RACKSPACE TECHNOLOGY, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) – marketscreener.com

The following Management’s Discussion and Analysis of Financial Condition and

Results of Operations (“MD&A”) is intended to help readers understand our

results of operations, financial condition and cash flows and should be read in

conjunction with the consolidated financial statements and the related notes

included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly

Report”) and with the audited consolidated financial statements and the related

notes included in our Annual Report on Form 10-K. References to “

Rackspace

Technology

,” “we,” “our company,” “the company,” “us,” or “our” refer to

Rackspace Technology, Inc.

and its consolidated subsidiaries.

The following discussion contains forward-looking statements that are subject to

risks and uncertainties. Actual results may differ materially from those

contained in any forward-looking statements. See “Special Note Regarding

Forward-Looking Statements” contained elsewhere in this Quarterly Report.

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Overview

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

build and operate our customers’ cloud environments across all major technology

platforms, irrespective of technology stack or deployment model. We partner with

our customers at every stage of their cloud journey, enabling them to modernize

applications, build new products and adopt innovative technologies.

We operate our business and report our results through three reportable

segments: (1) Multicloud Services, (2) Apps & Cross Platform and (3) OpenStack

Public Cloud. Our Multicloud Services segment includes our multicloud services

offerings, as well as professional services related to designing and building

multicloud solutions and cloud-native applications. Our Apps & Cross Platform

segment includes managed applications, managed security and data services, as

well as professional services related to designing and implementing application,

security and data services. In early 2017, we determined that our OpenStack

Public Cloud offering was not core to our go-forward operations and we ceased to

incentivize our sales team to promote and sell the product by the end of that

year. We continue to serve our existing OpenStack Public Cloud customer base

while we focus our growth strategy and investments on our Multicloud Services

and Apps & Cross Platform offerings. See Item 1 of Part I, Financial Statements

– Note 14, “Segment Reporting,” for additional information about our segments.

We refer to certain supplementary “Core” financial measures, which reflect the

results or otherwise pertain to the performance of our Multicloud Services and

Apps & Cross Platform segments, in the aggregate. Our Core financial measures

exclude the results and performance of our OpenStack Public Cloud segment.

On August 7, 2020, we completed our initial public offering (the “IPO”), in

which we issued and sold 33,500,000 shares of our common stock at a public

offering price of $21.00 per share.


On

July 21, 2021

, we committed to an internal restructuring plan (the “

July 2021

Restructuring Plan”), which will drive a change in the type and location of

certain positions and is expected to result in the termination of approximately

10% of our workforce. We recorded total charges of

$34.1 million

and

$40.5

million

for the three and nine months ended

September 30, 2021

, respectively,

related to this restructuring plan. This included

$16.1 million

and

$22.5

million

for the three and nine months ended

September 30, 2021

for employee

related costs and other costs accounted for as exit and disposal costs under ASC

420 as described in Item 1 of Part I, Financial Statements – Note 8, “

July 2021

Restructuring Plan.” The remaining

$18.0 million

of expenses during the three

and nine months ended

September 30, 2021

, consisted primarily of one-time

offshore build out costs. We expect to incur additional expenses of

approximately

$30 million

over the next 12-18 months with the majority of the

remaining amount incurred in the next 12 months. After the

July 2021

Restructuring Plan is implemented, we expect to realize approximately

$95

to

$100 million

in gross annual savings compared to expense levels prior to the

commencement of the plan.

Impact of COVID-19

The outbreak of a novel strain of coronavirus, referred to as COVID-19, has

spread globally, including within

the United States

, and resulted in the

World

Health Organization

declaring the outbreak a “pandemic” in

March 2020

, with

variant strains of the virus continuing to be identified globally. The effects

of COVID-19 and its variants continue to evolve, and the full impact and

duration of the virus are unknown. Managing COVID-19 has severely impacted

healthcare systems and businesses worldwide. The effects of COVID-19 and its

variants and the response to the virus have negatively impacted overall economic

conditions. To date, COVID-19 and its variants have not adversely affected our

results of operations or financial condition in any material respect; however,

the ultimate extent of the impact of COVID-19 and its variants on our

operational and financial performance will depend on certain developments,

including the duration and severity of the outbreak, the pace of economic

recovery, the possible resurgence in the spread of the virus or any variant

strain(s) of the virus, advances in testing, treatment, and prevention,

including the efficacy and availability of vaccines, its impact on our

customers, vendors and employees and its impact on our sales cycles as well as

industry events, all of which are uncertain and cannot be predicted. If the

pandemic worsens or the global economic recovery slows, we could experience

service disruption, loss of customers or higher levels of doubtful trade

accounts receivable, which could have an adverse effect on our results of

operations and cash flows. We continue to focus on the health and safety of our

employees, customers and partners and, among other things, have implemented a

work-from-home policy and are limiting contact between our employees and

customers while continuing to deliver a Fanatical Experience. To date, the

impact on our business has been limited as most of our services are already

delivered remotely or capable of being delivered remotely and we have a diverse

customer base. The full extent to which COVID-19 and its variants may impact our

financial condition or results of operations over the medium to long term,

however, remains uncertain. Due to our recurring revenue business model, the

effect of COVID-19 and its variants may not be fully reflected in our results of

operations until future periods, if at all. We will continue to actively monitor

the situation and may take further actions that alter our business operations as

may be

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required by federal, state or local authorities, or that we determine are in the

best interests of our employees, customers, partners, suppliers and

stockholders, including developing a plan to return our workforce back to the

office when it is safe to do so.

Key Factors Affecting Our Performance

We believe our combination of proprietary technology, automation capabilities

and technical expertise creates a value proposition for our customers that is

hard to replicate for both competitors and in-house IT departments. Our

continued success depends to a significant extent on our ability to meet the

challenges presented by our highly competitive and dynamic market, including the

following key factors:

Differentiating Our Service Offerings in a Competitive Market Environment


Our success depends to a significant extent on our ability to differentiate,

expand and upgrade our service offerings in line with developing customer needs,

while deepening our relationships with leading public cloud service providers

and establishing new relationships, including with sales partners. We are a

certified premier consulting and managed services partner to some of the largest

cloud computing platforms, including AWS, Azure, Google Cloud, Oracle, SAP and

VMware. We believe we are unique in our ability to serve customers across major

technology stacks and deployment options, all while delivering a Fanatical

Experience. Our existing and prospective customers are also under increasing

pressure to move from on-premise or self-managed IT to the cloud to compete

effectively in a digital economy and maximize the value of their cloud

investments, which we believe presents an opportunity for professional services

projects as well as new recurring business. Annualized Recurring Revenue

(“ARR”), which we believe is an important indicator of our market

differentiation and future revenue opportunity from recurring customer

contracts, was

$2,576.4 million

and

$2,901.9 million

for the three months ended

September 30, 2020

and 2021, respectively. See “Key Operating Metrics.”

Customer Relationships and Retention


Our success greatly depends on our ability to retain and develop opportunities

with our existing customers and to attract new customers. We operate in a

growing but competitive and evolving market environment, requiring innovation to

differentiate us from our competitors. We believe that our integrated cloud

service portfolio and our differentiated customer experience and technology are

keys to retaining and growing revenue from existing customers as well as

acquiring new customers. For example, we believe that the Rackspace Fabric

provides customers a unified experience across their entire cloud and security

footprint, and that our Rackspace Elastic Engineering model, announced in

April

2021

, helps customers embrace a cloud native approach with on-demand access to a

dedicated team of highly skilled cloud architects and engineers. These offerings

differentiate us from legacy IT service providers that operate under long-term

fixed and project-based fee structures often tethered to their existing

technologies with less automation.

Shift in Capital Intensity


In recent years, the mix of our revenues has shifted from high capital intensity

service offerings to low capital intensity service offerings and we expect this

mix shift to continue. Historically, we primarily offered dedicated hosting and

OpenStack Public Cloud services to our customers, which required us to deploy

servers and equipment to ensure adequate capacity for new customers and, in

certain cases, on behalf of customers at the start or during the performance of

a contract, resulting in a high level of anticipatory and success-based capital

expenditures. Today, the vast majority of our revenue is derived from service

offerings, such as multicloud services, application services and professional

services, which have significantly lower success-based capital requirements

because they allow us to leverage our partners’ infrastructure or technology

because we are able to use technology to make our capital expenditures more

efficient. As a result, we have recently experienced and expect to continue to

experience changes in our capital expenditures requirements.

