Rackspace Technology Inc
For the period ended Sep 30, 2024. Filed Nov 12, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Nov 12, 2024
RXT$2.53+6.3%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-06-30; filed 2024-08-09.
0001810019-24-000132
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-09-30; filed 2024-11-12.
0001810019-24-000159
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 223 previous paragraphs and 246 current paragraphs.
157 unchanged; 57 reworded; 29 added; 8 removed; 1 previous and 3 current paragraphs rearranged.
Tables are not compared: 23 previous and 23 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (29)
Current report
Selling, general and administrative expenses decreased $8 million, or 4%, to $170 million in the three months ended September 30, 2024 from $177 million in the three months ended September 30, 2023. The decrease was partially driven by additional insurance recovery proceeds related to the Hosted Exchange incident received in the current period. Other cost fluctuations between periods included a reduction in depreciation and amortization expense and personnel costs.
Current report
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.
Current report
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.
Current report
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.
Current report
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.
Current report
In addition, in thethree months ended September 30, 2023, we recorded a $9 million increase in the estimated fair value, less estimated cost to sell, of our corporate headquarters, which was classified as held for sale under GAAP as of December 31, 2022. See Item 1 of Part I, Financial Statements - Note 5, "Property, Equipment and Software, net" for more information.
Current report
We recorded an $18 million gain on debt extinguishment in the three months ended September 30, 2024 related to repurchases of $24 million principal amount of the FLSO Term Loan Facility.
Current report
We recorded a $55 million gain on debt extinguishment in the three months ended September 30, 2023 related to repurchases of $85 million principal amount of 5.375% Senior Notes.
Current report
Other Expense, Net
Current report
We had $1 million and $3 million of other expense inthe three months ended September 30, 2024 and 2023, respectively. The decrease was driven by foreign currency gains and the favorable impact of the non-cash fair value adjustment on our convertible promissory note, as discussed in Item 1 of Part I, Financial Statements - Note 2, "Customer Contracts." This decrease was partially offset by an increase in costs incurred in the three months ended September 30, 2024 related to the accounts receivable purchase agreement entered into in September 2023.
Current report
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2024
Current report
Impairment of Goodwill
Current report
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.
Current report
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.
Current report
Impairment of Assets, Net
Current report
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.
Current report
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.
Current report
In addition, in thethree months ended September 30, 2023, we recorded a $9 million increase in the estimated fair value, less estimated cost to sell, of our corporate headquarters, which was classified as held for sale under GAAP as of December 31, 2022. See Item 1 of Part I, Financial Statements - Note 5, "Property, Equipment and Software, net" for more information.
Current report
We recorded a $163 million gain on debt extinguishment in the nine months ended September 30, 2023 related to repurchases of $250 million principal amount of 5.375% Senior Notes.
Current report
Other Expense, Net
Current report
February 29, 2024 Assessment
Current report
September 30, 2024 Assessment
Current report
We performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting units by utilizing changes in assumptions that reflect reasonably likely future changes in the discount rate used in the weighted-average cost of capital calculation and the terminal growth rate. Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of our Private Cloud and Public Cloud reporting units of approximately $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.
Current report
January 1, 2023 Assessment
Current report
March 31, 2023 Assessment
Current report
September 30, 2023 Assessment
Current report
During the third quarter of 2023, we experienced a sustained decline in our stock price resulting in our market capitalization being less than the carrying value of our combined reporting units. As of September 30, 2023, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our reporting units, including the significance of the amount, if any, of excess carrying value over fair value, consistency of operating margins and cash flows, budgeted-to-actual performance for the first nine months of the year, overall change in economic climate, changes in the industry and competitive environment, and earnings quality and sustainability. After considering all available evidence in our evaluation of goodwill impairment indicators, we determined it appropriate to perform an interim quantitative assessment of our reporting units as of September 30, 2023.
