After going private in 2016 after accepting a$32 per share, or$4.3 billion, price from Apollo Global Management, Rackspace is looking when again to the public markets. Going public in 2008, Rackspace is taking 2nd aim at a public offering around 12 years after its preliminary debut. The business describes its business as a “multicloud innovation services”vendor, assisting its clients”design, operate and develop”cloud environments. That Rackspace is highlighting a services focus works context to understand its financial profile, as we’ll see in a moment.
First, some basics. The business’s S-1 filing signifies a $100 million placeholder figure for how much the company might raise in its public offering. That figure will alter, however does tell us that company is likely to target a share sale that will net it closer to $100 million than $500 million, another popular placeholder figure.
Rackspace will list on the Nasdaq with the ticker sign “RXT.” Goldman, Citi, J.P. Morgan, RBC Capital Markets and other banks are assisting finance its (second) launching.
Similar to other business that went private, just later to launching when again as a public business, Rackspace has oceans of debt.
The business’s balance sheet reported cash and equivalents of $125.2 million since March 31, 2020. On the other side of the ledger, Rackspace has debts of $3.99 billion, made up of a $2.82 billion term loan center, and $1.12 billion in senior notes that cost the company an 8.625% coupon, to name a few financial obligations. The term loan costs a lower 4% rate, and stems from the preliminary deal to take Rackspace private ($2 billion), and another $800 million that was later taken on “in connection with the Datapipe Acquisition.”
The senior notes, originally worth an overall of $1,200 million or $1.20 billion, likewise originated from the acquisition of the company throughout its 2016 transaction; private equity’s capability to buy companies with obtained money, later on taking them public once again and utilizing those earnings to restrict the resulting debt profile while maintaining financial control is rewarding, if a bit saucy.
Rackspace intends to utilize IPO continues to decrease its debt-load, including both its term loan and senior notes. Specifically just how much Rackspace can put against its financial obligations will depend upon its IPO prices.
Those financial obligations take a business that is easily rewarding on a running basis and make it deeply unprofitable on a net basis. Observe:
Image Credits: SECLooking at the reactionary column, we can see a business with product earnings, though slim gross margins for a putatively tech company. It created $21.5 million in Q1 2020 operating make money from its $652.7 million in income from the quarter. Nevertheless, interest expenses of $72 million in the quarter assisted lead Rackspace to a deep $48.2 million net loss.
Not all is lost, nevertheless, as Rackspace does have favorable operating cash flow in the same three-month duration. Still, the company’s multi-billion-dollar debt load is still steep, and difficult.
Going back to our discussion of Rackspace’s service, remember that it said that it sells “multicloud technology services,” which informs us that its gross margins will be service-focused, which is to say that they won’t be software-level. And they are not. In Q1 2020 Rackspace had gross margins of 38.2%, below 41.3% in the year-ago Q1. That trend is worrisome.
The company’s growth profile is also somewhat uneven. From 2017 to 2018, Rackspace saw its profits broaden from $2.14 billion to $2.45 billion, growth of 14.4%. The company shrank a little in 2019, falling from $2.45 billion in earnings in 2018 to $2.44 billion the next year. Offered the economy that year, and the value of cloud in 2019, the outcomes are a little unexpected.
Rackspace did grow in Q1 2020, nevertheless. The firm’s $652.7 million in first-quarter top-line easily bested in its Q1 2019 outcome of $606.9 million. The company grew 7.6% in Q1 2020. That’s very little, specifically throughout a duration in which its gross margins eroded, but the return-to-growth is likely welcome all the exact same.
TechCrunch did not see Q2 2020 lead to its S-1 today while reading the document, so we presume that the firm will re-file quickly to include more recent financial outcomes; it would be hard for the company to debut at an attractive rate in the COVID-19 age without sharing Q2 figures, we reckon.
How to value Rackspace is a puzzle. The company is tech-ish, which suggests it will discover some interest. However its slow growth rate, heavy debts and uninspired margins make it difficult to pin a reasonable multiple onto. More when we have it.
Article curated by RJ Shara from Source. RJ Shara is a Bay Area Radio Host (Radio Jockey) who talks about the startup ecosystem – entrepreneurs, investments, policies and more on her show The Silicon Dreams. The show streams on Radio Zindagi 1170AM on Mondays from 3.30 PM to 4 PM.