Our capital expenditures equaled 7% and 5% of our revenue for the three months

ended

September 30, 2020

and 2021, respectively, and 9% and 8% of our revenue

for the nine months ended

September 30, 2020

and 2021, respectively. While there

is some variability in capital expenditures from quarter to quarter due to

timing of purchases, we expect to maintain or lower capex intensity levels over

the longer term.

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Human Capital

Our ability to be successful and to execute on our strategies depends on our

ability to hire and retain qualified employees. Like others in our industry, we

are realizing higher than historical levels of voluntary attrition. As a result,

we are accelerating our best shoring efforts and expanding the geographic reach

of our recruiting pool. The company continues to enhance and develop programs to

attract, retain and develop top talent.

Key Operating Metrics

The following table and discussion present and summarize our key operating

performance indicators, which management uses as measures of our current and

future business and financial performance:

Three Months Ended September 30,

(In millions, except %) 2020 2021

Bookings $ 314.6

$ 200.3

Annualized Recurring Revenue (ARR) $ 2,576.4

$ 2,901.9

Bookings

We calculate Bookings for a given period as the annualized monthly value of our

recurring customer contracts entered into during the period from (i) new

customers and (ii) net upgrades by existing customers within the same workload,

plus the actual (not annualized) estimated value of professional services

consulting, advisory or project-based orders received during the period.

“Recurring customer contracts” are any contracts entered into on a multi-year or

month-to-month basis, but excluding any professional services contracts for

consulting, advisory or project-based work.

Bookings for any period may reflect orders that we perform in the same period,

orders that remain outstanding as of the end of the period and the annualized

value of recurring month-to-month contracts entered into during the period, even

if the terms of such contracts do not require the contract to be renewed.

Bookings include net upgrades by existing customers within the same workload,

but exclude net downgrades by such customers within that workload. Any customer

that contracts for a new workload is considered a new customer and the entire

value of the contract or upgrade is recorded in Bookings, irrespective of

whether the same customer canceled or downgraded other workloads. Bookings also

do not include the impact of any known contract non-renewals or service

cancellations by our customers, except for positive net upgrades by existing

customers. In cases where a new or upgrading customer enters into a multi-year

contract, Bookings include only the annualized contract value. Bookings do not

include usage-based fees in excess of contracted minimum commitments until

actually incurred.

We use Bookings to measure the amount of new business generated in a period,

which we believe is an important indicator of new customer acquisition and our

ability to cross-sell new services to existing customers. Bookings are also used

by management as a factor in determining performance-based compensation for our

sales force. While we believe Bookings, in combination with other metrics, is an

indicator of our near-term future revenue opportunity, it is not intended to be

used as a projection of future revenue. Our calculation of Bookings may differ

from similarly-titled metrics presented by other companies.

Our Bookings were

$200.3 million

in the three months ended

September 30, 2021

compared to

$314.6 million

in the three months ended

September 30, 2020

. This

decrease is the result of the company’s focus in the current year on growing

revenue and profitability with the new customers onboarded in 2019 and 2020.

Sales activities were previously heavily weighted towards new customer

acquisition, and in particular infrastructure sales, which drives higher dollar

bookings. While we continue to acquire new customers, we also aim to deepen

relationships with these customers through high-margin services bookings. In

addition, we are investing in initiatives to drive sales productivity

improvements.

Annualized Recurring Revenue


We calculate Annualized Recurring Revenue, or ARR, by annualizing our actual

revenue from existing recurring customer contracts (as defined under “Bookings”

above) for the most recently completed fiscal quarter. ARR is not adjusted for

the impact of any known or projected future customer cancellations, service

upgrades or downgrades or price increases or decreases.

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We use ARR as a measure of our revenue trend and an indicator of our future

revenue opportunity from existing recurring customer contracts, assuming zero

cancellations. The amount of actual revenue that we recognize over any 12-month

period is likely to differ from ARR at the beginning of that period, sometimes

significantly. This may occur due to new Bookings, higher or lower professional

services revenue, subsequent changes in our pricing, service cancellations,

upgrades or downgrades and acquisitions or divestitures. Our calculation of ARR

may differ from similarly-titled metrics presented by other companies.

Our ARR was $2,576.4 million and $2,901.9 million for the three months ended

September 30, 2020 and 2021, respectively.

Key Components of Statement of Operations

Revenue


A substantial amount of our revenue, particularly within our Multicloud Services

segment, is generated pursuant to contracts that typically have a fixed term

(typically from 12 to 36 months). Our customers generally have the right to

cancel their contracts by providing us with written notice prior to the end of

the fixed term, though most of our contracts provide for termination fees in the

event of cancellation prior to the end of their term, typically amounting to the

outstanding value of the contract. These contracts include a monthly recurring

fee, which is determined based on the computing resources utilized and provided

to the customer, the complexity of the underlying infrastructure and the level

of support we provide. Our public cloud services within the Multicloud Services

segment and most of our Apps & Cross Platform and OpenStack Public Cloud

services generate usage-based revenue invoiced on a month-to-month basis and can

be canceled at any time without penalty. We also generate revenue from

usage-based fees and fees from professional services earned from customers using

our hosting and other services. We typically recognize revenue on a daily basis,

as services are provided, in an amount that reflects the consideration to which

we expect to be entitled in exchange for our services. Our usage-based

arrangements generally include a variable consideration component, consisting of

monthly utility fees, with a defined price and undefined quantity. Our customer

contracts also typically contain service level guarantees, including with

respect to network uptime requirements, that provide discounts when we fail to

meet specific obligations and, with respect to certain products, we may offer

volume discounts based on usage. As these variable consideration components

consist of a single distinct daily service provided on a single performance

obligation, we account for all of them as services are provided and earned.

Cost of revenue


Cost of revenue consists primarily of usage charges for third-party

infrastructure and personnel costs (including salaries, bonuses, benefits and

share-based compensation) for engineers, developers and other employees involved

in the delivery of services to our customers. Cost of revenue also includes

depreciation of servers, software and other systems infrastructure, data center

rent and other infrastructure maintenance and support costs, including software

license costs and utilities. Cost of revenue is driven mainly by demand for our

services, our service mix and the cost of labor in a given geography.

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Selling, general and administrative expenses (SG&A)

Selling, general and administrative expenses consist primarily of personnel

costs (including salaries, bonuses, commissions, benefits and share-based

compensation) for our sales force, executive team and corporate administrative

and support employees, including our human resources, finance, accounting and

legal functions. SG&A also includes research and development costs, repair and

maintenance of corporate infrastructure, facilities rent, third-party advisory

fees (including audit, legal and management consulting costs), marketing and

advertising costs and insurance, as well as the amortization of related

intangible assets and certain depreciation of fixed assets.

SG&A also includes transaction costs related to acquisitions and financings

along with costs related to integration and business transformation initiatives

which may impact the comparability of SG&A between periods. Employee related

costs and other costs incurred, as discussed in Item 1 of Part I, Financial

Statements – Note 8, “

July 2021

Restructuring Plan,” are also included within

SG&A.

Additionally, SG&A has historically included management fees. The management

consulting agreements were terminated on

August 4, 2020

, and therefore no

management fees will accrue or be payable for periods subsequent to that date,

thereby reducing our SG&A expenses; however, we also expect certain of our other

recurring SG&A costs to increase due to the expansion of accounting, legal,

investor relations and other functions, incremental insurance coverage and other

services needed to operate as a public company.

Income taxes


Our income tax benefit (provision) and deferred tax assets and liabilities

reflect management’s best assessment of estimated current and future taxes to be

paid. To date, we have recorded consolidated tax benefits, reflecting our net

losses, though certain of our non-

U.S.

subsidiaries have incurred corporate tax

expense according to the relevant taxing jurisdictions. We are under certain

domestic and foreign tax audits. Due to the complexity involved with certain tax

matters, there is the possibility that the various taxing authorities may

disagree with certain tax positions filed on our income tax returns. We believe

we have made adequate provision for all uncertain tax positions. See Item 1 of

Part I, Financial Statements – Note 10, “Taxes.”

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Results of Operations

We discuss our historical results of operations, and the key components of those

results, below. Past financial results are not necessarily indicative of future

results.

