Rackspace Financial Forecast Reveals Multi-Cloud MSP Challenges

Numerous MSPs continue to dive into the fast-growing market for multi-cloud managed services. But sometimes a rising tide doesn’t lift all boats. The latest evidence comes from Rackspace Technology, which revealed a disappointing financial forecast on February 22, 2022. The result: Rackspace’s stock ($RXT) is down more than 20% in pre-market trading.

At first glance, Rackspace’s business appears to be performing reasonably well. Indeed, the multi-cloud MSP’s revenue was $777 million in Q4 of 2021, up 9% compared to Q4 of 2020. Also, multi-cloud services now represent 81% of Rackspace’s revenue, according to CFO Amar Maletira.

Roll all those data points together, and Rackspace certainly ranks among with world’s Top 250 Public Cloud MSPs, according to ChannelE2E research.

Rackspace: Progress In A Growth Market?

In a prepared statement about the Q4 2022 earnings, Rackspace CEO Kevin Jones said:

“The fourth quarter was a strong conclusion to the year, and Rackspace Technology continued to execute on its mission to lead the cloud services market as a best-in-class, pure-play cloud solutions company. It was a record quarter for Bookings, and we met or exceeded all of our financial targets while driving strong cash flow from operations.”

Moreover, Rackspace pointed to new growth opportunities — including a cloud contract win with BT, as well as the January 2022 acquisition of Just Analytics, a Microsoft Azure Data Analytics and artificial intelligence (AI) cloud partner in the Asia Pacific and Japan (APJ) region.

No doubt, Rackspace is focused on a growth market: Spending in the cloud managed services market is expected to reach $139.4 billion by 2026, up from $86.1 billion in 2021. That’s a 10.1% compound annual growth rate (CAGR) during the forecast period, according to MarketsAndMarkets.

Rackspace: Slowing Growth After Restructuring, Offshore Push?

Still, questions about Rackspace’s business remain. Indeed, investors appeared disappointed by Rackspace’s earnings call. During that call, Wall Street analysts raised questions about potential slowing growth, margin pressures and other headwinds that Rackspace could be facing.

In response, Maletira said that core Rackspace revenue is “sort of slowing down from a growth perspective” but he expected that to be a temporary trend. “We expect the growth rates to improve in the later half of the year,” he added.

The Q4 2022 earnings call arrived about seven months after Rackspace announced a growth strategy that included layoffs. That restructuring shifted various Rackspace support functions from the United States to offshore facilities. At the end of fiscal 2020, roughly 25 percent of Rackspace was offshore. By mid-fiscal 2022, roughly 50 percent of the company will be offshore, Maletira told Wall Street analysts during the February 22, 2022 earnings call.

Rackspace has pivoted multiple times over its business history. Originally a hosting provider, Rackspace initially attempted to compete against Amazon Web Services (AWS), Microsoft Azure and Google Cloud Platform (GCP). But the CSP effort, linked to OpenStack software, paid few dividends and Rackspace ultimately shifted to a multi-cloud MSP strategy.

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