to be non-core and launched multiple integration and business transformation initiatives intended to improve the efficiency of people and operations and identify recurring cost savings and new revenue growth opportunities. We believe that these transactions and activities resulted in costs, which have historically been substantial, and that may not be indicative of, or are not related to, our core operating results, including interest related to the incurrence of additional debt to finance acquisitions and third party legal, advisory and consulting fees and severance, retention bonus and other internal costs that we believe would not have been incurred in the absence of these transactions and activities and also may not be indicative of, or related to, our core operating results. We define Non-GAAP Net Income (Loss) as net income (loss) adjusted to exclude the impact of non-cash charges for share-based compensation, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, the amortization of acquired intangible assets, goodwill and asset impairment charges, and certain other non-operating, non-recurring or non-core gains and losses, as well as the tax effects of these non-GAAP adjustments. - 43 - Table of Contents We define Non-GAAP Operating Profit as income (loss) from operations adjusted to exclude the impact of non-cash charges for share-based compensation, special bonuses and other compensation expense, transaction-related costs and adjustments, restructuring and transformation charges, costs related to the Hosted Exchange incident, the amortization of acquired intangible assets, goodwill and asset impairment charges, 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, certain other non-operating, non-recurring or non-core gains and losses, interest expense, expenses for our accounts receivable purchase agreement, income taxes, depreciation and amortization, and goodwill and asset impairment charges. Non-GAAP Operating Profit and Adjusted EBITDA are management's principal metrics for measuring our underlying financial performance. Non-GAAP Operating Profit and Adjusted EBITDA, along with other quantitative and qualitative information, are also the principal financial measures used by management and our board of directors in determining performance-based compensation for our management and key employees. These non-GAAP measures are not intended to imply that we would have generated higher income or avoided net losses if the Rackspace Acquisition and the subsequent transactions and initiatives had not occurred. In the future we may incur expenses or charges such as those added back to calculate Non-GAAP Net Income (Loss), Non-GAAP Operating Profit or Adjusted EBITDA. Our presentation of Non-GAAP Net Income (Loss), Non-GAAP Operating Profit and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. Other companies, including our peer companies, may calculate similarly-titled measures in a different manner from us, and therefore, our non-GAAP measures may not be comparable to similarly-titled measures of other companies. Investors are cautioned against using these measures to the exclusion of our results in accordance with GAAP. The following tables present a reconciliation of Non-GAAP Net Income (Loss) and Adjusted EBITDA to the most directly comparable GAAP financial measures. For a reconciliation of income (loss) from operations to Non-GAAP Operating Profit, see " Loss from Operations, Segment Operating Profit, and Non-GAAP Operating Profit " in the year-over-year comparison under "Results of Operations" above. Net loss reconciliation to Non-GAAP Net Loss Three Months Ended March 31, (In millions) 2023 2024 Net loss $ (612.0) $ (640.6) Share-based compensation expense 15.2 12.8 Special bonuses and other compensation expense (a) 2.2 3.1 Transaction-related adjustments, net (b) 1.3 1.0 Restructuring and transformation expenses (c) 25.6 20.0 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage 3.2 0.2 Impairment of goodwill 543.1 573.2 Impairment of assets, net — 20.0 Net gain on divestiture and investments (d) (0.1) (0.1) Debt modification costs and gain on debt extinguishment (12.8) (56.7) Other adjustments (e) (2.1) 0.4 Amortization of intangible assets (f) 40.9 38.7 Tax effect of non-GAAP adjustments (g) (9.2) 3.7 Non-GAAP Net Loss $ (4.7) $ (24.3) - 44 - Table of Contents Net loss reconciliation to Adjusted EBITDA Three Months Ended March 31, (In millions) 2023 2024 Net loss $ (612.0) $ (640.6) Share-based compensation expense 15.2 12.8 Special bonuses and other compensation expense (a) 2.2 3.1 Transaction-related adjustments, net (b) 1.3 1.0 Restructuring and transformation expenses (c) 25.6 20.0 Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage 3.2 