Three Months Ended September 30, 2020 Compared to Three Months Ended

September 30, 2021

The following table sets forth our results of operations for the specified

periods, as well as changes between periods and as a percentage of revenue for

those same periods (totals in table may not foot due to rounding):

Three Months Ended September 30,

2020 2021 Year-Over-Year Comparison

(In millions, except %) Amount % Revenue Amount % Revenue Amount % Change

Revenue

$ 681.7

100.0 %

$ 762.5

100.0 % $ 80.8 11.9 %

Cost of revenue (435.9) (63.9) % (530.8) (69.6) % (94.9) 21.8 %

Gross profit 245.8 36.1 % 231.7 30.4 % (14.1) (5.7) %

Selling, general and (260.5) (38.2) % (234.6) (30.8) % 25.9 (9.9) %

administrative expenses

Loss from operations (14.7) (2.2) % (2.9) (0.4) % 11.8 (80.3) %

Other income (expense):

Interest expense (68.3) (10.0) % (51.5) (6.8) % 16.8 (24.6) %

Debt modification and

extinguishment costs (37.0) (5.4) % – – % 37.0 (100.0) %

Other income, net 0.7 0.1 % 0.1 0.0 % (0.6) (85.7) %

Total other income (expense) (104.6) (15.3) % (51.4) (6.7) % 53.2 (50.9) %

Loss before income taxes (119.3) (17.5) % (54.3) (7.1) % 65.0 (54.5) %

Benefit for income taxes 18.1 2.7 % 19.5 2.5 % 1.4 7.7 %

Net loss

$ (101.2)

(14.8) %

$ (34.8)

(4.6) % $ 66.4 (65.6) %

Revenue

Revenue increased

$81 million

, or 11.9%, to

$763 million

in the three months

ended

September 30, 2021

from

$682 million

in the three months ended

September 30, 2020

. Revenue was positively impacted by new customer acquisition

and growing customer spend in our Multicloud Services and Apps & Cross Platform

segments, as discussed below.

After removing the impact of foreign currency fluctuations, on a constant

currency basis, revenue increased 10.9% year-over-year. The following table

presents revenue growth by segment:

Three Months Ended September 30, % Change

Constant Currency

(In millions, except %) 2020 2021 Actual (1)

Multicloud Services $ 542.1

$ 625.1

15.3 % 14.4 %

Apps & Cross Platform 83.9 92.8 10.5 % 9.9 %

Core Revenue 626.0 717.9 14.7 % 13.8 %

OpenStack Public Cloud 55.7 44.6 (19.9) % (21.0) %

Total $ 681.7

$ 762.5

11.9 % 10.9 %

(1) Refer to “Non-GAAP Financial Measures” in this section for further

explanation and reconciliation.

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Multicloud Services revenue in the three months ended

September 30, 2021

increased 15%, on an actual basis, and 14% on a constant currency basis, from

the three months ended

September 30, 2020

. Underlying growth was driven by both

the acquisition of new customers and increased spend by existing customers,

partially offset by cancellations by existing customers. Offerings in this

segment with the strongest growth include managed public cloud services on AWS,

Microsoft Azure and Google Cloud, and VMware Cloud.

Apps & Cross Platform revenue in the three months ended September 30, 2021

increased 11%, on an actual, and 10% on a constant currency basis, from the

three months ended September 30, 2020, primarily due to growth in our offerings

for managed security and management of productivity and collaboration

applications, partially offset by a decrease in professional services revenue.

OpenStack Public Cloud revenue in the three months ended September 30, 2021

decreased 20%, on an actual basis, and 21% on a constant currency basis, from

the three months ended September 30, 2020 due to customer churn.

Cost of Revenue


Cost of revenue increased

$95 million

, or 22%, to

$531 million

in the three

months ended

September 30, 2021

from

$436 million

in the three months ended

September 30, 2020

, primarily due to an increase in usage charges for

third-party infrastructure associated with growth in these offerings and the

impact of an increased volume of larger, multi-year customer contracts which

typically have a larger infrastructure component and lower margins. The increase

in third-party infrastructure was partially offset by a decline in personnel

costs primarily due to lower headcount as a result of restructuring activities,

including the

July 2021

Restructuring Plan, and the continued shift of roles to

lower-cost locations. Depreciation expense also decreased primarily related to

certain property, equipment and software reaching the end of its useful life for

depreciation purposes as we shift towards faster-growing, value-added service

offerings which have significantly lower capital requirements than our legacy

capital-intensive revenue streams. Additionally, in

March 2021

, we completed an

assessment of the useful lives of certain customer gear equipment which resulted

in a revision of certain useful lives within our policy ranges, further

contributing to the reduction in depreciation expense. We also had

year-over-year expense reductions in data center and license expenses as a

result of initiatives to lower our cost structure, which included the

consolidation of data center facilities and optimizing our vendor license

spending.

As a percentage of revenue, cost of revenue increased 570 basis points in the

three months ended

September 30, 2021

to 69.6% from 63.9% in the three months

ended

September 30, 2020

, primarily driven by a 1,320 basis point increase in

usage charges for third-party infrastructure, partially offset by a decrease

related to depreciation, personnel, data center, and license expense.

Gross Profit and Non-GAAP Gross Profit


Our consolidated gross profit was

$232 million

in the three months ended

September 30, 2021

, a decrease of

$14 million

from

$246 million

in the three

months ended

September 30, 2020

. Our Non-GAAP Gross Profit was

$250 million

in

the three months ended

September 30, 2021

, a decrease of

$5 million

from

$256

million

in the three months ended

September 30, 2020

. Non-GAAP Gross Profit is a

non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more

information. Our consolidated gross margin was 30.4% in the three months ended

September 30, 2021

, a decrease of 570 basis points from 36.1% in the three

months ended

September 30, 2020

.

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The table below presents our segment non-GAAP gross profit and gross margin for

the periods indicated, and the change in gross profit between periods:

Three Months Ended September 30,

(In millions, except %) 2020 2021 Year-Over-Year Comparison

% of Segment % of Segment

Non-GAAP gross profit by segment: Amount Revenue Amount Revenue Amount % Change

Multicloud Services

$ 202.5

37.4 %

$ 200.4

32.1 % $ (2.1) (1.0) %

Apps & Cross Platform 27.7 33.0 % 33.8 36.4 % 6.1 22.0 %

OpenStack Public Cloud 25.3 45.4 % 16.1 36.1 % (9.2) (36.4) %

Non-GAAP Gross Profit 255.5 250.3 (5.2) (2.0) %

Less:

Share-based compensation expense (4.5)

(4.0)


Other compensation expense (1) (1.5)

(0.4)

Purchase accounting impact on

expense (2) (1.2)

(1.2)


Restructuring and transformation

expenses (3) (2.5)

(13.0)


Total consolidated gross profit $ 245.8

$ 231.7

(1) Adjustments for retention bonuses, mainly in connection with restructuring and

transformation projects, and the related payroll tax, and payroll taxes associated

with the exercise of stock options and vesting of restricted stock.

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

expenses.

(3) Adjustment for the impact of business transformation and optimization activities, as

well as associated severance, facility closure costs and lease termination expenses.

This amount also includes certain costs associated with the July 2021 Restructuring

Plan which are not accounted for as exit and disposal costs under ASC 420, including

one-time offshore build out costs.


Multicloud Services non-GAAP gross profit decreased 1% in the three months ended

September 30, 2021

from the three months ended

September 30, 2020

. Segment

non-GAAP gross profit as a percentage of segment revenue decreased by 530 basis

points, reflecting a 25% increase in segment cost of revenue and a 15% increase

in segment revenue. The increase in costs was mainly driven by higher

third-party infrastructure costs, partially offset by lower personnel costs,

depreciation, data center, and license expense.

Apps & Cross Platform non-GAAP gross profit increased 22% in the three months

ended

September 30, 2021

from the three months ended

September 30, 2020

. Segment

non-GAAP gross profit as a percentage of segment revenue increased by 340 basis

points, reflecting a 5% increase in segment cost of revenue and an 11% increase

in segment revenue. The increase in cost of revenue was driven by the segment’s

higher business volume as well as higher third-party infrastructure costs.

OpenStack Public Cloud non-GAAP gross profit decreased 36% in the three months

ended

September 30, 2021

from the three months ended

September 30, 2020

due to

customer churn. Segment non-GAAP gross profit as a percentage of segment revenue

decreased by 930 basis points, reflecting a 20% decrease in segment revenue,

partially offset by a 6% decrease in segment cost of revenue.

