Can the Rackspace Dismantling Save Money-Loss-Loss San Antonio Tech Company?

Rackspace Technology is considering selling parts to support a money-losing San Antonio cloud company.

CEO Kevin Jones raised the possibility of such a move during a conference call late Tuesday with reporters and financial analysts to discuss the company’s first-quarter results. He said Rackspace recently completed a “strategic review” after hearing from a potential buyer interested in one of his business.

“We figured the sum of the parts for Rackspace Technology could be greater than the value of our current organization,” Jones said.

Translation: The value of the company could be more in pieces than it is in its current form.

It is not clear which parts of the company, if any, can be put up for sale.

“Everything is on the table,” said the CEO. “We are evaluating all options.”

Everything that happens will be the latest development in the history of Rackspace, considered the ancestor of the modern tech sector in San Antonio.

The possibility of separation drew some positive reviews.

“We believe Rackspace will drive additional value both through direct selling and through business and process improvement,” Raymond James analyst Frank Lothan IV said in a research note on Wednesday. “We believe that eventually a deal will be reached, as the company has high-quality and different ownership assets within the market, particularly at the mid-market level, which should be attractive to potential buyers.”

Jones said the company will provide details of the alternatives in September.

Without providing details on what could be sold, he noted Rackspace’s growth in the public cloud market. Public clouds are subscription services that are shared with customers over the Internet. In comparison, a private cloud is a service that is controlled by a single company or organization. Rackspace is in both parts.

“We have a public cloud company that is significantly scaling than it was 18 months ago,” Jones said. “We have proactively evaluated all of our strategic options to take advantage of the public cloud market opportunity and increase our focus.”

Credit Suisse Analyst Kevin McVeigh said in a research note on Wednesday that Jones’ suggestion that the company’s business may be more than its total value is “driven in part by the attractive growth profile of the public cloud.”

troubled history

Founded in 1998, San Antonio’s largest technology company is struggling.

Rackspace first went public in August 2008 at $12.50 per share and rose to about $80 in 2013. But by mid-2016, the company had lost about 60 percent of its market value amid fierce competition from large-scale cloud computing providers.

In November of that year, Apollo Global Management, the New York private equity powerhouse, bought the company in a $4.3 billion deal.

Rackspace has its roots in the field of web hosting for clients. But after struggling to compete in this market with heavyweights Amazon, Microsoft and Google, it has moved on to partnering with tech giants to help its customers move their data to the cloud.

She spent the next few years bareback with Big Tech and going on an acquisition wave. Its goal was to position itself in a global cloud market that is expected to rise to $520 billion by 2024, according to projections from Gartner, a technology research and consulting firm.

Rackspace spent $1.7 billion to acquire four companies from 2017 to 2019. They include Onica, a cloud and management services company, and Datapipe, a managed services provider for private and public cloud clients.

Meanwhile, the streak posted annual losses totaling $632 million.

general struggles

In August 2020, Apollo reintroduced Rackspace to the stock market. Its market value was $4.2 billion. The first trading day did not go well. After opening at $21 a share, the shares fell nearly 22 percent to close at $16.39. It’s been basically declining ever since, with the company reporting quarterly losses.

Analysts said they did not find Rackspace’s streak of losses worrisome because the company was growing, although it will likely need to achieve profitability within two years to satisfy investors.

Its share price has fluctuated throughout the year and fell as low as $7.28 in late February.

The drop came as Rackspace’s year-end results for 2021 fell short of Wall Street expectations. The company posted a $218 million loss on $3 billion in revenue, which is an improvement from a $246 million loss on $2.7 billion in revenue in 2020.

The company has just acquired Just Analytics, a Singapore-based computer software company that specializes in cloud data and artificial intelligence. Rackspace has also partnered with BT Group, a British telecommunications and networking company that serves clients in more than 180 countries.

Jones described the BT partnership as the largest deal in the company’s history, and estimated it “could be worth several hundreds of millions of dollars over several years.” Rackspace said it expects to attract hundreds of new international customers as a result.

Analysts noted the pros and cons, and agreed that it would increase revenue but were concerned that higher expenses were a factor in lower-than-expected forecasts for the current quarter.

‘arms race’

After Apollo took over, Rackspace moved away from cloud hosting, becoming a services company with a multi-cloud approach, said John Prevost, executive director of the Open Cloud Institute at the University of Texas at San Antonio.

He was not surprised by the news that Rackspace could sell some companies.

“All of these companies are trying to figure out who they want to be when they grow up,” he said. “This whole world is in such a flux right now. It is an arms race for different products and service offerings.”

It may be time for the company to refocus its business strategy, he said.

“They are trying to figure out how to survive in this competitive landscape,” Prevost said. Big companies offer services they don’t. They can do anything they want in space but they probably can’t do everything. If they want to focus on areas where they can be global leaders, they have to pick and choose where they focus on that energy.”

“The Path to Redemption”

Rackspace on Tuesday reported a loss of $38.5 million in the first quarter on revenue of $775.5 million, an improvement from a loss of $64 million on revenue of $725.9 million a year earlier.

This time around, earnings and revenue beat Wall Street expectations, but Rackspace stock fell in the next two days and analysts lowered their expectations for performance.

Credit Suisse revised its price target to $15 from $19 a share while maintaining its “Outstanding Performance” rating.

Citigroup cut its price target to $13 from $16 and assigned a “buy” rating.

JP Morgan revised the price to $11 from $13 while maintaining a “neutral” rating.

Raymond James’ memo, which included a section titled “The Road to Payback,” was upgraded to “Outperform” and set a $12 price target.

“The work has taken longer than we initially anticipated, so we have been on the sidelines for a while, but we believe this gives management the ability to show significant improvement in the core business, or there will be a deal,” Lothan said. “In either case, we believe that investors can see a path to reward within a reasonable time.”

Writer Diego Mendoza Moyers contributed to this story.

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