Current report
For the quantitative goodwill impairment analysis performed as of September 30, 2023, we utilized a range of our weighted-average cost of capital of 11.0% to 12.5% as our discount rate, which was risk-adjusted for each reporting unit. After determining the fair value of our reporting units, we reconciled the combined fair value of the reporting units to the company's market capitalization as of September 30, 2023. As a result, we determined that the carrying amount of our Private Cloud reporting unit exceeded its fair value and recorded a goodwill impairment charge of $166 million during the third quarter of 2023, which is included in "Impairment of goodwill" in our Condensed Consolidated Statements of Comprehensive Loss. The impairment was driven by the company's cash flow projections as revised in the third quarter of 2023 to reflect current market conditions and business mix shifts. The Public Cloud reporting unit was determined to have a fair value that exceeded its carrying value by approximately 17% and therefore no impairment was recognized.
Current report
We performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting units by utilizing changes in assumptions that reflect reasonably likely future changes in the discount rate used in the weighted-average cost of capital calculation and the terminal growth rate. Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of our Private Cloud and Public Cloud reporting units of approximately $65 million and $52 million, respectively.
Removed paragraphs (8)
Previous report
We recorded $73 million of debt modification costs and gain on debt extinguishment in the three months ended June 30, 2024, which included a $49 million gain on debt extinguishment related to repurchases of an aggregate $68 million principal amount of 3.50% FLSO Senior Secured Notes, FLSO Term Loan Facility, and 5.375% Senior Notes during the period. The remaining amount is related to the closing of the Public Note Exchange in April 2024, which was initiated as part of the March 2024 Refinancing Transactions.
Previous report
We recorded a $95 million gain on debt extinguishment in the three months ended June 30, 2023 related to repurchases of $142 million principal amount of 5.375% Senior Notes.
Previous report
Other Income (Expense), Net
Previous report
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2024
Previous report
We recorded a $108 million gain on debt extinguishment in the six months ended June 30, 2023 related to repurchases of $165 million principal amount of 5.375% Senior Notes.
Previous report
Other Income (Expense), Net
Previous report
We had $11 million of other expense inthesix months ended June 30, 2024 and$2 million of other income in the six months ended June 30, 2023, respectively, primarily due to costs incurred inthesix months ended June 30, 2024 related to the accounts receivable purchase agreement entered into in September 2023 and the impact of foreign currency losses.
Previous report
During the three months ended June 30, 2024, Rackspace Finance initiated repurchases of an additional $24 million aggregate principal amount of the FLSO Term Loan Facility for $11 million. These repurchases subsequently settled on July 15, 2024.
Reworded paragraphs (57)
Previous wording
Revenue decreased $61 million, or 8.2%, to $685 million in the three months ended June 30, 2024 from $746 million in the three months ended June 30, 2023. Revenue declined due to decreases in both Private Cloud and Public Cloud revenue, as discussed below.
Current wording
Revenue decreased $57 million, or 7.7%, to $676 million in the three months ended September 30, 2024 from $732 million in the three months ended September 30, 2023. Revenue declined due to decreases in both Private Cloud and Public Cloud revenue, as discussed below.
Previous wording
After removing the impact of foreign currency fluctuations, on a constant currency basis, revenue decreased 8.3% year-over-year. The following table presents revenue growth by segment:
Current wording
After removing the impact of foreign currency fluctuations, on a constant currency basis, revenue decreased 7.9% year-over-year. The following table presents revenue growth by segment:
Previous wording
Public Cloud revenue in the three months ended June 30, 2024 decreased 2.0% on an actual and constant currency basis, from the three months ended June 30, 2023. The decline was due to macro-economic pressures, which caused a tightening of customer discretionary spend and optimizations, along with continued cyclical headwinds in IT services.
Current wording
Public Cloud revenue in the three months ended September 30, 2024 decreased 3.1% on an actual and constant currency basis, from the three months ended September 30, 2023. The decline was due to continued cyclical headwinds in IT services.