The aggregate amount of costs reflected in consolidated gross profit but

excluded from segment non-GAAP gross profit was

$18.6 million

in the three

months ended

September 30, 2021

, an increase of

$8.9 million

from

$9.7 million

in the three months ended

September 30, 2020

, reflecting higher restructuring

and transformation expenses, partially offset by lower share-based compensation

and other compensation expense. For more information about our segment non-GAAP

gross profit, see Item 1 of Part I, Financial Statements – Note 14, “Segment

Reporting.”

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Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased

$26 million

, or 10%, to

$235 million

in the three months ended

September 30, 2021

from

$261 million

in

the three months ended

September 30, 2020

, primarily due to a reduction in

Onica

integration costs and costs incurred in the prior period related to the IPO,

including

$20 million

of share-based compensation expense for certain awards

that became probable of vesting upon completion of the IPO. These cost

reductions were partially offset by costs incurred in the three months ended

September 30, 2021

related to the

July 2021

Restructuring Plan, including

$16

million

of restructuring charges accounted for as exit and disposal costs under

ASC 420. See Item 1 of Part I, Financial Statements – Note 8, “

July 2021

Restructuring Plan,” for additional information.

As a percentage of revenue, selling, general and administrative expenses

decreased 740 basis points, to 30.8% in the three months ended

September 30,

2021

from 38.2% in the three months ended

September 30, 2020

, for the reasons

discussed above.

Interest Expense

Interest expense decreased

$17 million

to

$52 million

in the three months ended

September 30, 2021

from

$68 million

in the three months ended

September 30,

2020

, primarily driven by a reduction in total debt outstanding and lower

interest rates as a result of significant debt refinancing transactions between

periods.

Debt Modification and Extinguishment Costs


We recorded

$37 million

of debt modification and extinguishment costs in the

three months ended

September 30, 2020

related to the repurchase of

$515 million

principal amount of our 8.625% Senior Notes through a tender offer. The 8.625%

Senior Notes were fully repaid as of

December 31, 2020

.

Benefit for Income Taxes


Our income tax benefit increased to

$20 million

in the three months ended

September 30, 2021

from

$18 million

in the three months ended

September 30,

2020

. Our effective tax rate increased from 15.1% in the three months ended

September 30, 2020

to 35.8% in the three months ended

September 30, 2021

. The

increase in the effective tax rate year-over-year is primarily due to the

geographic distribution of profits, which included the release of historic tax

reserves due to statute expiration that resulted in a

$13.4 million

tax benefit,

application of the GILTI provisions and executive compensation that is

nondeductible under IRC Section 162(m). The difference between the effective tax

rate for the three months ended

September 30, 2021

and the statutory rate is

primarily due to the geographic distribution of profits, which included the

release of the aforementioned historic tax reserves due to statute expiration,

and application of the GILTI provisions.

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Nine Months Ended

September 30, 2020

Compared to Nine Months Ended

September 30,

2021

The following table sets forth our results of operations for the specified

periods, as well as changes between periods and as a percentage of revenue for

those same periods (totals in table may not foot due to rounding):

Nine Months

Ended September 30,


2020 2021 Year-Over-Year Comparison

(In millions, except %) Amount % Revenue Amount % Revenue Amount % Change

Revenue

$ 1,990.9

100.0 %

$ 2,232.2

100.0 % $ 241.3 12.1 %

Cost of revenue (1,253.9) (63.0) % (1,529.7) (68.5) % (275.8) 22.0 %

Gross profit 737.0 37.0 % 702.5 31.5 % (34.5) (4.7) %

Selling, general and (707.5) (35.5) % (698.2) (31.3) % 9.3 (1.3) %

administrative expenses

Gain on sale of land – – % 19.9 0.9 % 19.9 100.0 %

Income from operations 29.5 1.5 % 24.2 1.1 % (5.3) (18.0) %

Other income (expense):

Interest expense (209.2) (10.5) % (154.6) (6.9) % 54.6 (26.1) %

Gain (loss) on investments, net 0.9 0.0 % (3.6) (0.2) % (4.5) NM

Debt modification and

extinguishment costs (37.0) (1.9) % (37.5) (1.7) % (0.5) 1.4 %

Other income (expense), net 0.4 0.0 % (1.1) (0.0) % (1.5) NM

Total other income (expense) (244.9) (12.3) % (196.8) (8.8) % 48.1 (19.6) %

Loss before income taxes (215.4) (10.8) % (172.6) (7.7) % 42.8 (19.9) %

Benefit for income taxes 33.4 1.7 % 37.2 1.7 % 3.8 11.4 %

Net loss

$ (182.0)

(9.1) %

$ (135.4)

(6.1) % $ 46.6 (25.6) %

NM = not meaningful.

Revenue

Revenue increased

$241 million

, or 12.1%, to

$2,232 million

in the nine months

ended

September 30, 2021

from

$1,991 million

in the nine months ended

September 30, 2020

. Revenue was positively impacted by new customer acquisition

and growing customer spend in our Multicloud Services and Apps & Cross Platform

segments, as discussed below.

After removing the impact from foreign currency fluctuations, on a constant

currency basis, revenue increased 10.8% year-over-year. The following table

presents revenue growth by segment:


Nine Months Ended September 30, % Change

Constant Currency

(In millions, except %) 2020 2021 Actual (1)

Multicloud Services

$ 1,569.0 $ 1,809.8

15.3 % 13.9 %

Apps & Cross Platform 245.3 282.8 15.3 % 14.5 %

Core Revenue 1,814.3 2,092.6 15.3 % 14.0 %

OpenStack Public Cloud 176.6 139.6 (20.9) % (22.2) %

Total

$ 1,990.9 $ 2,232.2

12.1 % 10.8 %

(1) Refer to “Non-GAAP Financial Measures” in this section for further

explanation and reconciliation.


Multicloud Services revenue in the nine months ended

September 30, 2021

increased 15%, on an actual basis, and 14% on a constant currency basis, from

the nine months ended

September 30, 2020

. Underlying growth was primarily driven

by both the acquisition of new customers and increased spend by existing

customers, partially offset by cancellations by existing customers. Offerings in

this segment with the strongest growth include managed public cloud services on

AWS, Microsoft Azure and Google Cloud, and VMware Cloud.

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Apps & Cross Platform revenue in the nine months ended

September 30, 2021

increased 15%, on an actual and constant currency basis, from the nine months

ended

September 30, 2020

, primarily due to growth in our offerings for managed

security and management of productivity and collaboration applications,

partially offset by a decrease in professional services revenue.

OpenStack Public Cloud revenue in the nine months ended September 30, 2021

decreased 21%, on an actual basis, and 22% on a constant currency basis, from

the nine months ended September 30, 2020 due to customer churn.

Cost of Revenue


Cost of revenue increased

$276 million

, or 22%, to

$1,530 million

in the nine

months ended

September 30, 2021

from

$1,254 million

in the nine months ended

September 30, 2020

, primarily due to an increase in usage charges for

third-party infrastructure associated with growth in these offerings and the

impact of an increased volume of larger, multi-year customer contracts which

typically have a larger infrastructure component and lower margins. The increase

in third-party infrastructure was partially offset by a decline in personnel

costs primarily due to cost savings as a result of shifting roles to lower-cost

locations, partially offset by an increase in share-based compensation and

severance expense. Depreciation expense decreased primarily related to certain

property, equipment and software reaching the end of its useful life for

depreciation purposes as we shift towards faster-growing, value-added service

offerings which have significantly lower capital requirements than our legacy

capital-intensive revenue streams. Additionally, in

March 2021

, we completed an

assessment of the useful lives of certain customer gear equipment which resulted

in a revision of certain useful lives within our policy ranges, further

contributing to the reduction in depreciation expense. We also had

year-over-year expense reductions in data center and license expenses as a

result of initiatives to lower our cost structure, which included the

consolidation of data center facilities and optimizing our vendor license

spending.

As a percentage of revenue, cost of revenue increased 550 basis points in the

nine months ended

September 30, 2021

to 68.5% from 63.0% in the nine months

ended

September 30, 2020

, primarily driven by a 1,330 basis point increase in

usage charges for third-party infrastructure, partially offset by a decrease

related to personnel costs, depreciation, data center, and license expense.

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Gross Profit and Non-GAAP Gross Profit

Our consolidated gross profit was

$703 million

in the nine months ended

September 30, 2021

, a decrease of

$35 million

from

$737 million

in the nine

months ended

September 30, 2020

. Our Non-GAAP Gross Profit was

$750 million

in

the nine months ended

September 30, 2021

, a decrease of

$13 million

from

$763

million

in the nine months ended

September 30, 2020

. Non-GAAP Gross Profit is a

non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more

information. Our consolidated gross margin was 31.5% in the nine months ended

September 30, 2021

, a decrease of 550 basis points from 37.0% in the nine months

ended

September 30, 2020

.