0.2 Impairment of goodwill 543.1 573.2 Impairment of assets, net — 20.0 Net gain on divestiture and investments (d) (0.1) (0.1) Debt modification costs and gain on debt extinguishment (12.8) (56.7) Other (income) expense, net (h) (2.1) 5.6 Interest expense 56.9 43.7 Benefit for income taxes (10.9) (4.7) Depreciation and amortization (i) 93.6 74.9 Adjusted EBITDA $ 103.2 $ 52.4 (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. The first quarter of 2024 also includes a $9.0 million MEIA early termination fee associated with the sale of our corporate headquarters. (d) Includes gains and losses on investment and from dispositions. (e) Primarily consists of foreign currency gains and losses. (f) All of our intangible assets are attributable to acquisitions, including the Rackspace Acquisition in 2016. (g) We utilize an estimated structural long-term non-GAAP tax rate in order to provide consistency across reporting periods, removing the effect of non-recurring tax adjustments, which include but are not limited to tax rate changes, U.S. tax reform, share-based compensation, audit conclusions and changes to valuation allowances. When computing this long-term rate for the 2023 and 2024 interim periods, we based it on an average of the 2022 and estimated 2023 tax rates and 2023 and estimated 2024 tax rates, respectively, recomputed to remove the tax effect of non-GAAP pre-tax adjustments and non-recurring tax adjustments, resulting in a structural non-GAAP tax rate of 26% for both periods. The non-GAAP tax rate could be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix including due to acquisition activity, or other changes to our strategy or business operations. We will re-evaluate our long-term non-GAAP tax rate as appropriate. We believe that making these adjustments facilitates a better evaluation of our current operating performance and comparisons to prior periods. (h) Primarily consists of foreign currency gains and losses and expense related to our accounts receivable purchase agreement. (i) Excludes accelerated depreciation expense related to facility closures. - 45 - Table of Contents Non-GAAP Earnings (Loss) Per Share We define Non-GAAP Earnings (Loss) Per Share as Non-GAAP Net Income (Loss) divided by our GAAP weighted average number of shares outstanding for the period on a diluted basis and further adjusted for the weighted average number of shares associated with securities which are anti-dilutive to GAAP loss per share but dilutive to Non-GAAP Earnings (Loss) Per Share. Management uses Non-GAAP Earnings (Loss) Per Share to evaluate the performance of our business on a comparable basis from period to period, including by adjusting for the impact of the issuance of shares that would be dilutive to Non-GAAP Earnings (Loss) Per Share. The following table reconciles Non-GAAP Loss Per Share to our GAAP net loss per share on a diluted basis: Three Months Ended March 31, (In millions, except per share amounts) 2023 2024 Net loss attributable to common stockholders $ (612.0) $ (640.6) Non-GAAP Net Loss $ (4.7) $ (24.3) Weighted average number of shares - Diluted 213.2 219.8 Effect of dilutive securities (a) 1.1 5.7 Non-GAAP weighted average number of shares - Diluted 214.3 225.5 Net loss per share - Diluted $ (2.87) $ (2.91) Per share impacts of adjustments to net loss (b) 2.85 2.80 Per share impacts of shares dilutive after adjustments to net loss (a) 0.00 0.00 Non-GAAP Loss Per Share $ (0.02) $ (0.11) (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 Loss Per Share and are therefore included in the share count for purposes of this non-GAAP measure. Potential common share equivalents consist of shares issuable upon the exercise of stock options, vesting of restricted stock units (including performance-based restricted stock units) or purchases under the Employee Stock Purchase Plan (the "ESPP"), as well as contingent shares associated with our acquisition of Datapipe Parent, Inc. Certain of our potential common share equivalents are contingent on Apollo achieving pre-established performance targets based on a multiple of their invested capital ("MOI C") , which are included in the denominator for the entire period if such shares would be issuable as of the end of the reporting period assuming the end of the reporting period was the end of the contingency period. (b) Reflects the aggregate adjustments made to reconcile Non-GAAP Net Loss to our net loss, as noted in the above table, divided by the GAAP diluted number of shares outstanding for the relevant period. - 46 - Table of Contents Liquidity and Capital Resources Overview We primarily finance our operations and capital expenditures with internally-generated cash from operations and hardware