Rackspace’s intention not to sell leaves Wall Street wary

Rackspace Technology Inc. has decided to go it alone.

The cloud-computing services provider, the largest technology company in San Antonio, confirmed that it has chosen not to sell itself, ending a process that involved at least one potential buyer.

Instead, the company said it will pursue the restructuring plan that its management team referred to during its second-quarter earnings report this month, which includes realigning itself into separate business units for private and public clouds.

“We did evaluate several strategic options, including an inbound interest,” Casey Shilling, chief marketing officer at Rackspace, said in email Monday. “We decided that continuing to execute our strategy in the hypergrowth multicloud market as a stand-alone company is our best path forward for value creation.”

With the decision, Rackspace ended months of confusion and rumors among local tech leaders over its future. And it spurred new questions as financial analysts voiced concerns about the company’s intention not to sell.

In May, Rackspace CEO Kevin Jones raised the possibility of selling parts of the company. It completed a “strategic review” after being approached by an entity interested in one of its businesses.

“We concluded that a sum of the parts of Rackspace Technology could be greater than our current enterprise value,” Jones said at the time.

The company said it has experienced growth in public cloud services and that it was evaluating strategic options “to take advantage of the public cloud market opportunity and sharpen our focus.”

On Aug. 9, amid widespread speculation, Jones told analysts and investors during the second-quarter earnings call that the company would likely announce its restructuring plan this fall. He said the company had “received very positive feedback” about its plans from “key” partners Amazon, Google, Microsoft and VMware.

“We are nearing the point where we can provide additional details on our go-forward game plan, including any additional decisions regarding the structure of the company, later this fall,” Jones said.

Several Rackspace Technology Inc. employees break for lunch in March 2019. The company recently laid off several hundred employees, including ones who worked in the company’s headquarters in Windcrest.

Marvin Pfeiffer, Staff photographer

Meanwhile, Rackspace reported a widening loss in the second quarter, despite an 11th-straight quarter of revenue growth. Its $41 million loss in the recent quarter was up 11 percent — from $37 million — during second quarter 2021. Revenue increased nearly 4 percent year over year, to $772 million from $744 million.

Afterward, analysts covering Rackspace moved to downgrade the company’s shares.

“The company has abandoned the strategic options exploration in favor of restructuring themselves as a stand-alone entity,” Raymond James analyst Frank Louthan said in a note. “A large part of our upgrade thesis was the two paths to shareholder value, and with the quickest one (a sale of all or part of the business) now off the table, we are left to wait for a restructuring.”

The following day, Rackspace’s share prices plummeted 16 percent to $5.80. The stock price fell to a low of $5.14 on Aug. 23 and was hovering around $5.30 the next day.

The restructuring plan

On Monday, Shilling said Rackspace is moving forward with “focusing on both” public and private cloud markets.

Private clouds support services controlled by one business or organization, while public clouds are subscription services shared with customers over the internet.

Rackspace is seeing “huge opportunity” in the public cloud market, as tech giants continue to leverage the growing cloud-computing industry while adding $10 billion of new revenue in the second quarter, Shilling said.

“Over time,” she said, “we believe that for every dollar a company spends on infrastructure, they will spend significantly more on services, so the services opportunity can be many multiples the size of the infrastructure revenue.”

The company also expects “big opportunities” in the private market, as companies in health care, financial services, technology and other industries move to multicloud in search of data protection, security and privacy. “It is also often less expensive for customers to run their workloads in private cloud instead of public cloud,” Shilling said.

Shilling noted that artificial intelligence can be hosted in private clouds. The company, she said, believes that its years of experience in private cloud, its data center footprint and Rackspace Fabric positions it to seize opportunities in private cloud services.

Skepticism on the Street

While the company expresses optimism, Wall Street analysts have been skeptical.

Citi analyst Ashwin Shrivaikar earlier this month downgraded his rating for Rackspace’s stock to neutral from buy, slashing his price target to $7 from $13.