The table below presents our segment non-GAAP gross profit and gross margin for

the periods indicated, and the change in gross profit between periods:


Nine Months Ended September 30,

(In millions, except %) 2020 2021 Year-Over-Year Comparison

% of Segment % of Segment

Non-GAAP gross profit by segment: Amount Revenue Amount Revenue Amount % Change

Multicloud Services $ 600.0 38.2 % $ 598.8 33.1 % $ (1.2) (0.2) %

Apps & Cross Platform 84.8 34.6 % 100.7 35.6 % 15.9 18.8 %

OpenStack Public Cloud 78.3 44.3 % 50.8 36.4 % (27.5) (35.1) %

Non-GAAP Gross Profit 763.1 750.3 (12.8) (1.7) %

Less:

Share-based compensation expense (8.6)

(13.2)


Other compensation expense (1) (4.9)

(2.1)

Purchase accounting impact on

expense (2) (4.7)

(3.6)


Restructuring and transformation

expenses (3) (7.9)

(28.9)


Total consolidated gross profit $ 737.0

$ 702.5

(1) Adjustments for retention bonuses, mainly in connection with restructuring and

transformation projects, and the related payroll tax, and payroll taxes associated

with the exercise of stock options and vesting of restricted stock.

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

expenses.

(3) Adjustment for the impact of business transformation and optimization activities, as

well as associated severance, facility closure costs and lease termination expenses.

This amount also includes certain costs associated with the July 2021 Restructuring

Plan which are not accounted for as exit and disposal costs under ASC 420, including

one-time offshore build out costs.


Multicloud Services non-GAAP gross profit was relatively flat year-over-year.

Segment non-GAAP gross profit as a percentage of segment revenue decreased by

510 basis points, reflecting a 25% increase in segment cost of revenue and a 15%

increase in segment revenue. The increase in costs was mainly driven by higher

third-party infrastructure costs, partially offset by lower personnel,

depreciation, data center, and license expense.

Apps & Cross Platform non-GAAP gross profit increased 19% in the nine months

ended

September 30, 2021

from the nine months ended

September 30, 2020

. Segment

non-GAAP gross profit as a percentage of segment revenue increased by 100 basis

points, reflecting a 13% increase in segment cost of revenue and a 15% increase

in segment revenue. The increase in cost of revenue was primarily driven by the

segment’s higher business volume as well as higher third-party infrastructure

costs.

OpenStack Public Cloud non-GAAP gross profit decreased 35% in the nine months

ended

September 30, 2021

from the nine months ended

September 30, 2020

, due to

customer churn. Segment non-GAAP gross profit as a percentage of segment revenue

decreased by 790 basis points, reflecting a 21% decrease in segment revenue,

partially offset by a 10% decrease in segment cost of revenue.

The aggregate amount of costs reflected in consolidated gross profit but

excluded from segment non-GAAP gross profit was

$47.8 million

in the nine months

ended

September 30, 2021

, an increase of

$21.7 million

from

$26.1 million

in the

nine months ended

September 30, 2020

, reflecting higher restructuring and

transformation expenses and share-based compensation, partially offset by lower

purchase accounting adjustments and other compensation expense. For more

information about our segment non-GAAP gross profit, see Item 1 of Part I,

Financial Statements – Note 14, “Segment Reporting.”

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Selling, General and Administrative Expenses

Selling, general and administrative expenses were relatively flat

year-over-year. Costs incurred in the nine months ended

September 30, 2021

related to the

July 2021

Restructuring Plan included

$23 million

of

restructuring charges accounted for as exit and disposal costs under ASC 420.

Other cost increases between periods include costs related to other business

transformation initiatives and incremental costs to operate as a public company.

These increased expenses were offset by a reduction in

Onica

integration costs,

costs incurred in the prior period related to the IPO, and management consulting

fees as the agreements were terminated in connection with the IPO. See Item 1 of

Part I, Financial Statements – Note 8, “

July 2021

Restructuring Plan” for

additional information regarding the current period restructuring charges.

As a percentage of revenue, selling, general and administrative expenses

decreased 420 basis points, to 31.3% in the nine months ended September 30, 2021

from 35.5% in the nine months ended September 30, 2020, for the reasons

discussed above.

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 1 of Part I, Financial Statements – Note

4, “Property, Equipment and Software, net.”

Interest Expense


Interest expense decreased

$55 million

to

$155 million

in the nine months ended

September 30, 2021

from

$209 million

in the nine months ended

September 30,

2020

, primarily driven by a reduction in total debt outstanding and lower

interest rates as a result of significant debt refinancing transactions between

periods.

Debt Modification and Extinguishment Costs


In the nine months ended

September 30, 2021

we recorded

$37 million

and

$0.5 million

of debt modification and extinguishment costs related to the

February 2021

Refinancing Transaction and termination of the Receivables

Financing Facility, respectively, as further discussed in Item 1 of Part I,

Financial Statements – Note 6, “Debt. We recorded

$37 million

of debt

modification and extinguishment costs in the nine months ended

September 30,

2020

related to the repurchase of

$515 million

principal amount of our 8.625%

Senior Notes through a tender offer. The 8.625% Senior Notes were fully repaid

as of

December 31, 2020

.

Benefit for Income Taxes

Our income tax benefit increased to

$37 million

in the nine months ended

September 30, 2021

from

$33 million

in the nine months ended

September 30, 2020

.

Our effective tax rate increased from 15.5% in the nine months ended

September 30, 2020

to 21.5% in the nine months ended

September 30, 2021

. The

increase in the effective tax rate year-over-year is primarily due to the

geographic distribution of profits, which included the release of historic tax

reserves due to statute expiration that resulted in a

$13.4 million

tax benefit,

and tax effects from share-based compensation. The difference between the

effective tax rate for the nine months ended

September 30, 2021

and the

statutory rate is primarily due to the geographic distribution of profits, which

included the release of the aforementioned historic tax reserves due to statue

expiration, and tax effects from share-based compensation.

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Non-GAAP Financial Measures

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

underlying financial performance. The following discussion includes the

presentation of constant currency revenue, Non-GAAP Gross Profit, Non-GAAP Net

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

Per Share (“EPS”), which are non-GAAP financial measures that exclude the impact

of certain costs, losses and gains that are required to be included in our

profit and loss measures under GAAP. Although we believe these measures are

useful to investors and analysts for the same reasons they are useful to

management, as discussed below, these measures are not a substitute for, or

superior to,

U.S.

GAAP financial measures or disclosures. Other companies may

calculate similarly-titled non-GAAP measures differently, limiting their

usefulness as comparative measures. We have reconciled each of these non-GAAP

measures to the applicable most comparable GAAP measure throughout this MD&A.

Constant Currency Revenue


We use constant currency revenue as an additional metric for understanding and

assessing our growth excluding the effect of foreign currency rate fluctuations

on our international business operations. Constant currency information compares

results between periods as if exchange rates had remained constant period over

period and is calculated by translating the non-

U.S.

dollar income statement

balances for the most current period to

U.S.

dollars using the average exchange

rate from the comparative period rather than the actual exchange rates in effect

during the respective period. We also believe this is an important metric to

help investors evaluate our performance in comparison to prior periods.

The following table presents, by segment, actual and constant currency revenue

and constant currency revenue growth rates, for and between the periods

indicated:

Three Months

Ended September

30, 2020 Three Months Ended September 30, 2021 % Change

Revenue in

Foreign Currency Constant

(In millions, except %) Revenue Revenue Translation (a) Currency Actual Constant Currency

Multicloud Services

$ 542.1 $ 625.1

$ (5.1)

$ 620.0

15.3 % 14.4 %

Apps & Cross Platform 83.9 92.8 (0.5) 92.3 10.5 % 9.9 %

OpenStack Public Cloud 55.7 44.6 (0.7) 43.9 (19.9) % (21.0) %

Total

$ 681.7 $ 762.5

$ (6.3)

$ 756.2

11.9 % 10.9 %

(a) The effect of foreign currency is calculated by translating current period results using the

average exchange rate from the prior comparative period.

