Rackspace Technology (RXT) intends to raise $754 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides a range compute infrastructure and related software consulting services to enterprises of all sizes worldwide.

RXT’s IPO is not cheaply priced, the firm still has a significant debt load post-IPO and an uneven recent revenue growth trajectory.

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

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

Management is led 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 an 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 in investment from investors including private equity firm Apollo Global Management.

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

Rackspace reports operating results via three segments:

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

RXT has more than 6,700 employees, 2,500 of whom are cloud-certified professionals and 900 are quota-bearing representatives.

In addition, the firm has fostered an ecosystem that has grown to 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 positive result as it indicates the company is generating 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
  • Atos
  • CapGemini
  • Cognizant
  • Deloitte
  • DXC Technology
  • IBM
  • Equinix
  • 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.

RXT plans to sell 33.5 million shares of common stock at a midpoint price of $22.50 per share for gross proceeds of approximately $753.75 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $8.3 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 16.83%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We expect to use a portion of the net proceeds from this offering to redeem, retire or repurchase $600 million aggregate principal amount of our outstanding 8.625% Senior Notes and to pay related premiums, fees and expenses. The interest rate for our 8.625% Senior Notes is 8.625%. The 8.625% Senior Notes will mature on November 15, 2024.

Management’s presentation of the company roadshow is available here.

Listed underwriters 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 going public again to pay down the debt incurred in its buyout and subsequent ownership by private equity firms.

The company’s financials show a recent history of uneven topline revenue growth but a move to now positive operating profit albeit with uneven cash flow from operations.

Selling, G&A expenses as a percentage of total revenue have dropped and its Selling, G&A efficiency ratio has improved to 0.2x. Both results are positive signs of improvement.

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 82.2% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation to that of Cognizant, management is asking IPO investors to pay a higher EV/Revenue multiple of 3.33x versus 1.94x.

While RXT is growing slightly faster, it is producing negative earnings by comparison and has a significantly higher debt load, even after paying it down with the IPO’s proceeds.

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.

Given the IPO is not cheaply priced, the firm’s significant debt load post-IPO and uneven recent revenue growth trajectory, my opinion on the IPO is NEUTRAL.

Expected IPO Pricing Date: August 4, 2020.

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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