“Rackspace posted an overall disappointing quarter that included a top-line miss and a lower-than-expected outlook,” he wrote in a research note.

Louthan at Raymond James dropped his stock rating to market perform from outperform and removed his $12 target price.

“Management is making investments in the sales and other parts of the organization, which we believe will eventually show some positive results,” Louthan said in a note. “That said, in our experience, it often takes 12 months or longer for a new sales organization to hit its stride, and the existing team is ineffective as it adapts to the new targets and account focus.”

Credit Suisse analyst Kevin McVeigh maintained an outperform stock rating but lowered his price target to $10 from $12.

He said Rackspace’s stock “should react negatively” after a second-quarter “revenue miss” and “disappointing” third-quarter guidance. He would “wait for Rackspace to provide more details around its future structure” and called for the company to “develop and execute a plan positioning it for gross margin stabilization.”

He said expanding Rackspace’s business among current clients is more important than landing new ones.

In response, Rackspace said it has “a land and expand strategy” with its customers.

“Both landing and expanding are important as we help customers along their cloud journey,” Shilling said. “The realignment into two business units will sharpen our delivery execution, product development and go-to-market capabilities.”

Kevin Jones is CEO of Rackspace Technology Inc.

Courtesy of Rackspace

Acquisitions and partnerships

Founded in 1998, Rackspace went public in August 2008 and spent roughly eight years competing with tech giants such as Amazon, Microsoft and Google to host websites for clients. But the company couldn’t keep up and lost about 60 percent of its market during that time.

In November 2016, New York private equity powerhouse Apollo Global Management took the company — then known as Rackspace Hosting Inc. — private in a $4.3 billion deal. Rackspace embarked on a new strategy: Join the competition to help customers move their data to private and public clouds.

In August 2020, Rackspace underwent the second initial public offering in its history. After opening at $21 a share, the stock price fell below $16 before rebounding over the next few months to a high of $26.43 per share in April 2021. Since then, however, the stock prices has steadily fallen to its current level.

Under Apollo, Rackspace went on an acquisition spree, spending $1.7 billion to acquire four businesses from 2017 to 2019. They included Onica, a cloud services and management firm; and Datapipe, a managed services provider for private and public cloud customers. It said it strengthened cloud partnerships with midsize customers including Snowflake, Datadog, Cloudfare and Platform9, and attracted larger companies.

Since going public again, the company also acquired Just Analytics, a Singapore-based computer software company specializing in cloud data and artificial intelligence. Rackspace also partnered with BT Group, a U.K. telecommunications and network provider serving customers in more than 180 countries.

In May, Jones called the BT partnership the largest deal in company history, estimating “it could be worth several hundred million dollars over multiple years.” Rackspace said it expected to take on hundreds of new international customers as a result.

On Monday, Shilling said the partnership “gives customers an amazing set of offerings in the private cloud market.”

“We are bringing together BT’s capabilities as a world-class network and security provider, along with Rackspace Technology’s expertise as the premier pure play multicloud providers,” she said.

Analysts have agreed the deal would increase revenue but expressed concern about increased expense.

Meanwhile, the company posted a string of annual losses.

Its 2021 results fell short of Wall Street expectations, with profit and revenue declining. Its share price has fallen about 60 percent over the past year.

Local impacts

Amid its financial losses, Rackspace last year laid off 700 workers, or about 10 percent of its global workforce.

At least half of the affected employees worked in the company’s headquarters in Windcrest. In a regulatory filing, Rackspace said the layoffs were part of “an internal restructuring plan” and that it would tap its offshore service centers to backfill about 85 percent of the positions.

On Monday, Shilling responded to questions about how restructuring may impact Rackspace’s existing local operations and workforce, saying the restructuring “is not meant to be a location-related movement or cost-reduction exercise.”

“This is about executing our business strategy and growing Rackspace in the amazing cloud market,” she said.

eric.killelea@express-news.net

Leave a Reply

Your email address will not be published. Required fields are marked *