What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-03-21 compared with 2024-03-15 · 324 added, 251 removed, 684 unchanged (46% of the section changed)

7 unchanged sentences

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

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

We are a leading end-to-end, hybrid cloud 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 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 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 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.

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

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

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 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.

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

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

During the 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."

Key Factors Affecting Our Performance

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SG&A also includes transaction costs related to acquisitions and financings along with costs related to integration and business transformation initiatives which may impact the comparability of SG&A between periods .

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

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

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Interest expense (221.6) (7.5) % (98.0) (3.6) % 123.6 (55.8) %

Gain (loss) on investments, net

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

Gain on debt extinguishment

Gain on investments, net

0.3 0.0 % 0.1 0.0 % (0.2) (66.7) %

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

Gain on debt extinguishment, net of debt modification costs

271.3 9.2 % 147.2 5.4 % (124.1) (45.7) %

Other expense, net (5.0) (0.2) % (21.7) (0.8) % (16.7) NM

Total other income (expense) 45.0 1.5 % 27.6 1.0 % (17.4) (38.7) %

Loss before income taxes (854.4) (28.9) % (881.5) (32.2) % (27.1) 3.2 %

3 unchanged sentences

Revenue decreased $220 million, or 7.4%, to $2,737 million in 2024 from $2,957 million in 2023.

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% .

Revenue declined due to decreases in both Private Cloud and Public Cloud revenue, as discussed below.

After re moving the impact from foreign currency fluctuations, on a constant currency basis, revenue decreased 7.7% .

The following table presents revenue growth by segment:

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

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 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.

Public Cloud revenue in 2024 decreased 3.4% on an actual basis and 3.5% on a constant currency basis, from 2023.

The decline was due to weaker demand for services in the earlier part of the year.

Private Cloud revenue in 2024 decreased 13.2% on an actual basis and 13.6% on a constant currency basis, from 2023, due to customers rolling off legacy private cloud offerings.

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.

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.

Cost of revenue decreased $125 million, or 5%, to $2,204 million in 2024 from $2,328 million in 2023.

The decrease in cost of revenue was primarily due to an increase in the useful life of certain customer gear assets, as discussed in Item 8 of Part II, Financial Statements and Supplementary Data - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies", which resulted in a decline in depreciation expense between periods.

Additionally, a reduction in headcount drove a decrease in personnel costs.

Also contributing to the reduction in cost of revenue was license expense due to decreased usage between periods.

As a percentage of revenue, cost of revenue increased 180 basis points in 2024 to 80.5% from 78.7% in 2023, a s the decline in revenue outpaced the decrease in cost of revenue.

Usage charges for third-party infrastructure drove a 370 basis point increase.

The decrease in other expenses, discussed above, partially offset the increase.

Our gross profit was $533 million in 2024, a decrease of $95 million from $629 million in 2023.

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SG&A expenses decreased $60 million, or 8%, to $708 million in 2024 from $767 million in 2023.

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.

2023 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.

Further contributing to the decrease year-over-year was additional insurance recovery proceeds related to the Hosted Exchange incident received in the current period.

In addition, personnel costs decreased due to a reduction in salaries driven by lower headcount and decreases in severance and commissions expense, partially offset by an increase in non-equity incentive compensation.

Other non-personnel cost fluctuations included lower professional fees, a reduction in depreciation and amortization expense, and business optimization related expenses between periods.

We also had an increase in the gain on sale of certain assets which further contributed to the reduction in SG&A expenses.

SG&A expenses as a percentage of revenue was 25.9% for 2024 and 2023.

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

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Share-based compensation expense 65.4 63.4

Special bonuses and other compensation expense (a)

Transaction-related adjustments, net (b)

Restructuring and transformation expenses (c)

Transaction-related adjustments, net (a)

Restructuring and transformation expenses (b)

Hosted Exchange incident expenses, net of proceeds received or expected to be received under our insurance coverage (4.8) (1.4)

Impairment of goodwill 708.8 714.9

UK office closure (d)

UK office closure (c)

Impairment of assets, net 52.2 20.0

Amortization of intangible assets (e)

Amortization of intangible assets (d)

Non-GAAP Operating Profit $ 157.2 $ 105.6

(a) Includes expense related to retention bonuses, mainly relating to restructuring and integration projects, and the related payroll tax, senior executive signing bonuses and relocation costs, and payroll taxes associated with the exercise of stock options and vesting of restricted stock.