leases, and if necessary, borrowings under the New Revolving Credit Facility. As of March 31, 2024, the New Revolving Credit Facility provided for up to $375 million of borrowings, none of which was drawn and outstanding as of March 31, 2024. Our primary uses of cash are working capital requirements, debt service requirements and capital expenditures. Based on our current level of operations and available cash, we believe our sources will provide sufficient liquidity over at least the next twelve months. We cannot provide assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under the New Revolving Credit Facility or from other sources in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. We cannot assure that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital, and there can be no assurance that any such capital will be available to us on acceptable terms or at all. From time to time, depending upon market and other conditions, as well as upon our cash balances and liquidity, we, our subsidiaries or our affiliates may acquire (and have acquired) our outstanding debt securities or our other indebtedness through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we, our subsidiaries or our affiliates may determine (or as may be provided for in the indenture governing the 3.50% FLSO Senior Secured Notes (the “3.50% FLSO Senior Secured Notes Indenture”), the indenture governing the 5.375% Senior Notes (the "5.375% Notes Indenture") or the indenture governing the 3.50% Senior Secured Notes (the "3.50% Notes Indenture" and, together with the 3.50% FLSO Senior Secured Notes Indenture and 5.375% Notes Indenture, the "Indentures"), if applicable), for cash or other consideration. On September 29, 2023, indirect subsidiaries of the company entered into a revolving agreement where a bankruptcy-remote special purpose vehicle can sell accounts receivable, based upon the face amount of eligible receivables in the collateral pool, up to an aggregate maximum limit of $300 million to a financial institution on a recurring basis in exchange for cash. On February 12, 2024, the revolving agreement was amended to include certain international subsidiaries of the company as parties to the agreement and Rackspace Receivables Canada Limited, a Canadian indirect subsidiary of the company, was established as a special purpose vehicle. At March 31, 2024, we held $283 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $111 million was held by foreign entities. We have entered into installment payment arrangements with certain equipment and software vendors, along with sale-leaseback arrangements for equipment and certain property leases that are considered financing obligations. We had $63 million outstanding with respect to these arrangements as of March 31, 2024. We may choose to utilize these various sources of funding in future periods. We also lease certain equipment and real estate under operating and finance lease agreements. We had $474 million outstanding with respect to operating and finance lease agreements as of March 31, 2024. We may choose to utilize such leasing arrangements in future periods. As of March 31, 2024, we had $2,598 million aggregate principal amount outstanding under the FLSO Term Loan Facility, the FLFO Term Loan Facility, the Term Loan Facility, 3 .50% FLSO Senior Secured Notes, 5.375% Senior Notes, and 3.50% Senior Secured Notes, with $375 million of borrowing capacity available under the New Revolving Credit Facility. Our liquidity requirements are significant, primarily due to debt service requirements. - 47 - Table of Contents Debt In March 2024, we initiated a series of debt refinancing transactions that substantially impacted our existing debt instruments: the Senior Facilities, the 3.50% Senior Secured Notes, and the 5.375% Senior Notes. We also entered into new debt instruments: the New Senior Facilities, which includes the FLSO Term Loan Facility, the FLFO Term Loan Facility, and the New Revolving Credit Facility, and the 3 .50% FLSO Senior Secured Notes. See Item 1 of Part I, Financial Statements - Note 7, “Debt,” for more information regarding the March 2024 Refinancing Transactions and the related accounting impacts. New Debt Instruments New Senior Facilities On March 12, 2024, Rackspace Finance Holdings, LLC ( “Rackspace Finance Holdings”), Rackspace Finance, LLC ( “Rackspace Finance”), the lenders and issuing banks party thereto and Citibank, N.A., as the administrative agent and collateral agent, entered into the credit agreement governing the FLSO Term Loan Facility, FLFO Term Loan Facility and New Revolving Credit Facility (together, the “New Senior Facilities”) (the “New First Lien Credit Agreement”). FLSO Term Loan Facility Rackspace