Rackspace Technology (RXT) aims to go public from the sale of its common stock, according to an S-1 registration statement.

The firm provides a range of multicloud services, security and data services to enterprises of all sizes worldwide.

RXT is pursuing a large market with favorable industry dynamics but is debt-heavy from its private equity buyout a few years ago.

I’ll provide an update when we learn more about the IPO.

San Antonio, Texas-based Rackspace was founded to provide infrastructure solutions to enterprises.

Since its take-private acquisition by private equity firm Apollo Capital Management in 2016, the firm has transitioned to a cloud agnostic services focus on recurring revenue.

Management is headed by Chief Executive Officer Kevin Jones, who has been with the firm since April 2019 and was previously SVP and General Manager of Americas at DXC Technology Company, an IT services firm.

Below is a brief overview video of Rackspace's approach:

Source: Rackspace Technology

The firm provides multicloud services for the following infrastructure and software platforms:

  • Amazon AWS
  • Google Cloud
  • Microsoft Azure
  • VMware
  • Oracle
  • Salesforce
  • SAP
  • Others

Rackspace has received at least $1.6 billion from investors including private equity firm Apollo Global Management.

The company pursues new customers via a dedicated sales and marketing force optimized by specialty and business unit function.

Rackspace reports operating activity via three segments:

  • Multicloud Services
  • Apps and Cross-Platform
  • OpenStack Public Cloud

RXT has more than 6,800 employees, 2,500 of whom are cloud-certified professionals and 900 are quota-bearing representatives.

In addition, the firm has developed an ecosystem of more than 3,000 partners.

Selling, G&A expenses as a percentage of total revenue have been dropping as revenues have increased in the most recent period.

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, rose to 0.2x in the most recent reporting period.

The firm’s net revenue retention rate for the most recent quarter, Q1 2020, was 98%. A figure of 100% or more is considered a good result as it indicates the company is earning equal to or more revenue from each customer cohort over time.

According to a 2020 market research report by Grand View Research, the global market for cloud computing was valued at $266 billion in 2019 and is expected to reach $808 billion by 2027.

This represents a forecast CAGR of 14.9% from 2020 to 2027.

The main drivers for this expected growth are the historic and multi-decade transition by enterprises from on-premise systems to cloud infrastructures.

Also, the chart below show the historic and forecast U.S. cloud computing market size, by use, from 2016 to 2027:

uscloudmarket

Major competitive or other industry participants include:

  • Accenture (ACN)
  • Atos (AEXAF)
  • CapGemini (CAPMF)
  • Cognizant (CTSH)
  • Deloitte
  • DXC Technology (DXC)
  • IBM (IBM)
  • Equinix
  • CyrusOne (CONE)
  • QTS

Rackspace’s recent financial results can be summarized as follows:

  • Uneven topline revenue
  • Variable gross profit and gross margin
  • Uneven operating profit and margin
  • Fluctuating cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

rackspacepl

Source: Company registration statement

As of March 31, 2020, Rackspace had $125 million in cash and $5.5 billion in total liabilities, of which long-term debt was $3.9 billion.

Free cash flow during the twelve months ended March 31, 2020, was $123.2 million.

Rackspace intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

We expect to use a portion of the net proceeds from this offering to repay [an as-yet-undetermined] principal amount of the outstanding loans under our Term Loan Facility, to redeem, retire or repurchase [an as-yet-undetermined] principal amount of our outstanding 8.625% Senior Notes and to pay related premiums, fees and expenses.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, Citigroup, J.P. Morgan, RBC Capital Markets, Evercore ISI, Barclays, BMO Capital Markets, Credit Suisse, Deutsche Bank Securities, HSBC, LionTree, Siebert WIlliams Shank, Drexel Hamilton, and Apollo Global Securities.

Commentary

Rackspace is seeking public investment capital to pay down debt it took on as a result of its buyout by private equity firm Apollo in 2016.

The firm’s financials indicate that it has had uneven topline revenue and gross profit growth in the past few years.

Cash flow from operations has dropped significantly in recent reporting periods.

Selling, G&A expenses as a percentage of total revenue have decreased; its Selling, G&A efficiency rate has increased, with both results a positive sign of operational improvement.

The firm’s retention rate, when compared to top software companies, needs some improvement at 95%.

The market opportunity for providing multicloud services is quite favorable to RXT’s prospects in the years ahead, as medium and large enterprises continue their historic and multi-decade transition from on-premises infrastructure to the cloud.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 80.8% since their IPO. This is a top-tier performance for all major underwriters during the period.

While Rackspace is well-positioned to grow in the years ahead, it has a heavy debt load typical of private equity-sponsored IPO deals, so none of the IPO will go towards its growth initiatives, instead going to pay down debt.

When we learn more about the IPO’s pricing and valuation assumptions, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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