Beginning in the second quarter of 2023, includes expense related to the one-time grant of long-term incentive bonuses as a component of our annual compensation award process.

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

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

This amount also includes total charges of $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.

(a) Includes legal, professional, accounting and other advisory fees related to acquisitions, integration costs of acquired businesses, purchase accounting adjustments, and exploratory acquisition and divestiture costs and expenses related to financing activities.

(b) Includes consulting and advisory fees related to business transformation and optimization activities, as well as associated severance, certain facility closure costs, and lease termination expenses.

Also includes payroll taxes associated with the exercise of stock options and vesting of restricted stock.

The year ended December 31, 2024 also includes a $9.0 million MEIA early termination fee associated with the sale of our corporate headquarters in March 2024.

(c) 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.

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343.0 28.2 % 294.4 27.9 % (48.6) (14.2) %

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

Corporate functions (267.6) (233.0) 34.6 (12.9) %

(255.0) (247.8) 7.2 (2.8) %

Non-GAAP Operating Profit

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Public Cloud operating profit decreased 46% in 2024 from 2023.

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.

Segment operating profit as a percentage of segment revenue decreased by 210 basis points, reflecting a 3% decrease in segment revenue, partially offset by a 1% decrease in segment operating expenses .

Private Cloud operating profit decreased 14% in 2024 from 2023.

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.

Segment operating profit as a percentage of segment `revenue decreased by 30 basis points, due to a 13% decrease in segment revenue;

inline with a 13% decrease in segment operating expenses.

The decrease in operating expenses was largely driven by a reduction in depreciation expense due to an increase in the useful life of certain customer gear assets, as discussed in “Cost of Revenue” above.

Also contributing to the reduction in Private Cloud operating expenses was a decrease in license expense and personnel costs between periods.

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.

This expense decreased 13% in 2024 due to a reduction in depreciation and amortization expense driven by certain assets reaching the end of their useful life.

Additionally, our continued focus on cost management further contributed to the cost reduction.

For more information about our segment operating profit, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 16, "Segment Reporting."

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We recorded a total of $715 million and $709 million in non-cash goodwill impairment charges in 2024 and 2023, respectively.

In connection with the preparation of the March 2024 Refinancing Transactions that were completed in March and April 2024, as further described in Item 8 of Part II, Financial Statements and Supplementary Data - 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.

We performed an interim goodwill impairment analysis as of September 30, 2024 based on our assessment of 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.

The results of this goodwill impairment analysis indicated an impairment of goodwill within our Public Cloud and Private Cloud reporting units of $69 million and $73 million, respectively, recorded in the third 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.

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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.

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

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

As a result, we determined that the carrying value of our 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.

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

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

As a result, we determined that the carrying value of our 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.

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We recorded a total of $20 million and $52 million in net asset impairment charges in 2024 and 2023, respectively.

We evaluated our indefinite-lived intangible asset for impairment as of September 30, 2023.

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 first quarter of 2024.

We also performed a quantitative assessment of our indefinite-lived intangible asset prior to testing our goodwill for impairment as September 30, 2024, which did not indicate any impairment of the Rackspace trade name.

Similarly, 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.

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.

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

In addition, during 2023, we recorded a $5 million net increase in the estimated fair value, less estimated cost to sell, of our corporate headquarters w hich was classified as held for sale under GAAP as of December 31, 2022.

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.

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

Interest expense decreased $124 million, or 56%, to $98 million in 2024 from $222 million in 2023 , primarily due to the accounting for contractual interest payments on debt instruments entered into as part of the March 2024 Refinancing Transactions, portions of which are recorded as a reduction of related premiums and not as interest expense, which reduces interest expense relative to contractual interest cost.

Gain on Debt Extinguishment, Net of Debt Modification Costs

We recorded $80 million gain on debt extinguishment, net of debt modification costs in 2024 related to the March 2024 Refinancing Transactions.

In addition, we recorded $67 million total gain on debt extinguishment related to repurchases of an aggregate $92 million principal amount of 3.50% FLSO Senior Secured Notes, FLSO Term Loan Facility, and 5.375% Senior Notes in 2024.