Nine Months

Ended September

30, 2020 Nine Months Ended September 30, 2021 % Change

Revenue in

Foreign Currency Constant

(In millions, except %) Revenue Revenue Translation (a) Currency Actual Constant Currency

Multicloud Services

$ 1,569.0 $ 1,809.8

$ (22.3)

$ 1,787.5

15.3 % 13.9 %

Apps & Cross Platform 245.3 282.8 (1.9) 280.9 15.3 % 14.5 %

OpenStack Public Cloud 176.6 139.6 (2.3) 137.3 (20.9) % (22.2) %

Total

$ 1,990.9 $ 2,232.2

$ (26.5)

$ 2,205.7

12.1 % 10.8 %

(a) The effect of foreign currency is calculated by translating current period results using the

average exchange rate from the prior comparative period.

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Non-GAAP Gross Profit

Our principal measure of segment profitability is segment non-GAAP gross profit.

We also present Non-GAAP Gross Profit in this MD&A, which is the aggregate of

segment non-GAAP gross profit, because we believe the measure is useful in

analyzing trends in our underlying, recurring gross margins. We define Non-GAAP

Gross Profit as our consolidated gross profit, adjusted to exclude the impact of

share-based compensation expense and other non-recurring or unusual compensation

items, purchase accounting-related effects, and certain business

transformation-related costs. For a reconciliation of our Non-GAAP Gross Profit

to our total consolidated gross profit, see “Gross Profit and Non-GAAP Gross

Profit” above.

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


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

EBITDA because they are a basis upon which management assesses our performance

and we believe they are useful to evaluating our financial performance. We

believe that excluding items from net income that may not be indicative of, or

are unrelated to, our core operating results, and that may vary in frequency or

magnitude, enhances the comparability of our results and provides a better

baseline for analyzing trends in our business.

The Rackspace Acquisition was structured as a leveraged buyout of Rackspace

Technology Global, our Predecessor, and resulted in several accounting and

capital structure impacts. For example, the revaluation of our assets and

liabilities resulted in a significant increase in our amortizable intangible

assets and goodwill, the incurrence of a significant amount of debt to partially

finance the Rackspace Acquisition resulted in interest payments that reflect our

high leverage and cost of debt capital, and the conversion of Rackspace

Technology Global’s unvested equity compensation into a cash-settled bonus plan

and obligation to pay management fees to our equityholders resulted in new cash

commitments. In addition, the change in ownership and management resulting from

the Rackspace Acquisition led to a strategic realignment in our operations that

had a significant impact on our financial results. Following the Rackspace

Acquisition, we acquired several businesses, sold businesses and investments

that we deemed to be non-core and launched multiple integration and business

transformation initiatives intended to improve the efficiency of people and

operations and identify recurring cost savings and new revenue growth

opportunities. We believe that these transactions and activities resulted in

costs, which have historically been substantial, and that may not be indicative

of, or are not related to, our core operating results, including interest

related to the incurrence of additional debt to finance acquisitions and third

party legal, advisory and consulting fees and severance, retention bonus and

other internal costs that we believe would not have been incurred in the absence

of these transactions and activities and also may not be indicative of, or

related to, our core operating results.

We define Non-GAAP Net Income (Loss) as net income (loss) adjusted to exclude

the impact of non-cash charges for share-based compensation, special bonuses and

other compensation expense, transaction-related costs and adjustments,

restructuring and transformation charges, management fees, the amortization of

acquired intangible assets 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 net income (loss), plus interest expense

and income taxes, further 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, management fees, the amortization of acquired intangible assets and

certain other non-operating, non-recurring or non-core gains and losses.

We define Adjusted EBITDA as Non-GAAP Operating Profit plus depreciation and

amortization.


Non-GAAP Operating Profit and Adjusted EBITDA are management’s principal metrics

for measuring our underlying financial performance. Adjusted EBITDA, along with

other quantitative and qualitative information, is also the principal financial

measure used by management and our board of directors in determining

performance-based compensation for our management and key employees.

These non-GAAP measures are not intended to imply that we would have generated

higher income or avoided net losses if the Rackspace Acquisition and the

subsequent transactions and initiatives had not occurred. In the future we may

incur expenses or charges such as those added back to calculate Non-GAAP Net

Income (Loss), Non-GAAP Operating Profit or Adjusted EBITDA. Our presentation of

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

not be construed as an inference that our future results will be unaffected by

these items. Other companies, including our peer companies, may calculate

similarly-titled measures in a different manner from us, and therefore, our

non-GAAP measures may not be comparable to similarly-titled measures of other

companies. Investors are cautioned against using these measures to the exclusion

of our results in accordance with GAAP.

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The following table presents a reconciliation of Non-GAAP Net Income (Loss),

Non-GAAP Operating Profit and Adjusted EBITDA to our net loss for the periods

indicated:

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2020 2021 2020 2021

Net loss

$ (101.2)

$

(34.8) $ (182.0) $ (135.4)

Share-based compensation expense


40.2 19.1 56.8 56.7

Special bonuses and other compensation

expense (a) 5.0 2.1 19.1 9.1

Transaction-related adjustments, net (b) 18.9 6.5 35.4 21.8

Restructuring and transformation expenses

(c) 22.6 55.2 59.7 132.9

Management fees (d) 1.3 – 8.4 –

Gain on sale of land – – – (19.9)

Net (gain) loss on divestiture and

investments (e) – – (0.9) 3.6

Debt modification and extinguishment costs

(f) 37.0 – 37.0 37.5

Other (income) expense, net (g) (0.7) (0.1) (0.4) 1.1

Amortization of intangible assets (h) 44.1 43.9 132.3 137.4

Tax effect of non-GAAP adjustments (i) (30.8) (38.3) (67.7) (91.2)

Non-GAAP Net Income 36.4 53.6 97.7 153.6

Interest expense 68.3 51.5 209.2 154.6

Benefit for income taxes (18.1) (19.5) (33.4) (37.2)

Tax effect of non-GAAP adjustments (i) 30.8 38.3 67.7 91.2

Non-GAAP Operating Profit 117.4 123.9 341.2 362.2

Depreciation (j) 73.4 59.2 222.8 180.4

Adjusted EBITDA

$ 190.8 $ 183.1

$ 564.0

$ 542.6

(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.

(b) Includes legal, professional, accounting and other advisory fees related to the

acquisition of Onica in the fourth quarter of 2019 and the IPO in the third quarter of

2020, integration costs of acquired businesses, purchase accounting adjustments

(including deferred revenue fair value discount), payroll costs for employees that

dedicate significant time to supporting these projects and exploratory acquisition and

divestiture costs and expenses related to financing activities.

(c) Includes consulting and advisory fees related to business transformation and

optimization activities, payroll costs for employees that dedicate significant time to

these projects, as well as associated severance, facility closure costs, and lease

termination expenses. This amount also includes employee related costs and other costs

related to the July 2021 Restructuring Plan of $16.1 million and $22.5 million,

respectively, for the three and nine months ended September 30, 2021, which are

accounted for as exit and disposal costs under ASC 420. In addition, it includes

certain costs associated with the July 2021 Restructuring Plan which are not accounted

for as exit and disposal costs under ASC 420, including one-time offshore build out

costs.

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

The management consulting agreements were terminated effective August 4, 2020, and

therefore no management fees have accrued or will be payable for periods after August

4, 2020.

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

(f) Includes expenses related to repurchases of 8.625% Senior Notes, the February 2021

Refinancing Transaction and termination of the Receivables Financing Facility.

(g) Reflects mainly changes in the fair value of foreign currency derivatives.

(h) All of our intangible assets are attributable to acquisitions, including the Rackspace

Acquisition in 2016.

(i) We utilize an estimated structural long-term non-GAAP tax rate in order to provide

consistency across reporting periods, removing the effect of non-recurring tax

adjustments, which include but are not limited to tax rate changes, U.S. tax reform,

share-based compensation, audit conclusions and changes to valuation allowances. When

computing this long-term rate for the 2020 and 2021 interim periods, we based it on an

average of the 2019 and estimated 2020 tax rates and 2020 and estimated 2021 tax

rates, respectively, recomputed to remove the tax effect of non-GAAP pre-tax

adjustments and non-recurring tax adjustments, resulting in a structural non-GAAP tax

rate of 26% for all periods. The non-GAAP tax rate could be subject to change for a

variety of reasons, including the rapidly evolving global tax environment, significant

changes in our geographic earnings mix including due to acquisition activity, or other

changes to our strategy or business operations. We will re-evaluate our long-term

non-GAAP tax rate as appropriate. We believe that making these adjustments facilitates

a better evaluation of our current operating performance and comparisons to prior

periods.