Previous wording
Private Cloud revenue in the three months ended June 30, 2024 decreased 16.8% on an actual basis and 17.0% on a constant currency basis, from the three months ended June 30, 2023, due to customers rolling off old generation private cloud offerings and expected decline in legacy OpenStack offerings.
Current wording
Private Cloud revenue in the three months ended September 30, 2024 decreased 14.4% on an actual basis and 14.7% on a constant currency basis, from the three months ended September 30, 2023, due to customers rolling off old generation private cloud offerings and decline in legacy OpenStack offerings.
Previous wording
Cost of revenue decreased $40 million, or 7%, to $554 million in the three months ended June 30, 2024 from $593 million in the three months ended June 30, 2023. The decrease in cost of revenue was primarily due to a decline in personnel costs associated with a reduction in headcount between periods and lower severance expense. Also contributing to the reduction in cost of revenue was an increase in the useful life of certain customer gear assets, as discussed in Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies", which resulted in a decline in depreciation expense between periods. A reduction in license expense due to decreased usage further contributed to the decrease in cost of revenue between periods. Increased usage charges for third-party infrastructure partially offset these reductions.
Current wording
Cost of revenue decreased $42 million, or 7%, to $538 million in the three months ended September 30, 2024 from $580 million in the three months ended September 30, 2023. The decrease in cost of revenue was primarily due to an increasein the useful life of certain customer gear assets, as discussed in Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies", which resulted in a decline in depreciation expense between periods. In addition, we experienced a reduction in usage charges for third-party infrastructure; consistent with the decrease in revenue, and a reduction in license expense due to decreased usage between periods. A decline in personnel costs, driven by a decrease in headcount between periods, and lower severance expense further contributed to the overall reduction in cost of revenue.
Previous wording
As a percentage of revenue, cost of revenue increased 130 basis points in the three months ended June 30, 2024 to 80.8% from 79.5% in the three months ended June 30, 2023 as the decline in revenue growth outpaced the decrease in cost of revenue.
Current wording
As a percentage of revenue, cost of revenue increased 40 basis points in the three months ended September 30, 2024 to 79.6% from 79.2% in the three months ended September 30, 2023 as the decline in revenue growth outpaced the decrease in cost of revenue.
Previous wording
Our gross profit was $131 million in the three months ended June 30, 2024, a decrease of $22 million from $153 million in the three months ended June 30, 2023. Our gross margin was 19.2% in the three months ended June 30, 2024, a decrease of 130 basis points from 20.5% in the three months ended June 30, 2023.
Current wording
Our gross profit was $138 million in the three months ended September 30, 2024, a decrease of $15 million from $152 million in the three months ended September 30, 2023. Our gross margin was 20.4% in the three months ended September 30, 2024, a decrease of 40 basis points from 20.8% in the three months ended September 30, 2023.
Previous wording
As a percentage of revenue, selling, general and administrative expenses decreased 210 basis points, to 27.0% in the three months ended June 30, 2024 from 29.1% in the three months ended June 30, 2023 driven by the factors discussed above.
Current wording
As a percentage of revenue, selling, general and administrative expenses increased 90 basis points, to 25.1% in the three months ended September 30, 2024 from 24.2% in the three months ended September 30, 2023 as the decline in revenue growth outpaced the decrease in selling, general and administrative expenses.
Previous wording
Our loss from operations was $54 million in the three months ended June 30, 2024 compared to $64 million in the three months ended June 30, 2023. Our Non-GAAP Operating Profit was $23 million in the three months ended June 30, 2024, a decrease of $16 million from $39 million in the three months ended June 30, 2023. Non-GAAP Operating Profit is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information.
Current wording
Our loss from operations was $174 million in the three months ended September 30, 2024 compared to $239 million in the three months ended September 30, 2023. Our Non-GAAP Operating Profit was $34 million in the three months ended September 30, 2024, a decrease of $11 million from $46 million in the three months ended September 30, 2023. Non-GAAP Operating Profit is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information.
