Rackspace execs confirmed the sale of its Cloud Sites hosting sub to Liquid Web but ignored the white elephant in the room that Apollo Global is reportedly in talks to slurp the entire organisation.
The private equity house might well end up taking Rackspace private again in a deal valued at up to $4bn, buying the company time to restructure while out of the glare of Wall Street moneymen.
In a conference call to discuss Q2 results, CEO Taylor Rhodes, refused to comment on the wider “media speculation” about the future ownership of Rackspace.
But he said the sale of its web hosting unit to Liquid Web, a $90m turnover hosting firm, was due to it “growing at a lower rate” than at the overall corporate target and needed “substantial new investment”.
“What we’ve been able to do is find a strategic buyer in Liquid Web, who will buy the company at a higher multiple than it was producing for us and allow us to both focus our portfolio, as well as find a happy home for that business and help us raise some incremental funds”.
Back in the first quarter, Rackspace spun out its online backup tool Jungle Disk, which is now privately owned, and Exceptional Cloud Services, bought in 2013, is also now deemed peripheral.
“This is a discipline on the business as we go from this business model evolution, we want to find every way way we can to focus our assets and our resources so that we can really put all our guns on AWS, Azure, etc,” said the CEO added.
Rackspace has re-dressed itself as a cloud and managed services seller some years back, and again more recently as a customer front end for AWS and Microsoft - it is effectively reselling those public clouds and wrapping its services around them.
Ian Moyse, sales director at Axios Systems - a former sales director for the new business team at Rackspace until February - said not building and hosting their own IP meant lower margin for his previous employer.
“The value proposition is selling services around other peoples’ technology,” he told us, “the margins are lower so Rackspace has to transact more public cloud sales to stand still.”
He said the restructure at the company would take more than one or two quarters. “This is a business that did well but has struggled of late based on new market entrants and giants like AWS and Microsoft with deep pockets.”
The pace of top line growth at Rackspace has been on a downward trajectory in recent quarters, and went up by seven per cent in calendar Q2 to $523.6m.
Rhodes said the “maturing” areas of the business “slowed” in the three months and it was trying to flog new services to its existing customer base.
He said sales team shifted resources to AWS where it has 277 customers signed up, and it saw demand for managed services on Microsoft’s public cloud and OpenStack private cloud.
R&D and sales and marketing costs were down in the quarter but hikes in general and admin costs and depreciation and amortisation bumped up total costs and expenses to $459.3m from $447.2m.
Operating profit was up to $64.3m from $42.2m, and after tax and interest repayments, net profit stood at $35.8m from $28.3m.
Rhodes warned future sales will be affected by the Brexit vote, and it anticipated roughly $70m of “negative impact” from the weakening of the British pound.
“We’ve seen somewhat higher churn rates and some slowdown in spending among our UK customers, some of whose businesses have suffered currency fluctuation and uncertainty that have slowed the Brexit vote.”
He said one large customer in the “travel business” had “sought bankruptcy protection” and expects further instances. ®