Finance issued the FLSO Term Loan Facility in an aggregate principal amount of $1,687 million. The FLSO Term Loan Facility matures on May 15, 2028. As of March 31, 2024, the contractual interest rate on the FLSO Term Loan Facility was 8.18%. We are required to make quarterly principal payments of $4 million, which began on March 31, 20 24. Rackspace Finance is the borrower and all obligations under the FLSO Term Loan Facility are guaranteed on a senior secured basis, jointly and severally, by Rackspace Finance Holdings on a limited-recourse basis and by certain of Rackspace Finance’s subsidiaries (the “Subsidiary Guarantors”). The obligations under the FLSO Term Loan Facility are secured by a pledge of Rackspace Finance’s capital stock directly held by Rackspace Finance Holdings and substantially all of Rackspace Finance’s and the Subsidiary Guarantors’ assets, subject to exceptions. As of March 31, 2024, $1,683 million in aggregate principal amount of the FLSO Term Loan Facility remained outstanding. We have entered into interest rate swap agreements to manage the interest rate risk associated with interest payments on the FLSO Term Loan Fac ility that result from fluctuations in Term SOFR. See Item 1 of Part I, Financial Statements - Note 11, “Derivatives,” for more information on the interest rate swap agreements. FLFO Term Loan Facility Rackspace Finance issued the FLFO Term Loan Facility in an aggregate principal amount $275 million. The FLFO Term Loan Facility matures on May 15, 2028. As of March 31, 2024, the contractual interest rate on the FLFO Term Loan Facility was 11.68%. We are required to make quarterly principal payments of $0.7 million, beginning on June 30, 2024 . Rackspace Finance is the borrower and all obligations under the FLFO Term Loan Facility are guaranteed on a senior secured basis, jointly and severally, by Rackspace Finance Holdings on a limited-recourse basis and by the Subsidiary Guarantors. The obligations under the FLFO Term Loan Facility are secured by the same collateral that secures the FLSO Term Loan Facility, the New Revolving Credit Facility and the 3.50% FLSO Senior Secured Notes. As of March 31, 2024, $275 million aggregate principal amount of the FLFO Term Loan Facility remained outstanding. - 48 - Table of Contents We have entered into interest rate swap agreements to manage the interest rate risk associated with interest payments on the FLFO Term Loan Fac ility that result from fluctuations in Term SOFR. See Item 1 of Part I, Financial Statements - Note 11, “Derivatives,” for more information on the interest rate swap agreements. New Revolving Credit Facility Rackspace Finance established the New Revolving Credit Facility in an aggregate principal amount of $375 million of commitments. All revolving lenders under the prior Revolving Credit Facility exchanged their revolving loan commitments for commitments in respect of the New Revolving Credit Facility, which replaces in full the prior Revolving Credit Facility. The New Revolving Credit Facility matures on May 15, 2028. The New Revolving Credit Facility includes a commitment fee equal to 0.50% per annum in respect of the unused commitments that is due quarterly. This fee is subject to one step-down based on the net first lien leverage ratio. Rackspace Finance is the borrower and all obligations under the New Revolving Credit Facility are guaranteed on a senior secured basis, jointly and severally, by Rackspace Finance Holdings on a limited-recourse basis and by the Subsidiary Guarantors. The obligations under the New Revolving Credit Facility are secured by the same collateral that secures the FLSO Term Loan Facility, the FLFO Term Loan Facility and the 3.50% FLSO Senior Secured Notes. As of March 31, 2024, we had total commitments of $375 million, no outstanding borrowings under the New Revolving Credit Facility, and $3.5 million of letters of credit issued thereunder. As such, as of March 31, 2024, we had $375 million of available commitments remaining. 3.50% FLSO Senior Secured Notes due 2028 On March 12, 2024, Rackspace Finance issued $267 million initial aggregate principal amount of 3.50% FLSO Senior Secured Notes. The 3.50% FLSO Senior Secured Notes will mature on May 15, 2028 and bear interest at an annual fixed rate of 3.50%. Interest is payable semiannually on each February 15 and August 15, commencing on August 15, 2024. Rackspace Finance is the borrower and all obligations under the 3.50% FLSO Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, by Rackspace Finance Holdings on a limited-recourse basis and by the Subsidiary Guarantors. The obligations under the 3.50% FLSO Senior Secured Notes are secured by the same collateral that secures the FLSO Term Loan