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

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Other Expense, Net

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.

The increase in other expense, net to $22 million in 2024 from $5 million in 2023 is primarily due to a full year of costs incurred in 2024 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 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 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.

Our income tax benefit increased by $7 million to $23 million in 2024 from $17 million in 2023.

Our effective tax rate increased from 1.9% in 2023 to 2.6% in 2024.

The increase in the effective tax rate year-over-year is primarily due to the tax impact associated with goodwill impairments recorded in both the first and third quarters of 2024 as well as goodwill impairments recorded in 2023, the majority of which were nondeductible for income tax purposes, and the income tax benefit of $103 million related to the March 2024 Refinancing Transactions discussed above.

The difference between the effective tax rate and the statutory rate in 2024 is primarily due to the tax impact associated with changes in the valuation allowance, the tax impact associated with the goodwill impairments recorded in the first and third quarters of 2024, the majority of which were nondeductible for income tax purposes, and the tax impact of the March 2024 Refinancing Transactions.

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

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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 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) %

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

(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 costs and loss on debt extinguishment

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

(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

(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 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.

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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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.

Private Cloud revenue in 2023 decreased 12.2% on an actual basis and 12.3% 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

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.

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.

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.

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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.

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.

9 unchanged sentences

Share-based compensation expense 69.5 65.4

Special bonuses and other compensation expense (a)

Transaction-related adjustments, net (b)

Restructuring and transformation expenses (c)

Transaction-related adjustments, net (a)

Restructuring and transformation expenses (b)

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 (c)

Impairment of assets, net 146.1 52.2

Gain on sale of land (19.9) —

Amortization of intangible assets (d)

Non-GAAP Operating Profit $ 319.4 $ 157.2

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.

(a) 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, and exploratory acquisition and divestiture costs and expenses related to financing activities.

Also includes payroll taxes associated with the exercise of stock options and vesting of restricted stock.

(c) 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.

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496.2 35.9 % 343.0 28.2 % (153.2) (30.9) %

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

Corporate functions (297.5) (267.6) 29.9 (10.1) %

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$ 319.4 $ 157.2 $ (162.2) (50.8) %

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.

Public Cloud operating profit decreased 32% in 2023 from 2022.

Segment operating profit as a percentage of segment revenue decreased by 220 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 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.

Segment operating profit as a percentage of segment revenue decreased by 770 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.

This expense decreased 10% 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 16, "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.

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.

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.

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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.

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 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.

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 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.

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 5, "Property, Equipment and Software, net."

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.

Interest Expense

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.

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.

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

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We track several non-GAAP financial measures to monitor and manage our underlying financial performance.

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

The following discussion includes the presentation of constant currency revenu e, 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.

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We have reconciled each of these non-GAAP measures to the applicable most comparable GAAP measure throughout this MD&A.

Update to Non-GAAP Financial Measures

Beginning in the fourth quarter of 2024, we have updated the presentation of our non-GAAP financial measures to no longer exclude certain cash compensation paid to employees who remain employed with Rackspace which were previously included in “special bonuses and other compensation expenses” and “restructuring and transformation expenses” line items of our reconciliations.

Additionally, we have removed “special bonuses and other compensation expenses” line item and the remaining adjustments are now presented within “restructuring and transformation expenses” line item.

All prior period Non-GAAP Gross Profit, Non-GAAP Net Income (Loss), Non-GAAP Operating Profit, Adjusted EBITDA and Non-GAAP Earnings (Loss) Per Share financial measures have been recasted to reflect current period presentation.

Constant Currency Revenue

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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.

We define Non-GAAP Gross Profit as gross profit, adjusted to exclude the impact of share-based compensation expense, 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:

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Share-based compensation expense 11.6 9.1 7.6

Special bonuses and other compensation expense (a)

Purchase accounting impact on expense (b)

Restructuring and transformation expenses (c)

Purchase accounting impact on expense (a)

Restructuring and transformation expenses (b)

8.7 17.9 19.8

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Non-GAAP Gross Profit $ 880.1 $ 658.7 $ 562.6

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.

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.

Also includes payroll taxes associated with the exercise of stock options and vesting of restricted stock.