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

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Non-GAAP Earnings Per Share (EPS)

We define Non-GAAP EPS as Non-GAAP Net Income divided by our GAAP weighted

average number of shares outstanding for the period on a diluted basis and

further adjusted for the weighted average number of shares associated with

securities which are anti-dilutive to GAAP earnings per share but dilutive to

Non-GAAP EPS. Management uses Non-GAAP EPS to evaluate the performance of our

business on a comparable basis from period to period, including by adjusting for

the impact of the issuance of shares that would be dilutive to Non-GAAP EPS. The

following table reconciles Non-GAAP EPS to our GAAP net loss per share on a

diluted basis:

Three Months Ended September 30, Nine Months Ended September 30,

(In millions, except per share

amounts) 2020 2021 2020 2021

Net loss attributable to common

stockholders

$ (101.2) $ (34.8)

$ (182.0)

$ (135.4)

Non-GAAP Net Income

$ 36.4 $ 53.6

$ 97.7

$ 153.6

Weighted average number of shares –

Diluted 186.7 209.3 172.6 207.3

Effect of dilutive securities (a) 5.9 2.6 2.8 4.8

Non-GAAP weighted average number of

shares – Diluted 192.6 211.9 175.4 212.1

Net loss per share – Diluted

$ (0.54) $ (0.17)

$ (1.05)

$ (0.65)

Per share impacts of adjustments to

net loss (b) 0.74 0.42 1.62 1.39

Per share impacts of shares dilutive

after adjustments to net loss (a) (0.01) (0.00) (0.01) (0.02)

Non-GAAP EPS

$ 0.19 $ 0.25

$ 0.56

$ 0.72

(a) Reflects impact of awards that would have been anti-dilutive to Net loss per share,

and therefore not included in the calculation, but would be dilutive to Non-GAAP EPS

and are therefore included in the share count for purposes of this non-GAAP measure.

Potential common share equivalents consist of shares issuable upon the exercise of

stock options, vesting of restricted stock or purchase under the Employee Stock

Purchase Plan (the “ESPP”), as well as contingent shares associated with our

acquisition of Datapipe Parent, Inc. Certain of our potential common share equivalents

are contingent on Apollo achieving pre-established performance targets based on a

multiple of their invested capital (“MOIC”), which are included in the denominator for

the entire period if such shares would be issuable as of the end of the reporting

period assuming the end of the reporting period was the end of the contingency period.

(b) Reflects the aggregate adjustments made to reconcile Non-GAAP Net Income to our net

loss, as noted in the above table, divided by the GAAP diluted number of shares

outstanding for the relevant period.

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Liquidity and Capital Resources

Overview

We primarily finance our operations and capital expenditures with

internally-generated cash from operations and hardware leases, and if necessary,

borrowings under the Revolving Credit Facility. As of

September 30, 2021

, the

Revolving Credit Facility provided for up to

$375 million

of borrowings, none of

which was drawn as of

September 30, 2021

. On

June 29, 2021

, as part of our

on-going efforts to reduce debt, we entered into an agreement to voluntarily

prepay and terminate the Receivables Financing Facility. As of

September 30,

2021

, we had no remaining outstanding balance under the Receivables Financing

Facility. We believe our Revolving Credit Facility will provide sufficient

liquidity, if needed, to cover amounts that we may have previously drawn upon

under the terminated facility. Our primary uses of cash are working capital

requirements, debt service requirements and capital expenditures. Based on our

current level of operations and available cash, we believe our sources will

provide sufficient liquidity over at least the next twelve months. We cannot

provide assurance, however, that our business will generate sufficient cash

flows from operations or that future borrowings will be available to us under

the Revolving Credit Facility or from other sources in an amount sufficient to

enable us to pay our indebtedness or to fund our other liquidity needs. Our

ability to do so depends on prevailing economic conditions and other factors,

many of which are beyond our control. In addition, upon the occurrence of

certain events, such as a change of control, we could be required to repay or

refinance our indebtedness. We cannot assure that we will be able to refinance

any of our indebtedness, including the Senior Facilities, the 5.375% Senior

Notes, and the 3.50% Senior Secured Notes (see discussion below), on

commercially reasonable terms or at all. Any future acquisitions, joint ventures

or other similar transactions will likely require additional capital, and there

can be no assurance that any such capital will be available to us on acceptable

terms or at all.

From time to time, depending upon market and other conditions, as well as upon

our cash balances and liquidity, we, our subsidiaries or our affiliates may

acquire (and have acquired) our outstanding debt securities or our other

indebtedness through open market purchases, privately negotiated transactions,

tender offers, redemption or otherwise, upon such terms and at such prices as

we, our subsidiaries or our affiliates may determine (or as may be provided for

in the indenture governing the 5.375% Senior Notes (the “5.375% Notes

Indenture”) or the indenture governing the 3.50% Senior Secured Notes (the

“3.50% Notes Indenture” and, together with the 5.375% Notes Indenture, the

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

At

September 30, 2021

, we held

$260 million

in cash and cash equivalents (not

including

$3 million

in restricted cash, which is included in “Other non-current

assets”), of which

$119 million

was held by foreign entities.

We have entered into installment payment arrangements with certain equipment and

software vendors, along with sale-leaseback arrangements for equipment and

certain property leases that are considered financing obligations. We had

$124

million

outstanding with respect to these arrangements as of

September 30, 2021

.

We may choose to utilize these various sources of funding in future periods.

We also lease certain equipment and real estate under operating and finance

lease agreements. We had

$572 million

outstanding with respect to operating and

finance lease agreements as of

September 30, 2021

. We may choose to utilize such

leasing arrangements in future periods.

As of

September 30, 2021

, we had

$3,389 million

aggregate principal amount

outstanding under our Term Loan Facility, 5.375% Senior Notes, and 3.50% Senior

Secured Notes, with

$375 million

of borrowing capacity available under the

Revolving Credit Facility. Our liquidity requirements are significant, primarily

due to debt service requirements.

On

February 2, 2021

, we issued 2,665,935 shares of common stock to DPH 123, LLC,

an

ABRY

affiliate, for no additional consideration pursuant to the Agreement and

Plan of Merger, dated as of

September 6, 2017

, (the “Datapipe Merger Agreement”)

in connection with our

November 15, 2017

acquisition of

Datapipe Parent, Inc.

We

will be required to issue additional shares of our common stock to DPH 123, LLC

based on the MOIC exceeding certain thresholds as defined in the Datapipe Merger

Agreement. If the MOIC exceeds 3.0x, which is indicated by a volume weighted

average trading price (“VWAP”) 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.

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Debt

Senior Facilities

On

February 9, 2021

, we amended and restated the credit agreement (the “First

Lien Credit Agreement”) governing our senior secured credit facilities, which

included a new seven-year

$2,300 million

senior secured first lien term loan

facility (the “Term Loan Facility”) and the Revolving Credit Facility (together,

the “Senior Facilities”). We used the borrowings under the Term Loan Facility,

together with the proceeds from the issuance of the 3.50% Senior Secured Notes

described below (together, the “

February 2021

Refinancing Transaction”), to

repay all borrowings under the prior term loan facility (the “Prior Term Loan

Facility”), to pay related fees and expenses and for general corporate purposes.

The Term Loan Facility will mature on

February 15, 2028

and the Revolving Credit

Facility will mature on

August 7, 2025

. We may request one or more incremental

term loan facilities, one or more incremental revolving credit facilities and/or

increase the commitments under the Revolving Credit Facility in an amount equal

to the greater of

$860 million

and 1.0x Pro Forma Adjusted EBITDA (as defined in

the amended First Lien Credit Agreement), plus additional amounts, subject to

compliance with applicable leverage ratios and certain terms and conditions.

Interest on the Term Loan Facility is due at the end of each interest period

elected, not exceeding 90 days, for LIBOR loans and at the end of every calendar

quarter for base rate loans. As of

September 30, 2021

, the interest rate on the

Term Loan Facility was 3.50%. Beginning

June 30, 2021

, we are required to make

quarterly amortization payments on the Term Loan Facility in an annual amount

equal to 1.0% of the original principal amount of the Term Loan Facility, with

the balance due at maturity. The Revolving Credit Facility includes a commitment

fee equal to 0.50% per annum in respect of the unused commitments that is due

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

leverage ratio. The Senior Facilities require us to make certain mandatory

prepayments under certain conditions defined in the credit agreement.

