Rackspace exploring partial sell-off
CEO says in quarterly report that the ‘sum of our parts’ could be greater than the whole
Rackspace Technology Inc. is exploring the sale of some of its businesses, its CEO said Tuesday.
The San Antonio-based cloud computing company, whose shares closed Tuesday at about a third of their price a year ago, recently completed a strategic review and has received interest in one of its businesses.
“We concluded that a sum of the parts of Rackspace Technology could be greater than our current enterprise value,” CEO Kevin Jones said in a statement. “Accordingly, we are evaluating strategic alternatives and options.”
He disclosed the possibility as Rackspace reported a 6.8 percent increase in revenue for the quarter ended March 31.
The company reported a loss of $38.5 million on revenue of $775.5 million, an improvement from a loss of $64 million on revenue of $725.9 million in the same period last year. Earnings and revenue both topped Wall Street expectations.
In a conference call with analysts and reporters after markets closed Tuesday, Jones said Rackspace is developing a plan for its next business steps, with an announcement set for September.
“The market has evolved, and it’s evolved pretty rapidly in the last 18 to 24 months,” he said. “We have a public cloud business that is significantly scaled from 18 months ago. We’ve been proactively evaluating all of our strategic options to take advantage of the public cloud market opportunity and sharpen our focus.”
The quarter marked Rackspace’s 10th consecutive quarter of revenue growth, and Jones sounded optimistic despite global economic challenges.
“While there are near-term headwinds in the economy, such as supply chain disruption and the war in Ukraine, we do not see any recessionary pressure in this business,” he said, later adding:
“Cloud is only accelerating, even in the economic environment we’ve seen so far this year.”
Rackspace’s so-called hyperscaler partners such as Amazon Web Services, Google and Microsoft grew revenue from 35 percent to 50 percent, or more than $10 billion, in the first quarter alone.
Rackspace reported earnings after markets closed on a day that saw its shares dip nearly 6 percent to $8.63. They were gaining in after-hours trading.
New York private-equity powerhouse Apollo Global Management took the company private in a $4.3 billion deal in 2016 and reintroduced it to the stock market in August 2020. Its share price has greatly fluctuated since.
Rackspace stock soared to a high of $26.43 per share in April 2021 before plunging to a low of $7.28 — which it hit in late February.
The low point came as Rackspace’s annual report for 2021 fell short of Wall Street expectations.
The company reported a loss of $218 million on revenue of $3 billion last year, an improvement from a loss of $246 million on revenue of $2.7 billion in 2020. But it also forecast revenue from $768 million to $778 million in the period, missing analysts’ expectations of $791 million.
Analysts also found fault in Rackspace partnering in January with BT Group, a U.K. telecommunications and network provider serving customers in more than 180 countries.
The CEO declined to disclose financial details of the agreement. He 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 expects to take on hundreds of new international customers as a result.
Despite the hype, analysts agreed the deal would increase
revenue but expressed concern that increased expense associated with it played a role in the lower-than-expected forecast for the fourth quarter.
Rackspace, founded in 1998, is the largest tech employer in San Antonio. Since 2007, the company has spent $1.7 billion to acquire four businesses — including
Onica, a cloud services and management firm, and Datapipe, a managed services provider for private and public cloud customers.
The company has said it has strengthened cloud partnerships with midsize customers including Snowflake, Datadog, Cloudfare and Platform9, and attracted
larger companies.
In January, the company acquired Just Analytics, a Singapore-based computer software company specializing in cloud data and artificial intelligence. On Tuesday, Jones said the company had completed the acquisition and begun expanding Just Analytics’ services.
Two months ago, Rackspace announced its “revitalized” Technical Career Track program, which aims “to provide team members a path into senior roles.”
The tool to attract and retain workers came after Rackspace said in July it would lay off 700 workers, or about 10 percent of its global workforce. At least half of the affected employees worked at the company’s Windcrest headquarters in San Antonio.
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 back-fill about 85 percent of the positions.