Rackspace considers selling part of business: 'Everything' on the table

CEO points to two very different multi-cloud markets, says it's already spoken to potential buyer

Rackspace Technology is considering selling off at least part of its business following a strategic review, with CEO Kevin Jones admitting that "everything is on the table."

The company disclosed it has already received interest from a potential buyer.

The move was announced during a conference call covering Rackspace's Q1 2022 earnings, where Jones claimed that Rackspace is well positioned as a pure play multi-cloud services company.

He reckons it is benefitting from the wave of growth being enjoyed by the cloud hyperscalers whose services it resells. The public infrastructure cloud market, for example, is growing at roughly a third every quarter and remains dominated by AWS, Microsoft and Google.

However, Jones also noted that Rackspace's business had morphed during recent years, such that it now operates in two very different multi-cloud markets with different operating models, growth trajectories and investment prospects.

"Public cloud is right in a long-term secular growth wave and is a services-centric capital-light product line where we can make smart investments to capture additional whitespace and growth opportunities. On the other hand, private cloud and managed hosting is in a low growth market where we're focused on optimizing profit and free cash flow," Jones explained.

As a result, Rackspace is now considering reorganizing the company in line with these two markets, as well as exploring other strategic alternatives, he added.

CFO Amar Maletira said the cloud market had evolved rapidly in the last 18 to 24 months, and so Rackspace is evaluating all its options to exploit the opportunity it says exists there. He revealed the company has already received interest from a potential buyer for part of its business, but would not say which.

"As we completed this strategic review, and based on inbound interest for one of our businesses, we concluded that the sum of the parts valuation of Rackspace Technology could be greater than our current enterprise value," he said, adding: "This is in part driven by the attractive growth profile of our public cloud offerings. Accordingly, we are evaluating strategic alternatives and options."

This would seem to imply that Rackspace is happy with the part of its business that offers services around public clouds, but not so happy with the private cloud and managed hosting side.

Rackspace was asked which part of the company the "inbound interest" referred to during its earnings call, but Jones would not provide specific details. Rackspace plans to share its new strategy, operating organization, and long-term financial model at an Analyst Day to be held in September.

"But, I can assure you in terms of strategic alternatives, everything is on the table. And we're evaluating all options, including this current inbound interest for one of our businesses and we'll provide further information as appropriate in light of developments," he said.

Rackspace reported revenue for calendar Q1 2022 of $776 million, an increase of 7 percent year-on-year, lower than the 11 percent reported for 2021.

Revenue from Rackspace's Multicloud Services and Apps & Cross Platform segment increased 9 percent, while income from operations was down to $21m from $24m in the first quarter of 2021.

Rackspace has been in and out of private hands already, initially going public on the New York Stock Exchange in 2008, before being acquired by private equity player Apollo Global Management in 2016. The company saw a second IPO in 2020 that valued it at $4.2 billion, lower than the $4.3 billion that Apollo Global had paid for it.

Last year, Rackspace shed around 10 per cent of its workforce. ®

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