Rackspace Technology Global, our wholly-owned subsidiary, is the borrower under

the Senior Facilities, and all obligations under the Senior Facilities are (i)

guaranteed by Inception Parent, Rackspace Technology Global’s immediate parent

company, on a limited recourse basis and secured by the equity interests of

Rackspace Technology Global held by Inception Parent and (ii) guaranteed by

Rackspace Technology Global’s wholly-owned domestic restricted subsidiaries and

secured by substantially all material owned assets of

Rackspace Technology

Global and the subsidiary guarantors, including the equity interests held by

each, in each case subject to certain exceptions.

As of

September 30, 2021

,

$2,289 million

aggregate principal amount of the Term

Loan Facility remained outstanding. See Item 1 of Part I, Financial Statements –

Note 6, “Debt,” for more information regarding our Senior Facilities and the

February 2021

Refinancing Transaction.

We have entered into interest rate swap agreements to manage the interest rate

risk associated with interest payments on the Term Loan Facility that result

from fluctuations in the LIBOR rate. See Item 1 of Part I, Financial Statements

– Note 11, “Derivatives,” for more information on the interest rate swap

agreements.

5.375% Senior Notes due 2028


Rackspace Technology Global issued

$550 million

aggregate principal amount of

the 5.375% Senior Notes on

December 1, 2020

. The 5.375% Senior Notes will mature

on

December 1, 2028

and bear interest at a fixed rate of 5.375% per year,

payable semi-annually on each

June 1

and

December 1

, commencing on

June 1, 2021

through maturity. The 5.375% Senior Notes are guaranteed on a senior unsecured

basis by all of Rackspace Technology Global’s wholly-owned domestic restricted

subsidiaries that guarantee the Senior Facilities.

As of September 30, 2021, $550 million aggregate principal amount of the 5.375%

Senior Notes remained outstanding.

3.50% Senior Secured Notes due 2028


On

February 9, 2021

, Rackspace Technology Global issued

$550 million

aggregate

principal amount of 3.50% Senior Secured Notes. The 3.50% Senior Secured Notes

will mature on

February 15, 2028

and bear interest at an annual fixed rate of

3.50%. Interest is payable semiannually on each

February 15

and

August 15

,

commencing on

August 15, 2021

. We may redeem some or all of the 3.50% Senior

Secured Notes at our option prior to

February 15, 2024

subject to certain

limitations and conditions outlined in the 3.50% Notes Indenture.

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The 3.50% Senior Secured Notes are secured by first-priority security interests

in substantially all material owned assets of Rackspace Technology Global and

the subsidiary guarantors, including the equity interest held by each, subject

to certain exceptions, which assets also secure the Senior Facilities.

As of September 30, 2021, $550 million aggregate principal amount of the 3.50%

Senior Secured Notes remained outstanding.

Debt covenants


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

September 30, 2021

, our 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 contain covenants that, among other things, limit our

subsidiaries’ ability to incur certain additional debt, incur certain liens

securing debt, pay certain dividends or make other restricted payments, make

certain investments, make certain asset sales and enter into certain

transactions with affiliates. These covenants are subject to a number of

exceptions, limitations, and qualifications as set forth in the Indentures.

Additionally, upon the occurrence of a change of control (as defined in the

Indentures), we will be required to make an offer to repurchase all of the

outstanding 5.375% Senior Notes and 3.50% Senior Secured Notes, respectively, at

a price in cash equal to 101% of the aggregate principal amount, plus accrued

and unpaid interest, if any, to, but not including the purchase date.

Our “consolidated EBITDA,” as defined under our debt instruments, is calculated

in the same manner as our Adjusted EBITDA, presented elsewhere in this report,

except that our debt instruments allow us to adjust for additional items,

including certain start-up costs, and to give pro forma effect to acquisitions,

including resulting synergies, and internal cost savings initiatives. In

addition, under the Indentures, the calculation of consolidated EBITDA does not

take into account substantially any changes in GAAP subsequent to the date of

issuance, whereas under the Senior Facilities the calculation of consolidated

EBITDA takes into account the impact of certain changes in GAAP subsequent to

the original closing date other than with respect to capital leases.

As of September 30, 2021, we were in compliance with all covenants under the

Senior Facilities and the Indentures.

Capital Expenditures


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

periods indicated:

Nine Months Ended September 30,

(In millions) 2020 2021

Customer gear $ 105.0

$ 104.9

Data center build outs 13.2 10.6

Office build outs 2.5 1.9

Capitalized software and other projects 53.4 58.3

Total capital expenditures $

174.1 $ 175.7

Capital expenditures were relatively flat year-over-year, at $176 million in the

nine months ended September 30, 2021, compared to $174 million in the nine

months ended September 30, 2020.

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Cash Flows


The following table sets forth a summary of certain cash flow information for

the periods indicated:

Nine Months Ended September 30,

(In millions) 2020 2021

Cash provided by operating activities $ 132.7

$ 311.2

Cash used in investing activities $ (92.2)

$ (52.2)

Cash provided by (used in) financing activities $

128.5 $ (101.6)

Cash Provided by Operating Activities


Net cash provided by operating activities results primarily from cash received

from customers, offset by cash payments made for employee and consultant

compensation (less amounts capitalized related to internal-use software that are

reflected as cash used in investing activities), data center costs, license

costs, third-party infrastructure costs, marketing programs, interest, taxes,

and other general corporate expenditures.

Net cash provided by operating activities increased

$179 million

, or 135%, in

the nine months ended

September 30, 2021

compared to the nine months ended

September 30, 2020

. This increase was primarily driven by a

$321 million

increase in cash collections, primarily reflecting higher revenue levels and an

increased focus on collection efforts with customers, and to a lesser extent,

timing of collections. In addition, there was a

$61 million

decrease in debt

interest payments due to lower interest rates on our long-term debt following

various debt repurchase and refinancing transactions during the second half of

2020 and early 2021, and a

$39 million

decrease in employee-related payments due

to a shift in headcount to our offshore service centers. These operating cash

flow increases were partially offset by a

$230 million

increase in operating

expense payments, largely for third-party infrastructure costs.

Cash Used in Investing Activities

Net cash used in investing activities primarily consists of capital expenditures

to meet the demands of our customer base and our strategic initiatives. The

largest outlays of cash are for purchases of customer gear, data center and

office build outs, and capitalized payroll costs related to internal-use

software development.


Net cash used in investing activities decreased

$40 million

, or 43%, in the nine

months ended

September 30, 2021

compared to the nine months ended

September 30,

2020

. This decrease was mainly due to net proceeds of

$31 million

from the

January 2021

sale of a parcel of undeveloped land in the

United Kingdom

adjacent

to one of our existing data centers. There was also a

$10 million

decrease in

purchases of property, equipment, and software.

Cash Provided by or 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 was

$102 million

for the nine months ended

September 30, 2021

and net cash provided by financing activities was

$129

million

for the nine months ended

September 30, 2020

. The change was primarily

driven by

$667 million

in proceeds from the issuance of common stock in the IPO,

not including

$8 million

in fees paid, for the nine months ended

September 30,

2020

, partially offset by a

$435 million

decrease in net debt activity. Net

payments for long-term debt activity of

$503 million

during the nine months

ended

September 30, 2020

, which included

$545 million

of repayments on our

8.625% Senior Notes,

$22 million

of repayments on our Prior Term Loan Facility,

and

$1 million

in debt issuance costs paid, offset by borrowings of

$65 million

under the Receivables Financing Facility that remained outstanding at

quarter-end. Net payments for long-term debt activity were

$68 million

during

the nine months ended

September 30, 2021

, reflecting the refinancing of our

Prior Term Loan Facility, a

$65 million

repayment related to the termination of

our Receivables Financing Facility, and

$34 million

in debt issuance costs paid.

In addition, there was a

$40 million

increase in proceeds from employee stock

plans, a

$21 million

increase in payments for finance leases and the first two

payments for the financing component of our interest rate swaps totaling

$9

million

during the nine months ended

September 30, 2021

, offset by proceeds from

financing obligations of

$21 million

during the nine months ended

September 30,

2020

.

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Critical Accounting Policies and Estimates

Our critical accounting policies and estimates have not changed from those

described in our Annual Report on Form 10-K under “Management’s Discussion and

Analysis of Financial Condition and Results of Operations – Critical Accounting

Policies and Estimates.” For a description of accounting pronouncements recently

adopted and issued, see Item 1 of Part I, Financial Statements – Note 1,

“Company Overview, Basis of Presentation, and Summary of Significant Accounting

Policies.”

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