Previous wording
Public Cloud operating profit decreased 25% in the three months ended June 30, 2024 from the three months ended June 30, 2023. Segment operating profit as a percentage of segment revenue decreased by 80 basis points, reflecting a 2% decrease in segment revenue, partially offset by a 1% decrease in segment operating expenses.
Current wording
Public Cloud operating profit decreased 19% in the three months ended September 30, 2024 from the three months ended September 30, 2023. Segment operating profit as a percentage of segment revenue decreased by 80 basis points, reflecting a 3% decrease in segment revenue, partially offset by a 2% decrease in segment operating expenses.
Previous wording
Private Cloud operating profit decreased 21% in the three months ended June 30, 2024 from the three months ended June 30, 2023. Segment operating profit as a percentage of segment revenue decreased by 140 basis points due to a 17% decrease in segment revenue, partially offset by a 15% decrease in segment operating expenses. The decrease in costs was mainly driven by a reduction 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.
Current wording
Private Cloud operating profit decreased 14% in the three months ended September 30, 2024 from the three months ended September 30, 2023. Segment operating profit as a percentage of segment revenue increased by 30 basis points due to a 15% decrease in segment operating expenses, partially offset by a 14% decrease in segment revenue. The decrease in expenses was mainly driven by a reduction in personnel costs.
Previous wording
Centralized corporate functions that provide services to the segments in areas such as accounting, information technology, marketing, legal and human resources are not allocated to the segments and are included in "corporate functions" in the table above. This expense decreased 9% in the three months ended June 30, 2024 from the three months ended June 30, 2023 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.
Current wording
Centralized corporate functions that provide services to the segments in areas such as accounting, information technology, marketing, legal and human resources are not allocated to the segments and are included in "corporate functions" in the table above. This expense decreased 7% in the three months ended September 30, 2024 from the three months ended September 30, 2023 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.
Previous wording
Our income tax benefit was $30 million in the three months ended June 30, 2024 compared to $1 million income tax expense in the three months ended June 30, 2023. Our effective tax rate increased to 612.6% in the three months ended June 30, 2024 from (5.1)% in the three months ended June 30, 2023. The increase in the effective tax rate year-over-year is primarily due to the tax impact associated with changes in the valuation allowance and the March 2024 Refinancing Transactions. The difference between the effective tax rate and the statutory rate for the three months ended June 30, 2024 is primarily due to the tax impact associated with changes in the valuation allowance and the impact of the March 2024 Refinancing Transactions.
Current wording
Our income tax expense was$12 million in the three months ended September 30, 2024 compared to$17 million income tax benefit in the three months ended September 30, 2023. Our effective tax rate decreased to (6.8)% in the three months ended September 30, 2024 from 6.8% in the three months ended September 30, 2023. The decrease in the effective tax rate year-over-year and the difference between the effective tax rate and the statutory rate for the three months ended September 30, 2024 is primarily due to the tax impact associated with changes in the valuation allowance, the tax impact of the March 2024 Refinancing Transactions, and the tax impact associated with the goodwill impairment recorded in September 2024, the majority of which was nondeductible for income tax purposes.
Previous wording
Revenue decreased $129 million, or 8.6%, to $1,376 million in the six months ended June 30, 2024 from $1,505 million in the six months ended June 30, 2023. Revenue declined due to decreases in both Private Cloud and Public Cloud revenue, as discussed below.
Current wording
Revenue decreased $186 million, or 8.3%, to $2,052 million in the nine months ended September 30, 2024 from $2,237 million in the nine months ended September 30, 2023. Revenue declined due to decreases in both Private Cloud and Public Cloud revenue, as discussed below.
Previous wording
After removing the impact from foreign currency fluctuations, on a constant currency basis, revenue decreased 8.8% year-over-year. The following table presents revenue growth by segment:
Current wording
After removing the impact from foreign currency fluctuations, on a constant currency basis, revenue decreased 8.5% year-over-year. The following table presents revenue growth by segment:
Previous wording
Public Cloud revenue in the six months ended June 30, 2024 decreased 3.4% on an actual basis and 3.5% on aconstant currency basis, from the six months ended June 30, 2023. The decline was due to macro-economic pressures, which caused a tightening of customer discretionary spend and optimizations, along with continued cyclical headwinds in IT services.