The year ended December 31, 2022 also includes certain costs associated with the July 2021 Restructuring Plan which are not accounted for as exit and disposal costs under ASC 420, including one-time offshore build out costs.

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

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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, 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.

We define Non-GAAP Net Income (Loss) as net income (loss) adjusted to exclude the impact of non-cash charges for share-based compensation, 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, the interest expense impact from the March 2024 Refinancing Transactions, 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, 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, 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.

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.

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 in determining performance-based compensation for our management and key employees.

These non-GAAP measures are not intended to imply that we would have generated higher income or avoided net losses if the Rackspace Acquisition and the subsequent transactions and initiatives had not occurred.

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Share-based compensation expense 69.5 65.4 63.4

Special bonuses and other compensation expense (a)

11.8 10.0 12.1

Transaction-related adjustments, net (b)

25.7 11.0 5.2

Restructuring and transformation expenses (c)

Transaction-related adjustments, net (a)

Restructuring and transformation expenses (b)

64.6 56.7 58.5

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Impairment of goodwill 534.5 708.8 714.9

UK office closure (d)

UK office closure (c)

Impairment of assets, net 146.1 52.2 20.0

Gain on sale of land (19.9) — —

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

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

0.2 (0.3) (0.1)

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

Gain on debt extinguishment, net of debt modification costs

— (271.3) (147.2)

Other adjustments (g)

Interest expense impact from the March 2024 Refinancing Transactions (e)

Other adjustments (f)

10.0 (1.0) 1.2

Amortization of intangible assets (h)

Amortization of intangible assets (g)

166.8 161.0 154.1

Tax effect of non-GAAP adjustments (i)

Tax effect of non-GAAP adjustments (h)

(121.7) 1.7 (1.0)

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Share-based compensation expense 69.5 65.4 63.4

Special bonuses and other compensation expense (a)

11.8 10.0 12.1

Transaction-related adjustments, net (b)

25.7 11.0 5.2

Restructuring and transformation expenses (c)

Transaction-related adjustments, net (a)

Restructuring and transformation expenses (b)

64.6 56.7 58.5

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Impairment of goodwill 534.5 708.8 714.9

UK office closure (d)

UK office closure (c)

Impairment of assets, net 146.1 52.2 20.0

Gain on sale of land (19.9) — —

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

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

0.2 (0.3) (0.1)

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

Gain on debt extinguishment, net of debt modification costs

— (271.3) (147.2)

Other expense, net (j)

Other expense, net (i)

10.0 5.0 21.7

Interest expense 208.5 221.6 98.0

Benefit for income taxes (92.9) (16.6) (23.3)

Depreciation and amortization (k)

Depreciation and amortization (j)

387.5 366.4 293.3

Adjusted EBITDA $ 540.1 $ 362.6 $ 244.8

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.

(d) Expense recognized related to the closure of a UK office that we exited in the second quarter of 2023 prior to the lease end date.

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

(f) Includes gains 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.

(i) We utilize an estimated structural long-term non-GAAP tax rate in order to provide consistency across reporting periods, removing the effect of non-recurring tax adjustments, which include but are not limited to tax rate changes, U.S.

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, and exploratory acquisition and divestiture costs and expenses related to financing activities.

Includes consulting and advisory fees related to business transformation and optimization activities, as well as associated severance, certain facility closure costs, and lease termination expenses.

Also includes payroll taxes associated with the exercise of stock options and vesting of restricted stock.

The year ended December 31, 2022 includes charges of $5.2 million 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.

In addition, the year ended December 31, 2024 includes a $9.0 million MEIA early termination fee associated with the sale of our corporate headquarters in March 2024.

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.

Includes gains and losses on investment and from dispositions.

Interest expense impact due to the accounting for contractual interest payments on debt instruments entered into as part of the March 2024 Refinancing Transactions, which reduced interest expense relative to contractual interest cost.

Primarily consists of foreign currency gains and losses.

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

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.

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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) 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.

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

Excludes accelerated depreciation expense related to facility closures.

Non-GAAP Earnings (Loss) Per Share

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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.

Certain of our potential common share equivalents are contingent on certain investment funds managed by affiliates of 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 (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, 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.

