Rackspace Technology Channel Focus ‘Business As Usual’ Amid Sale Talk

Despite higher multicloud revenue and lower net losses in the first quarter, and despite expectations for continued growth, Rackspace Technology has once again put itself up for sale.

“[W]e are evaluating strategic alternatives and options,” CEO Kevin Jones said on Tuesday. “We will provide further information as appropriate in light of developments.”

For full context, here’s what Jones said in a May 10 press release:

Rackspace’s Kevin Jones

“Rackspace Technology recently completed an in-depth strategic review of our company. As we completed this strategic review, and also based on inbound interest for one of our businesses, we concluded that a sum-of-the-parts valuation of Rackspace Technology could be greater than our current enterprise value. This is in part driven by the attractive growth profile of public cloud.”

The managed cloud computing company has boomeranged in recent years between Wall Street and private ownership. It last went public in 2020 after coming out of private ownership in 2016 — and it had been public before that.

Rackspace now could exit the public market once more, news that comes a few months after it first told investors such a change was a possibility. Rackspace and its board “have been carefully examining every area of our business, weighing the company’s strategic options to increase shareholder value,” Jones said.

In fact, in a conversation on Tuesday with analysts, Jones indicated Rackspace already is talking with a potential buyer.

“I can assure you, in terms of strategic alternatives, everything is on the table,” he said, according to a transcript from SeekingAlpha. “And we’re evaluating all options, including this current inbound interest for one of our businesses.”

To that end, Rackspace may divest part of its holdings, because public and private cloud have “very different business dynamics” that require “very different skill sets and levels of investment,” Jones told investors.

“[W]e operate in two very different multicloud markets, with different operating models, growth trajectories and investment prospects,” Jones explained. “On one hand, 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. And 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.”

Rackspace’s Amar Maletira

Rackspace may sell all or some of its assets, or reorganize across public and private cloud. Regardless of what happens, the company intends to invest $15 million-$20 million during the second quarter, and executives predict fast returns on that — “within three to 12 months, three to six months,” Amar Maletira, president and CFO of Rackspace, told investors.

Rackspace says it will share more information during its analyst day, coming up in September.

What’s Going On at Rackspace?

While Rackspace operates in a hot market, it’s struggling.

In spite of its first-quarter growth, Rackspace does not seem to be performing up to Wall Street’s expectations. Case in point: Analysts were forecasting the company’s earnings at 23 cents per share for the second quarter. Rackspace this week provided guidance of 15-17 cents per share.

Constellation Research’s Holger Mueller

“They are stuck between on-premises and cloud support and can’t move customers,” Holger Mueller, principal analyst and vice president at Constellation Research, told Channel Futures.

As such, Rackspace’s growth, he noted, is “way too slow.” So the company is going to …

… “try to pretty the firm up. The separate businesses are more valuable than the combo.”

For its part, Rackspace appears confident that it will prevail despite economic headwinds — including the ongoing war in Ukraine and the looming possibility of recession.

“[C]loud is really only accelerating, even in the challenging economic environment we’ve seen so far this year,” Jones told analysts, citing the hyperscalers’ combined $10 billion growth in the first three months of 2022.

And if a recession does hit, “we think that multicloud becomes even more of a must-have” because it saves money, and supports scaling on demand and digital transformation, he added.

The Impact of Rackspace Technology’s Activity on the Channel

For now, managed service providers, agents and other Rackspace partners can breathe easy.

“We are business as usual with our partner community,” Renee Taylor, vice president of global alliances and channels at Rackspace, told Channel Futures on Wednesday.

Whether that might change remains up in the air. It depends on who managed service providers, agents and other Rackspace partners sell to, said Constellation Research’s Mueller, and whether a new Rackspace owner “supports the current plans and services.”

With that in mind, Mueller recommended that Rackspace channel partners “ensure contractual support and SLAs,” just to make sure clients continue getting what they purchased as Rackspace undergoes structural shifts.

Reading between the lines at Rackspace, a sale looks most likely to happen within the more legacy business. If that’s what arises, channel partners “need to understand if they are on the on-premises or the cloud side of the Rackspace business,” Mueller said.

Jones’ comments point to a long-term focus on public cloud being the case.

“Rackspace Technology benefits from secular tailwinds in a cloud market that shows no signs of slowing,” Jones said. “In the first quarter alone, our cloud hyperscaler partners added $10 billion of new cloud revenue. All of this new cloud revenue represents customers moving to the cloud, grappling with change, and needing help on their journey. And Rackspace Technology is extremely well-positioned to be their partner of choice as the only pure-play cloud services company.”