Current wording
Public Cloud revenue in the nine months ended September 30, 2024 decreased 3.3% on an actual basis and 3.4% on aconstant currency basis, from the nine months ended September 30, 2023. The decline was due to continued cyclical headwinds in IT services.
Previous wording
Private Cloud revenue in the six months ended June 30, 2024 decreased 15.8% on an actual basis and 16.3% on a constant currency basis, from the six months ended June 30, 2023, due to customers rolling off old generation private cloud offerings and expected decline in legacy OpenStack offerings.
Current wording
Private Cloud revenue in the nine months ended September 30, 2024 decreased 15.4% on an actual basis and 15.8% on a constant currency basis, from the nine months ended September 30, 2023, due to customers rolling off old generation private cloud offerings and decline in legacy OpenStack offerings.
Previous wording
Cost of revenue decreased $71 million, or 6%, to $1,112 million in the six months ended June 30, 2024 from $1,182 million in the six months ended June 30, 2023. The decrease in cost of revenue was primarily due to a decline in personnel costs associated with a reduction in headcount between periods and lower severance expense. Also contributing to the reduction in cost of revenue was an increase in the useful life of certain customer gear assets, as discussed in Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies", which resulted in a decline in depreciation expense between periods. A reduction in license expense due to decreased usage further contributed to the decrease in cost of revenue between periods. Increased usage charges for third-party infrastructure partially offset these reductions.
Current wording
Cost of revenue decreased $113 million, or 6%, to $1,650 million in the nine months ended September 30, 2024 from $1,763 million in the nine months ended September 30, 2023. The decrease in cost of revenue was primarily due to a decline in personnel costs associated with a reduction in headcount between periods and lower severance expense. Also contributing to the reduction in cost of revenue was an increase in the useful life of certain customer gear assets, as discussed in Item 1 of Part I, Financial Statements - Note 1, "Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies", which resulted in a decline in depreciation expense between periods. A reduction in license expense due to decreased usage further contributed to the decrease in cost of revenue between periods.
Previous wording
As a percentage of revenue, cost of revenue increased 220 basis points in the six months ended June 30, 2024 to 80.8% from 78.6% in the six months ended June 30, 2023, as the decline in revenue growth outpaced the decrease in cost of revenue. Usage charges for third-party infrastructure drove a 470 basis point increase. The decrease in personnel costs and depreciation expense, discussed above, partially offset the increase.
Current wording
As a percentage of revenue, cost of revenue increased 160 basis points in the nine months ended September 30, 2024 to 80.4% from 78.8% in the nine months ended September 30, 2023, as the decline in revenue growth outpaced the decrease in cost of revenue. Usage charges for third-party infrastructure drove a 400 basis point increase. The decrease in personnel costs and depreciation expense, discussed above, partially offset the increase.
Previous wording
Our gross profit was $264 million in the six months ended June 30, 2024, a decrease of $59 million from $323 million in the six months ended June 30, 2023. Our gross margin was 19.2% in the six months ended June 30, 2024, a decrease of 220 basis points from 21.4% in the six months ended June 30, 2023.
Current wording
Our gross profit was $402 million in the nine months ended September 30, 2024, a decrease of $73 million from $475 million in the nine months ended September 30, 2023. Our gross margin was 19.6% in the nine months ended September 30, 2024, a decrease of 160 basis points from 21.2% in the nine months ended September 30, 2023.
Previous wording
Selling, general and administrative expenses decreased$47 million, or 11%, to $378 million in the six months ended June 30, 2024 from $424 million in the six months ended June 30, 2023. The six months ended June 30, 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. 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.
Current wording
Selling, general and administrative expenses decreased$55 million, or 9%, to $547 million in the nine months ended September 30, 2024 from $602 million in the nine months ended September 30, 2023. The nine months ended September 30, 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 wasadditional 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.
