Rackspace Technology will be going public again. The company first went public in 2008, but was taken private in 2016. The $4.3 billion deal with Apollo Global Management, a private equity fund, allowed the company to try and reengineer itself — shedding jobs in some areas while growing in others and making big corporate acquisitions.
|Related:Rackspace Files To Go Public Again, Deal ‘Keeps’ Company In San Antonio, Says Co-Founder|
Being private meant they were outside the scrutiny of the market. Now, as the company prepares for an Initial Public Offering, it has put out its financials and given numbers and hard data. This provides a more complete picture of the San Antonio technology company than available in more than three years.
TPR Technology Reporter Paul Flahive sat down with Express-News and Houston Chronicle financial columnist Michael Taylor to talk more about it.
This story has been edited for length and clarity.
MT
They (Rackspace) are reporting that they incurred losses, which is to say they were not profitable in 2017, 2018 and 2019. And the losses grew from 2017 to 2018, and then shrank into 2019. Had they been public, the stock presumably would have been punished, although, though that's not always true for tech companies. But that's something that investors, when IPO will look at and say, “Well, how profitable are you?” The answer is they have not been profitable for three years. I think the story there that you tell as a tech company that's not been profitable is “Look, the market doesn't demand tech companies be profitable. We have a larger vision ahead of us.”
PF
Were you surprised by the amount of debt that they have taken on trying to solidify their position as a managed cloud provider and expanding their offerings as kind of an all-in-one, inclusive back-end website shop. They bought Datapipe for more than a billion dollars and Onica for more than $300 million?
MT
I counted their reporting about $4 billion in debt, and that does seem large. It's up against $2.2 to $2.4 billion in revenue. That's kind of an average over the past three years.
What you would hope with a tech company, a fast moving tech company and exciting IPO’ing tech company is the revenues are growing quickly. And that's what justifies carrying debt. The revenues are not growing quickly. They're not at a tech growth rate that you would go “Oh, that's, that's great. I can look beyond the debt. I don't need to worry about that.”
I think you do need to worry about $4 billion in debt.
PF
In talking to (Rackspace CEO) Kevin Jones a month ago, I asked, “What do you think of COVID-19? What does that mean for you guys? What's your position?”
And he had replied that it was very strong. You know, they were very well positioned for a culture for a society that's trying to get all online, do work from home, that trendline — I was not seeing that reflected in the financials.
MT
I will say I find that a credible story to tell. Most companies can't say things should be just as good or better now that everybody's trying to work from home, work remotely, connect through the cloud — things that we used to do in person. So, my first reaction is: that's a good story and I buy it.
Beyond me buying it, I think the NASDAQ market — the tech heavy stock market — has bought it.
If you were to measure the regular large companies stock market by the S&P 500. That's just all big companies (they are) up 6% on the year, and up 12% in the last three months. That's the baseline. And there is a lot of volatility because everybody's worried about a recession from COVID. The NASDAQ — the tech heavy portion of the market — is up 29% of the year and 24% in the last three months.
So, to be clichéd, it's a tale of two markets: the regular economy and stocks and then you have the NASDAQ, the tech heavy, or even I would say cloud-based services are radically outperforming the rest of the market.
So, if Jones says Rackspace can take advantage of that because they're cloud based, I believe it. But I wouldn't say you can see numbers. It's too soon, really. We've only been in COVID for four months. I think it's too soon to see the responses to that.
PF
Last week someone had mentioned to me that King Cloud, a Chinese cloud company, had recently raised half a billion dollars in its IPO. I don't know their market share. I don't know much about that company. But I mean, certainly that's a number and a company that would probably play into the narrative of what Rackspace is putting out there.
MT
Yeah, if you were to say generically, “Is now a good time to bring an IPO?”
I'd say from week to week, we have radically different ideas about risk because the COVID pandemic keeps shifting our ideas of what's safe and what's scary and what's plausible, and can the economy even be open.
But then if you say well give me the company that can bring a cloud-based, remote-learning, remote-working, don't-have-to-go-into-the-office type of technology. Maybe sign me up. And if you can prove out that other cloud companies like King Cloud that you just mentioned successfully launch their IPO Well, okay.
I'm interested to know at least take the meeting.
PF
Good place to end Michael Taylor. There's a financial columnist for The San Antonio Express-News and Houston Chronicle. Thanks, Michael.
MT
Thanks, Paul.
Paul Flahive can be reached at Paul@tpr.org or on Twitter @paulflahive.