Facility, the FLFO Term Loan Facility and the New Revolving Credit Facility. As of March 31, 2024, $267 million aggregate principal amount of the 3.50% FLSO Senior Secured Notes were outstanding. Existing Debt Instruments Senior Facilitie s On February 9, 2021, we amended and restated the credit agreement governing our senior secured credit facilities (the "First Lien Credit Agreement"), which included a new seven-year $2,300 million senior secured first lien term loan facility (the "Term Loan Facility") and the prior Revolving Credit Facility (together, the "Senior Facilities"). The Term Loan Facility will mature on February 15, 2028 and the prior Revolving Credit Facility was set to mature on August 7, 2025. Interest on the Term Loan Facility is due at the end of each interest period elected, not exceeding 90 days, for SOFR loans and at the end of every calendar quarter for base rate loans. As of March 31, 2024, the contractual interest rate on the Term Loan Facility was 8.18%. We are required to make quarterly amortization payments of $0.2 million. The Revolving Credit Facility included a commitment fee equal to 0.50% per annum in respect of the unused commitments that was due quarterly. This fee was subject to one step-down based on the net first lien leverage ratio. The Senior Facilities require us to make certain mandatory prepayments under certain conditions defined in the First Lien Credit Agreement. As of March 31, 2024, $62 million aggregate principal amount of the Term Loan Facility remained outstanding and the prior Revolving Credit Facility was replaced in full by the New Revolving Credit Facility. See Item 1 of Part I, Financial Statements - Note 7, “Debt,” for more information regarding our Senior Facilities. - 49 - Table of Contents We have entered into interest rate swap agreements to manage the interest rate risk associated with interest payments on the Term Loan Fac ility that result from fluctuations in Term SOFR. See Item 1 of Part I, Financial Statements - Note 11, "Derivatives," for more information on the interest rate swap agreements. 3.50% Senior Secured Notes due 2028 On February 9, 2021, Rackspace Technology Global issued $550 million aggregate principal amount of 3.50% Senior Secured Notes. The 3.50% Senior Secured Notes will mature on February 15, 2028 and bear interest at an annual fixed rate of 3.50%. Interest is payable semiannually on each February 15 and August 15, commencing on August 15, 2021. As of March 31, 2024, $182 million aggregate principal amount of the 3.50% Senior Secured Notes remained outstanding. 5.375% Senior Notes due 2028 Rackspace Technology Global issued $550 million aggregate principal amount of the 5.375% Senior Notes on December 1, 2020. The 5.375% Senior Notes will mature on December 1, 2028 and bear interest at a fixed rate of 5.375% per year, payable semi-annually on each June 1 and December 1, commencing on June 1, 2021. The 5.375% Senior Notes are guaranteed on a senior unsecured basis by all of Rackspace Technology Global's wholly-owned domestic restricted subsidiaries that guarantee the Senior Facilities. As of March 31, 2024, $128 million aggregate principal amount of the 5.375% Senior Notes remained outstanding. Debt covenants The FLSO Term Loan Facility, FLFO Term Loan Facility, and Term Loan Facility are not subject to a financial maintenance covenant. The New Revolving Credit Facility includes a financial maintenance covenant that limits the super-priority net senior secured leverage ratio to a maximum of 5.00 to 1.00. The super-priority net senior secured leverage ratio is calculated as the ratio of (x) the total amount of consolidated super-priority senior secured debt for borrowed money, less unrestricted cash and cash equivalents, to (y) consolidated EBITDA (as defined under the New First Lien Credit Agreement governing the New Senior Facilities). However, this financial maintenance covenant will only be applicable and tested if the aggregate amount of outstanding borrowings under the New Revolving Credit Facility and letters of credit issued thereunder (excluding $25 million of undrawn letters of credit and cash collateralized letters of credit) as of the last day of a fiscal quarter is greater than 35% of the New Revolving Credit Facility commitments as of the last day of such fiscal quarter. Additional covenants in the New Senior Facilities and Senior Facilities limit our subsidiaries' ability to, among other things, incur certain additional debt and liens, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates. The Indentures contain covenants that, among other things, limit our subsidiaries' ability to incur certain additional debt, incur certain liens securing