Previous wording
As a percentage of revenue, selling, general and administrative expenses decreased 70 basis points, to 27.5% in the six months ended June 30, 2024 from 28.2% in the six months ended June 30, 2023.
Current wording
As a percentage of revenue, selling, general and administrative expenses decreased 20 basis points, to 26.7% in the nine months ended September 30, 2024 from 26.9% in the nine months ended September 30, 2023.
Previous wording
Our loss from operations was $707 million in the six months ended June 30, 2024 compared to $645 million in the six months ended June 30, 2023. Our Non-GAAP Operating Profit was $39 million in the six months ended June 30, 2024, a decrease of $51 million from $90 million in the six months ended June 30, 2023. Non-GAAP Operating Profit is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information.
Current wording
Our loss from operations was $880 million in the nine months ended September 30, 2024 compared to $884 million in the nine months ended September 30, 2023. Our Non-GAAP Operating Profit was $73 million in the nine months ended September 30, 2024, a decrease of $62 million from $135 million in the nine months ended September 30, 2023. Non-GAAP Operating Profit is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information.
Previous wording
Public Cloud operating profit decreased 46% in the six months ended June 30, 2024 from the six months ended June 30, 2023. Segment operating profit as a percentage of segment revenue decreased by 200 basis points, reflecting a 3% decrease in segment revenue, partially offset by a 1% decrease in segment operating expenses.
Current wording
Public Cloud operating profit decreased 37% in the nine months ended September 30, 2024 from the nine months ended September 30, 2023. Segment operating profit as a percentage of segment revenue decreased by 150 basis points, reflecting a 3% decrease in segment revenue, partially offset by a 2% decrease in segment operating expenses.
Previous wording
Private Cloud operating profit decreased 22% in the six months ended June 30, 2024 from the six months ended June 30, 2023. Segment operating profit as a percentage of segment revenue decreased by 220 basis points, due to a 16% decrease in segment revenue, partially offset by a 13% decrease in segment operating expenses. The decrease in costs was mainly driven by a reduction 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.
Current wording
Private Cloud operating profit decreased 20% in the nine months ended September 30, 2024 from the nine months ended September 30, 2023. Segment operating profit as a percentage of segment revenue decreased by 140 basis points, due to a 15% decrease in segment revenue, partially offset by a 14% decrease in segment operating expenses. The decrease in expenses was mainly driven by a reduction in personnel costs.
Previous wording
Centralized corporate functions that provide services to the segments in areas such as accounting, information technology, marketing, legal and human resources are not allocated to the segments and are included in "corporate functions" in the table above. This expense decreased 6% in the six months ended June 30, 2024 from the six months ended June 30, 2023 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.
Current wording
Centralized corporate functions that provide services to the segments in areas such as accounting, information technology, marketing, legal and human resources are not allocated to the segments and are included in "corporate functions" in the table above. This expense decreased 7% in the nine months ended September 30, 2024 from the nine months ended September 30, 2023 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.
Previous wording
We recorded a total of$543 million and$573 million in non-cash goodwill impairment charges in the six months ended June 30, 2023 and June 30, 2024, respectively.
Current wording
We recorded a total of$709 million and$715 million in non-cash goodwill impairment charges in the nine months ended September 30, 2023 and September 30, 2024, respectively.
Previous wording
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 thesix months ended June 30, 2024. There was no such impairment in the six months ended June 30, 2023.
Current wording
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.
Previous wording
Interest expense decreased $52 million, or 46%, to $62 million in the six months ended June 30, 2024 from $114 million in the six months ended June 30, 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.
Current wording
Interest expense decreased $91 million, or 53%, to $80 million in the nine months ended September 30, 2024 from $171 million in the nine months ended September 30, 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.