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 December 31, 2024, the New Revolving Credit Facility provided for up to $375 million of borrowings, none of which was drawn and outstanding as of December 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 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.

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, including the Senior Facilities, the 5.375% Senior Notes and the 3.50% Senior Secured Notes, on commercially reasonable terms or at all.

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.

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

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

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

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

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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.

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 an SPV.

At December 31, 2024, we held $144 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $92 million was held by foreign entities.

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

As of December 31, 2023, we had $2,893 million aggregate principal amount outstanding under our Term Loan Facility, 5.375% Senior Notes, and 3.50% Senior Secured Notes, with $375 million of borrowing capacity available under the Revolving Credit Facility.

As of December 31, 2024, we had $2,449 million aggregate principal amount outstanding under t he 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.

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.

Refer to Item 8 of Part II, Financial Statements and Supplementary Data - 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, Rackspace Finance, the lenders and issuing banks party thereto and Citi, 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 December 31, 2024, the contractual interest rate on the FLSO Term Loan Facility was 7.35%.

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.

During the year ended December 31, 2024, Rackspace Finance repurchased and surrendered for cancellation an aggregate $43 million principal amount of the FLSO Term Loan Facility for $21 million.

As of December 31, 2024, $1,627 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 Facility that result from fluctuations in Term SOFR.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 14, "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 December 31, 2024, the contractual interest rate on the FLFO Term Loan Facility was 10.85%.

We are required to make quarterly principal payments of $0.7 million, which began 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 December 31, 2024, $273 million aggregate principal amount of the FLFO 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 FLFO Term Loan Facility that result from fluctuations in Term SOFR.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 14, "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 December 31, 2024 , we had total commitments of $375 million, no outstanding borrowings under the New Revolving Credit Facility, and $24 million of letters of credit issued thereunder.

As such, as of December 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.

On April 16, 2024, we completed the Public Note Exchange, pursuant to which (i) $138 million aggregate principal amount of the existing 3.50% Senior Secured Notes were exchanged or purchased for cancellation and (ii) $97 million aggregate principal amount of 3.50% FLSO Senior Secured Notes were issued by Rackspace Finance.

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.

During the year ended December 31, 2024, Rackspace Finance repurchased and surrendered for cancellation $46 million principal amount of the 3.50% FLSO Senior Secured Notes for $19 million, including accrued interest of $0.4 million.

As of December 31, 2024, $319 million aggregate principal amount of the 3.50% FLSO Senior Secured Notes were outstanding.

Existing Debt Instruments

Senior Facilities

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

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

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

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

On February 9, 2021, we amended and restated the First Lien Credit Agreement, which included a new seven-year $2,300 million Term Loan Facility and the prior Revolving Credit Facility, which we refer to together as 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.

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.

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 prior 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 last quoted by The Wall Street Journal 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 was 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.

The Revolving Credit Facility also 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.

In addition to the quarterly amortization payments discussed above, our Senior Facilities require us to make certain mandatory prepayments, including using (i) a portion of annual excess cash flow, as defined in the First Lien Credit Agreement, to prepay the Term Loan Facility, (ii) net cash proceeds of certain non-ordinary assets sales or dispositions of property to prepay the Term Loan Facility and (iii) net cash proceeds of any issuance or incurrence of debt not permitted under the Senior Facilities to prepay the Term Loan Facility.

We can make voluntary prepayments at any time without penalty.

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.

As a result of the March 2024 Refinancing Transactions, discussed above, over 97% of the $2,181 million aggregate principal amount of the Term Loan Facility outstanding as of December 31, 2023 was exchanged or purchased for cancellation.

As of December 31, 2024, the interest rate on the Term Loan Facility was 7.35% and the outstanding principal balance was $62 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 are required to make quarterly principal payments of $0.2 million, 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 Term SOFR.

See Item 8 of Part II, Financial Statements and Supplementary Data - Note 14, "Derivatives" for more information on the interest rate swap agreements.

We can make voluntary prepayments at any time without penalty, except in connection with a repricing event, as defined in the First Lien Credit Agreement.

During 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.

In conjunction with the March 2024 Refinancing Transactions, the prior Revolving Credit Facility was replaced in full by the New Revolving Credit Facility.