debt, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. Additionally, upon the occurrence of a change of control (as defined in the Indentures), we will be required to make an offer to repurchase all of the outstanding 3.50% FLSO Senior Secured Notes, 5.375% Senior Notes and 3.50% Senior Secured Notes, respectively, at a price in cash equal to 101.000% of the aggregate principal amount, plus accrued and unpaid interest, if any, to, but not including the purchase date. Our "consolidated EBITDA," as defined under our debt instruments, is calculated in the same manner as our Adjusted EBITDA, presented elsewhere in this report, except that our debt instruments allow us to adjust for additional items, including certain start-up costs, and to give pro forma effect to acquisitions, including resulting synergies, and internal cost savings initiatives. In addition, under the Indentures, the calculation of consolidated EBITDA does not take into account substantially any changes in GAAP subsequent to the date of issuance, whereas under the New Senior Facilities and Senior Facilities the calculation of consolidated EBITDA takes into account the impact of certain changes in GAAP subsequent to December 1, 2020 other than with respect to capital leases. As of March 31, 2024, we were in compliance with all covenants under the New Senior Facilities, the Senior Facilities and the Indentures. - 50 - Table of Contents Supplemental Financial Information In accordance with the 3.50% FLSO Senior Secured Notes Indenture, Rackspace Finance Holdings, Rackspace Finance and certain subsidiaries of Rackspace Finance (together with their restricted subsidiaries, the “New Credit Group”) are obligors under the 3.50% FLSO Senior Secured Notes. The following presents summarized financial information for the New Credit Group after eliminating intercompany transactions and balances among the New Credit Group. As of March 31, 2024, the New Credit Group had total assets of $3,429 million and total liabilities of $3,900 million, which included total debt of $2,625 million. The financial information for the New Credit Group differs from the financial information for the company and its consolidated subsidiaries primarily because Rackspace Technology Global has (i) debt that is not guaranteed by the New Credit Group, which debt was $370 million as of March 31, 2024, and (ii) Rackspace Technology Global is the party to the interest rate swap which had a net asset value of $53 million as of March 31, 2024. Capital Expenditures The following table sets forth a summary of our total capital expenditures for the periods indicated: Three Months Ended March 31, (In millions) 2023 2024 Customer gear $ 62.6 $ 32.6 Data center build outs 0.6 1.1 Office build outs 1.1 0.1 Capitalized software and other projects 7.2 11.8 Total capital expenditures $ 71.5 $ 45.6 Capital expenditures were $46 million in the three months ended March 31, 2024, compared to $72 million in the three months ended March 31, 2023, a decrease of $26 million . The decrease in capital expenditures was driven by purchases of customer gear originally intended to support a specific new customer during the first quarter of 2023. 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. Cash Flows The following table sets forth a summary of certain cash flow information for the periods indicated: Three Months Ended March 31, (In millions) 2023 2024 Cash used in operating activities $ (1.9) $ (90.3) Cash used in investing activities $ (11.7) $ (11.1) Cash provided by (used in) financing activities $ (41.3) $ 188.2 Cash Used in Operating Activities Net cash used in 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 used in operating activities was $90 million in the three months ended March 31, 2024 compared to $2 million in the three months ended March 31, 2023. The reduction in operating cash was primarily driven by payments in the first quarter of 2024 including a $45 million vendor prepayment, $28 million in third party fees paid in connection with the March 2024 Refinancing Transactions , and a $9 million early termination fee associated with the sale of our corporate headquarters. - 51 - Table of Contents Cash Used in Investing Activities Net cash used in investing activities primarily consists of capital expenditures to meet the demands of our customer base and our strategic initiatives. The largest outlays of cash are for purchases of customer gear, data center and office build outs, and capitalized payroll costs related to internal-use software development. Net cash used in investing activities decreased $1 million, or 5%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due to $17 million of net proceeds received in the current period from the March 2024 sale of