Rackspace: No Serious Buyers for Multi-Cloud MSP’s Business Units?
Rackspace Technology later this fall plans to share “additional details on our go-forward game plan, including any additional decisions regarding the structure of the company,” CEO Kevin Jones said as part of an earnings statement on August 9, 2022. However, the multi-cloud MSP no longer appears to be for sale.
The background: Rackspace since May 2022 has been “evaluating strategic alternatives and options” — which essentially means the multi-cloud MSP wanted to hear potential buyout bids for some or all of its businesses. Moreover, Rackspace had received “inbound interest” for one of its businesses, though the potential suitor and technology focus were not disclosed, the IT service provider indicated in May.
Fast forward to August 2022, and Rackspace has now decided that “continuing to execute our strategy is our best path forward for value creation,” a spokesperson told Barron’s.
Translation: It sounds like the inbound feeler offers weren’t lucrative enough for Rackspace to consider, ChannelE2E believes.
Amid that backdrop, Rackspace announced Q2 2022 financial results on August 9, 2022. The details included:
- Overall revenue of $772 million, up 4 percent from Q2 of 2021.
- A net loss of $41 million, compared to net loss of $37 million in the second quarter of 2021.
In the earnings statement, Jones emphasized Rackspace’s momentum in the cloud market, where secular tailwinds “show no signs of abating,” he said. Still, the revenue results fell short of Wall Street’s expectations, and Rackspace’s stock (RXT) fell 13% in after-hours trading.
Rackspace Reorg: Public Cloud, Private Cloud and Managed Hosting
Rackspace earlier this year reorganized the company into two distinct areas of focus:
- Public Cloud, and
- Private Cloud and Managed Hosting.
By July 2022, Rackspace hired Cognizant veteran Dharmendra (D K) Sinha as president of the company’s Public Cloud Business Unit.
Read between the lines, and the reorganization may allow Rackspace to sell off specific pieces of the business, or to fetch a higher price for the overall company — if the company ever receives offers of serious interest.
Rackspace in recent years has diversified into multi-cloud MSP services for AWS, Microsoft Azure and Google Cloud. More recently, the company had made more formalized moves into managed security services. However, the resulting growth has not been fast enough to please investors. Among the low-points:
- July 2021: Rackspace announced a growth strategy but buried the real news about company layoffs.
- February 2022: Rackspace’s weak financial forecast trimmed 20% from the company’s stock.
Rackspace CEO Statement
In a statement about the company’s latest financial performance and a potential company sale, Jones in August 2022 said:
“The second quarter financial results demonstrated solid growth and profitability for our business, as well as robust cash flow. We continue to benefit from secular tailwinds in the cloud market, which show no signs of abating.
Last quarter we previewed changes we are executing in our business, including aligning and repositioning the company to better capitalize on the immense market opportunity we see today. As we’ve met with customers, partners, and other stakeholders to preview these changes we have received very positive feedback. 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.”
Rackspace: Multiple Pivots, Owners and IPOs
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 (cloud service provider) effort, linked to OpenStack software, paid few dividends and Rackspace ultimately shifted to a multi-cloud MSP strategy.
Apollo Global Management acquired Rackspace Hosting for $4.3 billion in 2016 and took the business private. Another Rackspace IPO arrived in 2020, but investors were underwhelmed. Fast forward to August 2022, and Rackspace’s valuation has fallen to about $1.45 billion.
Still, 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.
Blog published May 10, 2022. Updated thereafter with details about the company reorganization.