3.50% Senior Secured Notes

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

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

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

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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 a result of the March 2024 Refinancing Transactions , over 91% of the $514 million aggregate principal amount of the 3.50% Senior Secured Notes outstanding as of December 31, 2023 was exchanged or purchased for cancellation.

As of December 31, 2024, $44 million aggregate principal amount of the 3.50% Senior Secured Notes remained outstanding.

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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 through maturity.

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 not subject to registration rights.

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

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

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 part of the March 2024 Refinancing Transactions, we repurchased and cancelled $69 million aggregate principal amount of the 5.375% Senior Notes during the year ended December 31, 2024.

In addition, during the year ended December 31, 2024, Rackspace Technology Global repurchased and surrendered for cancellation $3 million principal amount of 5.375% Senior Notes for $1 million.

As of December 31, 2024, $125 million aggregate principal amount of the 5.375% Senior Notes remained outstanding.

Debt covenants

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

The Revolving Credit Facility included a financial maintenance covenant that limits the borrower's net first lien leverage ratio to a maximum of 5.00 to 1.00.

The net first lien leverage ratio is calculated as the ratio of (x) the total amount of the borrower’s first lien debt for borrowed money (which is currently identical to the total amount outstanding under the Senior Facilities), less the borrower’s unrestricted cash and cash equivalents, to (y) consolidated EBITDA (as defined under the First Lien Credit Agreement governing the Senior Facilities).

However, this financial maintenance covenant will only be applicable and tested if the aggregate amount of outstanding borrowings under the Revolving Credit Facility and letters of credit issued thereunder (excluding $25 million of undrawn letters of credit and cash collateralized letters of credit) as of the last day of a fiscal quarter is equal to or greater than 35% of the Revolving Credit Facility commitments as of the last day of such fiscal quarter.

Additional covenants in the Senior Facilities limit our subsidiaries' ability to, among other things, incur certain additional debt and liens, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates.

The Indentures contains covenants that, among other things, limit our subsidiaries' ability to incur certain additional debt, incur certain liens securing debt, pay certain dividends or make other restricted payments, make certain investments, make certain asset sales and enter into certain transactions with affiliates.

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 5.375% Senior Notes and 3.50% Senior Secured Notes at a price in cash equal to 101.000% of the aggregate principal amount, plus accrued and unpaid interest, if any, to, but not including the purchase date.

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 at a price in cash equal to 101.000% of the aggregate principal amount, plus accrued and unpaid interest, if any, to, but not including the purchase date.

Our “consolidated EBITDA,” as defined under our debt instruments, is calculated in the same manner as our Adjusted EBITDA, presented elsewhere in this report, except that our debt instruments allow us to adjust for additional items, including certain start-up costs, and to give pro forma effect to acquisitions, including resulting synergies, and internal cost savings initiatives.

In addition, under the Indentures, the calculation of consolidated EBITDA does not take into account substantially any changes in GAAP subsequent to the date of issuance, whereas under the Senior Facilities, the calculation of consolidated EBITDA takes into account the impact of certain changes in GAAP subsequent to the original closing date other than with respect to capital leases.

As of December 31, 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.

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 December 31, 2024, we were in compliance with all covenants under the New Senior Facilities, the Senior Facilities and the Indentures.

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 December 31, 2024, the New Credit Group had total assets of $3,008 million and total liabilities of $3,809 million, which included total debt of $2,556 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 $229 million as of December 31, 2024, and (ii) Rackspace Technology Global is the party to the interest rate swap which had a net asset value of $26 million as of December 31, 2024.

Capital Expenditures

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

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.

The $40 million increase and $45 million decrease in capital expenditures from 2022 to 2023 and from 2023 to 2024, respectively, was primarily 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;

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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.

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

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Net cash provided by operating activities results primarily from cash received from customers, offset by cash payments made for employee and consultant compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), data center costs, license costs, third-party infrastructure costs, marketing programs, interest, taxes, and other general corporate expenditures.

Net cash provided by operating activities for 2024 decreased $335 million, or 89% , from 2023.

The reduction in operating cash between periods was primarily driven by $209 million of cash proceeds received during 2023 related to the sale of our receivables, an increase of $98 million of operating expenses between periods, $32 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 in the first quarter of 2024.