our corporate headquarters facility, partially offset by a $16 million increase in cash purchases of property, equipment, and software between periods. Cash Provided by (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 provided by financing activities was $188 million in the three months ended March 31, 2024 compared to $41 million of net cash used in financing activities in the three months ended March 31, 2023. The change was driven by the March 2024 Refinancing Transactions which resulted in net cash proceeds of $217 million. - 52 - Table of Contents Critical Accounting Policies and Estimates Our critical accounting policies and estimates have not changed from those described in our Annual Report under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates." Goodwill and Indefinite-Lived Intangible Assets Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Our indefinite-lived intangible assets consists of our Rackspace trade name, which was recorded at fair value on our balance sheet at the date of the Rackspace Acquisition. Application of the goodwill and other indefinite-lived intangible asset impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. We test goodwill and our indefinite-lived intangible asset, the Rackspace trade name, for impairment on an annual basis as of October 1st or more frequently if events or circumstances indicate a potential impairment. These events or circumstances could include a significant change in the business climate, regulatory environment, established business plans, operating performance indicators or competition. Potential impairment indicators may also include, but are not limited to, (i) the results of our most recent annual or interim impairment testing, (ii) downward revisions to internal forecasts, and the magnitude thereof, if any, (iii) declines in our market capitalization below our book value, and the magnitude and duration of those declines, if any, (iv) a reorganization resulting in a change to our operating segments, and (v) other macroeconomic factors, such as increases in interest rates that may affect the weighted average cost of capital, volatility in the equity and debt markets, or fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a component). We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. Assets and liabilities are assigned to each of our reporting units if they are employed by a reporting unit and are considered in the determination of the reporting unit fair value. Certain assets and liabilities are shared by multiple reporting units, and thus, are allocated to each reporting unit based on the relative size of a reporting unit, primarily based on revenue. Prior to October 1, 2023, we had 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. 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. We estimate the fair values of our reporting units and the Rackspace trade name using the discounted cash flow method and relief-from-royalty method, respectively. These calculations require the use of significant estimates and assumptions, such as: (i) the royalty rate; (ii) the estimation of future revenue 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. As part of the goodwill impairment test, we also consider our market capitalization in assessing the reasonableness of the combined fair values estimated for our reporting units, including OpenStack Public Cloud. The estimates and assumptions used to calculate the fair value of our reporting units and the Rackspace trade name from year to year are based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could produce materially different results. For the quantitative goodwill impairment analysis, we utilize the income approach to determine the fair value of our reporting units. The income approach utilizes a discounted cash flow method which is based on the present value of projected cash flows. The discounted cash flow models reflect our assumptions 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. - 53 - Table of Contents In connection with the debt refinancing transactions that were completed in March and April 2024, as further described in Item 1 of Part I, Financial Statements - Note 7, “Debt”, we updated our internal forecasts. Our updated internal forecasts considered our year-to-date operating performance, current customer bookings and revised expectations based on current performance, revisions to our expected growth and timing of such growth based on current and expected performance, current customer retention rates, revisions to the timing of the expected effects of our strategic initiatives and overall related risks, including macroeconomic factors, to achieving our forecasts. Our Board of Directors reviewed and