Previous wording
We recorded $80 million debt modification costs and gain on debt extinguishment in the six months ended June 30, 2024 related to the March 2024 Refinancing Transactions. In addition, we recorded a $49 million gain on debt extinguishment related to repurchases of an aggregate $68 million principal amount of 3.50% FLSO Senior Secured Notes, FLSO Term Loan Facility, and 5.375% Senior Notes during the period.
Current wording
We recorded $80 million debt modification costs and gain on debt extinguishment in the nine months ended September 30, 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 during the period.
Previous wording
We had $5 million of other expense and $0.2 million of other income inthe three months ended June 30, 2024 and June 30, 2023, respectively, primarily due to costs incurred inthe three months ended June 30, 2024 related to the accounts receivable purchase agreement entered into in September 2023 and the impact of foreign currency losses.
Current wording
We had $12 millionand$0.3 million of other expense in the nine months ended September 30, 2024 and 2023, respectively, primarily due to costs incurred inthe nine months ended September 30, 2024 related to the accounts receivable purchase agreement entered into in September 2023.
Previous wording
Our income tax benefit increased to $35 million in the six months ended June 30, 2024 from $10 million in the six months ended June 30, 2023. Our effective tax rate increased to 5.3% in the six months ended June 30, 2024 from 1.5% in the six months ended June 30, 2023. The increase in the effective tax rate year-over-year is primarily due to the tax impact associated with changes in the valuation allowance, geographic distribution of profits, the tax impact associated with goodwill impairments recorded in both the first quarter of 2024 and the first quarter of 2023, the majority of which were nondeductible for income tax purposes, and the income tax benefit of $88 million related to the March 2024 Refinancing Transactions discussed above. The difference between the effective tax rate and the statutory rate for the six months ended June 30, 2024 is primarily due to the tax impact associated with changes in the valuation allowance, the tax impact associated with the goodwill impairment recorded in the first quarter of 2024, and the impact of the March 2024 Refinancing Transactions.
Current wording
Our income tax benefit decreased to $23 million in the nine months ended September 30, 2024 from $26 million in the nine months ended September 30, 2023. Our effective tax rate decreased to 2.8% in the nine months ended September 30, 2024 from 2.9% in the nine months ended September 30, 2023. The decrease in the effective tax rate year-over-year is primarily due to the tax impact associated with changes in the valuation allowance, geographic distribution of profits, the tax impact associated with goodwill impairments recorded in both the first and third quarters of 2024 and the first quarter of 2023, the majority of which were nondeductible for income tax purposes, and the income tax benefit of $80 million related to the March 2024 Refinancing Transactions discussed above. The difference between the effective tax rate and the statutory rate for the nine months ended September 30, 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.
Previous wording
Net income (loss) reconciliation to Non-GAAP Net Loss
Current wording
Net loss reconciliation to Non-GAAP Net Loss
Previous wording
Net income (loss) reconciliation to Adjusted EBITDA
Current wording
Net loss reconciliation to Adjusted EBITDA
Previous wording
We define Non-GAAP Earnings (Loss) Per Share as Non-GAAP Net Income (Loss) divided by our GAAP weighted average number of shares outstanding for the period on a diluted basis and further adjusted for the weighted average number of shares associated with securities which are anti-dilutive to GAAP loss per share but dilutive to Non-GAAP Earnings (Loss) Per Share. Management uses Non-GAAP Earnings (Loss) Per Share to evaluate the performance of our business on a comparable basis from period to period, including by adjusting for the impact of the issuance of shares that would be dilutive to Non-GAAP Earnings (Loss) Per Share. The following table reconciles Non-GAAP Earnings (Loss) Per Share to our GAAP net earnings (loss) per share on a diluted basis:
Current wording
We define Non-GAAP Earnings (Loss) Per Share as Non-GAAP Net Income (Loss) divided by our GAAP weighted average number of shares outstanding for the period on a diluted basis and further adjusted for the weighted average number of shares associated with securities which are anti-dilutive to GAAP loss per share but dilutive to Non-GAAP Earnings (Loss) Per Share. Management uses Non-GAAP Earnings (Loss) Per Share to evaluate the performance of our business on a comparable basis from period to period, including by adjusting for the impact of the issuance of shares that would be dilutive to Non-GAAP Earnings (Loss) Per Share. The following table reconciles Non-GAAP Loss Per Share to our GAAP net loss per share on a diluted basis:
Previous wording
At June 30, 2024, we held $190 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $124 million was held by foreign entities.