Net cash provided by operating activities for 2023 increased $128 million, or 52%, from 2022.

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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.

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 2024 decreased $9 million, or 10%, from 2023, primarily due to $17 million of net proceeds received in the current year from the March 2024 sale of our corporate headquarters facility.

In addition, there was a $7 million increase in cash from other investing activities largely due to the sale of property and equipment between periods.

These cash inflows were partially offset by a $14 million increase in cash purchases of property, equipment, and software from 2023 to 2024.

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

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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.

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

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

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

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 2024 decreased $310 million, or 99%, from 2023.

The change was primarily driven by an increase in proceeds of $275 million from the new FLFO Term Loan Facility as part of the March 2024 Refinancing Transactions compared to $50 million of debt proceeds in 2023, a reduction in debt repayments of $79 million, and a $23 million decrease in principal payments of finance lease liabilities between periods.

This activity was partially offset by $22 million of payments related to debt extinguishment costs.

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.

The change was driven by a $169 million increase in net payments related to long-term debt between periods as 2023 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 2022 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.

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

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

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

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

Off-Balance Sheet Arrangements

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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.

On February 12, 2024, the Receivables Purchase Facility 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 an SPV.

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.

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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.

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(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;

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

(iii) estimation of the terminal growth rates;

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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 discounted cash flow models reflect our assumptions and considerations regarding revenue growth rates, projected gross profit margins, projected operating costs, projected EBITDA margins, 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.

February 29, 2024 Assessment

In connection with the preparation of the debt refinancing transactions that were completed in March and April 2024, as further described in Item 8 of Part II, Financial Statements and Supplementary Data - 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 reviewed and approved our internal budget for fiscal year 2024 on February 28, 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 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.

September 30, 2024 Assessment

During the third quarter of 2024, as part our routine budget-to-actual assessment, we updated our internal forecasts to consider our year-to-date operating performance, current customer bookings and revised expectations based on actualization, 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.

As of September 30, 2024, we assessed our 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.

For the quantitative goodwill impairment analysis performed as of September 30, 2024, we utilized a range of our weighted-average cost of capital of 12.0% to 13.0% 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 September 30, 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 $69 million and $73 million for Public Cloud and Private Cloud, respectively, during the third quarter of 2024, 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 2024 to reflect expected realization of business performance, including strategic business shifts and the timing when the benefits of such shifts will be realized.

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 $108 million and $14 million, respectively, whereas a 50 basis point decrease in the discount rate assumption would result in increases in fair value of our Private Cloud and Public Cloud reporting units of approximately $121 million and $15 million, respectively.

October 1, 2024 Assessment

In connection with our annual impairment analysis as of October 1, 2024, we completed a quantitative goodwill impairment analysis.

The results of the quantitative goodwill impairment analysis performed as of October 1, 2024 indicated no impairment charges to our Private Cloud or Public Cloud reporting units.

January 1, 2023 Assessment

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March 31, 2023 Assessment

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.

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September 30, 2023 Assessment

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.

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October 1, 2023 Assessment

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.

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September 1, 2022 Assessment

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.

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October 1, 2022 Assessment

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

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December 31, 2022 Assessment

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.

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As of December 31, 2024, the carrying amount of goodwill was $735.7 million.

Indefinite-Lived Intangible Assets

Year Ended December 31, 2024

As of February 29, 2024 and September 30, 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 both periods and a discount rate of 13.7% as of February 29, 2024 and 12.4% as of September 30, 2024.

We completed the quantitative assessments of our indefinite-lived intangible asset prior to testing our goodwill for impairment as of September 30, 2024, 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 Consolidated Statements of Comprehensive Loss.

Year Ended December 31, 2023

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.

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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.

Year Ended December 31, 2022

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.

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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.

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 EBITDA margins, 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.

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

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

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

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

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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.

As of December 31, 2024, our company is subject to Pillar Two legislation in certain jurisdictions where we operate.

We have evaluated the potential impact of Pillar Two and it did not have a material impact on the company’s results of operations in 2024.

Although we do not currently expect that Pillar Two will have a material impact on our future results of operations, we will continue to evaluate the potential impact on future periods of the “Pillar Two” framework as additional guidance is released and additional countries may adopt this legislation.

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