approved our internal budget for fiscal year 2024 on February 28, 2024. As of February 29, 2024, we assessed our Board approved 2024 internal budget along with 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 our current and forecasted operating margins and cash flows, budgeted-to-actual performance, timing of the expected effects of our strategic initiatives, overall change in economic climate, changes in the industry and competitive environment, changes to our risk-adjusted discount rates 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 February 29, 2024. For the quantitative goodwill impairment analysis performed as of February 29, 2024, we utilized a range of our weighted-average cost of capital of 13.0% to 14.0% as our base rate, which was then subsequently risk-adjusted to determine the discount rate used 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 February 29, 2024. As a result, we determined that the carrying amount of our Public Cloud and Private Cloud reporting units exceeded their fair value. We recorded a goodwill impairment charge of $385 million and $188 million for Public Cloud and Private Cloud, respectively, during the first quarter of 2024, which is included in "Impairment of goodwill" in our Condensed Consolidated Statements of Comprehensive Loss. The impairment was driven by the company's cash flow projections as revised in the first quarter of 2024 to reflect current market conditions and expected business performance, including strategic business shifts and the timing when the benefits of such shifts will be realized. 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 or decrease in the discount rate assumption would result in decreases or increases in fair value of our Private Cloud and Public Cloud reporting units of approximately $101 million and $14 million, 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. We reassigned goodwill to the updated reporting units using a relative fair value approach. The results of the quantitative goodwill impairment analysis performed as of January 1, 2023, subsequent to the change, indicated an impairment within our Private Cloud reporting unit, and we recorded a non-cash impairment charge of $271 million in the first quarter of 2023. For the quantitative goodwill impairment analysis performed as of January 1, 2023, we utilized a range of our weighted-average cost of capital of 10.5% to 12.0% 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 Condensed 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. - 54 - Table of Contents 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. 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 Condensed 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. We performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting units by utilizing changes in assumptions that reflect reasonably likely future changes in the discount rate used in the weighted-average cost of capital calculation and the terminal growth rate. Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of our Private Cloud and Public Cloud reporting units of approximately $80 million and $65 million, respectively. Indefinite-Lived Intangible Assets As of January 1, 2023, March 31, 2023 and February 29, 2024, 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 13.7% as of February 29, 2024. 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 February 29, 2024 indicated that the estimated fair value of the Rackspace trade name was less than its carrying value. As a result, we recorded a $20 million non-cash impairment charge during the first quarter of 2024 which is included in "Impairment of assets, net" in our Condensed 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 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. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) volatility in the equity and debt markets or other macroeconomic factors, (ii) an increase in the weighted-average cost of capital due to further increases in interest rates, (iii) decrease in future cash flows due to lower than expected sales, or (iv) fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations. Accordingly, if our current cash flow assumptions are not realized, we experience further sustained declines in our stock price or market capitalization, or increases in costs of capital, it is possible that an additional impairment charge may be recorded in the future, which could be material. - 55 - Table of Contents Long-Lived Assets We also performed recoverability tests of our long-lived assets in conjunction with the goodwill impairment analyses as of January 1, 2023, March 31, 2023, and February 29, 2024 which did not result in any impairment charges. - 56 - Table of Contents