Current wording
At September 30, 2024, we held $157 million in cash and cash equivalents (not including $3 million in restricted cash, which is included in "Other non-current assets"), of which $125 million was held by foreign entities.
Previous wording
We have entered into installment payment arrangements with certain equipment and software vendors, along with sale-leaseback arrangements for equipment and certain property leases that are considered financing obligations. We had $58 million outstanding with respect to these arrangements as of June 30, 2024. We may choose to utilize these various sources of funding in future periods.
Current wording
We have entered into installment payment arrangements with certain equipment and software vendors, along with sale-leaseback arrangements for equipment and certain property leases that are considered financing obligations. We had $56 million outstanding with respect to these arrangements as of September 30, 2024. We may choose to utilize these various sources of funding in future periods.
Previous wording
We also lease certain equipment and real estate under operating and finance lease agreements. We had $495 million outstanding with respect to operating and finance lease agreements as of June 30, 2024. We may choose to utilize such leasing arrangements in future periods.
Current wording
We also lease certain equipment and real estate under operating and finance lease agreements. We had $487 million outstanding with respect to operating and finance lease agreements as of September 30, 2024. We may choose to utilize such leasing arrangements in future periods.
Previous wording
As of June 30, 2024, we had $2,484 million aggregate principal amount outstanding under the FLSO Term Loan Facility, the FLFO Term Loan Facility, the Term Loan Facility, 3.50% FLSO Senior Secured Notes,5.375% Senior Notes, and 3.50% Senior Secured Notes, with $375 million of borrowing capacity available under the New Revolving Credit Facility. Our liquidity requirements are significant, primarily due to debt service requirements.
Current wording
As of September 30, 2024, we had $2,455 million aggregate principal amount outstanding under the FLSO Term Loan Facility, the FLFO Term Loan Facility, the Term Loan Facility, 3.50% FLSO Senior Secured Notes,5.375% Senior Notes, and 3.50% Senior Secured Notes, with $375 million of borrowing capacity available under the New Revolving Credit Facility. Our liquidity requirements are significant, primarily due to debt service requirements.
Previous wording
As of June 30, 2024, the contractual interest rate on the FLSO Term Loan Facility was 8.19%. We are required to make quarterly principal payments of $4 million, which began on March 31, 2024.
Current wording
As of September 30, 2024, the contractual interest rate on the FLSO Term Loan Facility was 7.98%. We are required to make quarterly principal payments of $4 million, which began on March 31, 2024.
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Rearranged current paragraphs (3)
Current report — wording carried from elsewhere
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. After considering all available evidence in our evaluation of goodwill impairment indicators, we determined it appropriate to perform an interim quantitative assessment of our reporting units as of September 30, 2024.
Current report — wording carried from elsewhere
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 Condensed 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.
Current report — wording carried from elsewhere
The quantitative test as of September 30, 2023 indicated that the estimated fair value of the Rackspace trade name was less than its carrying value. As a result, we recorded a $57 million non-cash impairment charge during the third quarter of 2023 which is included in "Impairment of assets, net" in our Condensed Consolidated Statements of Comprehensive Loss.
Rearranged previous paragraphs (1)
Previous report — wording carried elsewhere
Selling, general and administrative expenses decreased $32 million, or 15%, to $185 million in the three months ended June 30, 2024 from $217 million in the three months ended June 30, 2023. The three months ended June 30, 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. Other cost fluctuations included lower professional fees, a reduction in depreciation and amortization expense, and business optimization related expenses between periods. Personnel costs decreased marginally between periods driven by a reduction in severance and commissions expense.