Rackspace preps IPO after going private in 2016 for $4.3B – ProWellTech
After going private in 2016 after accepting a price of $ 32 per share, or $ 4.3 billion, from Apollo Global Management, Rackspace once again looks to public markets. First public in 2008, Rackspace is taking the second target in a public offering about 12 years after its initial debut.
The company describes its business as a provider of “multicloud technology services”, helping its customers to “design, build and manage” cloud environments. That Rackspace highlighting a focus on services is a useful context for understanding its financial profile, as we will see shortly.
But first, some basics. The company’s S-1 deposit indicates a placeholder amount of $ 100 million as far as the company can raise in its public offering. That figure will change, but it tells us that the firm is likely to target a stock sale which will bring it closer to $ 100 million than another $ 500 million, another popular placeholder.
Rackspace will list on the Nasdaq with the ticker symbol “RXT”. Goldman, Citi, JP Morgan, RBC Capital Markets and other banks are helping to support its (second) debut.
Similar to other companies that have gone private, only to later debut as a public company again, Rackspace has oceans of debt.
The company’s balance sheet reported cash and cash equivalents of $ 125.2 million as of March 31, 2020. Across the ledger, Rackspace has debts of $ 3.99 billion, consisting of a forward loan of $ 2.82 billion and $ 1.12 billion in senior securities which cost the firm an 8.625% coupon, among other debts. The term loan costs a 4% lower rate and derives from the initial transaction to take private Rackspace ($ 2 billion) and another $ 800 million which were subsequently taken “in connection with the acquisition of Datapipe”.
The senior notes, originally for a total value of $ 1,200 million or $ 1.20 billion, also came from the acquisition of the company during its 2016 transaction; the ability of private equity to purchase companies with borrowed money, subsequently make them public and use that proceeds to limit the resulting debt profile while maintaining financial control is profitable, albeit a little cheeky.
Rackspace intends to use IPO proceeds to reduce the debt load, including both the term loan and the senior notes. The amount of Rackspace you can put up against your debts will depend on your IPO price exactly.
These debts take on a company that is conveniently profitable on an operating basis and make it profoundly unprofitable on a net basis. To observe:
Image credits: SEC Looking at the far right column, we can see a company with tangible income, albeit with reduced gross margins for a putatively technological company. It generated $ 21.5 million in first quarter 2020 operating profit from its $ 652.7 million in quarterly revenue. However, interest expenses of $ 72 million in the quarter helped bring Rackspace to a net loss of $ 48.2 million.
All is not lost, however, as Rackspace has a positive operating cash flow over the same three-month period. However, the company’s multi-billion dollar debt load is still steep and expensive.
Returning to our discussion of the Rackspace business, we recall that he said he sells “multicloud technology services”, which tells us that his gross margins will be focused on the service, which is to say that they will not be at the software level. And they are not. In the first quarter of 2020, Rackspace recorded gross margins of 38.2%, down from 41.3% in the first quarter of the previous year. This trend is worrying.
The company’s growth profile is also slightly irregular. From 2017 to 2018, Rackspace saw its revenue increase from $ 2.14 to $ 2.45 billion, up 14.4%. The company shrank slightly in 2019, dropping from $ 2.45 billion in 2018 revenue to $ 2.44 billion the following year. Given the economy of that year and the importance of the cloud in 2019, the results are somewhat surprising.
However, Rackspace grew in the first quarter of 2020. The company’s $ 652.7 million in the first quarter first line easily outpaced the 2019 first quarter result of $ 606.9 million. The company grew 7.6% in the first quarter of 2020. It’s not much, especially during a period when its gross margins have eroded, but the return to growth is probably welcome anyway.
ProWellTech did not see the second quarter 2020 results in its S-1 today while reading the document, so we assume the firm will reschedule to include the most recent financial results; it would be difficult for the company to debut at an attractive price in the COVID-19 era without sharing the second quarter figures, we believe.
How to evaluate Rackspace is a puzzle. Society is technological, which means it will find some interest. But its slow growth rate, heavy debts and poor margins make it difficult to find a fair multiple. More when we have it.