It was the “worst stock in the world,” a tech columnist called Rackspace five years ago.
The crown jewel of San Antonio’s fledgling tech scene was struggling uphill to compete in the cloud computing space against the behemoths Amazon, Google, and Microsoft. The deep pockets of the giants allowed them to wage a price war Rackspace simply couldn’t afford. It was in a fragile spot, and in danger of becoming another casualty of Amazon.
But Rackspace today is a different animal. It is a “transformed company,” says CEO Kevin Jones, having been acquired by an equity firm, taken private, restructured, and returned to the public market.
“Who we partner with has changed, who we compete with has changed, what we sell is changed, and who we sell it to is changed. All that’s changed,” he told the San Antonio Report in a videoconference call from his Dallas residence. “A lot of people still think we’re the old company that used to compete with AWS, Google, and Microsoft. Nothing could be further from the truth.”
The company, rebranded as Rackspace Technology, now rides the tidal wave of so-called multicloud, the growing trend among companies to spread their operations across several different cloud services. Whereas before, Rackspace’s model was based on competing among those clouds – or selling space on a server rack, hence the name – Rackspace has fashioned itself into a white glove service that helps mid-sized enterprises glide comfortably onto other clouds.
It’s a promising model, analysts say.
“These guys are actually on to something fairly big,” said Amit Daryanani, an analyst with Evercore ISI. Rackspace, he said, is positioned to capitalize on a tectonic shift happening in the market, as firms across sectors – retail, travel, banking – move to a digital model. The movement has only accelerated under the coronavirus pandemic.
“It is ridiculously complicated to manage these data migrations and execute on them. What you need is almost this consulting-like service that’s willing to help design, manage, implement everything for you from Point A to the finish line,” he said. “There aren’t a lot of companies that will do this.”
Filling that space in the market seems to be paying off for Rackspace. The company on Monday reported 11% revenue growth in the first quarter to $726 million, marking a second consecutive quarter with double digit revenue growth. The company has also recently announced new expansions into Asia, Europe, the Middle East, and Africa.
Although Monday’s earnings report saw Rackspace’s stock plummet roughly 20% by the start of trading Tuesday, analysts have remained steady in rating it a buy.
Another key milestone came when Jones arrived in 2019, the latest in a long series of executives the company had rapidly shuffled through. Jones’ came with a pedigree in services: His past leadership roles were at service and support firms like DXC Technologies, Hewlett Packard Enterprise (a support-oriented spinoff from the better-known HP Computers), and Electronic Data Systems.
Jones said his early years at EDS taught him the importance of “putting the customer at the center, because then everything else will follow.”
To funnel these customers to the right service, the big three tech firms and thousands of other partners are now embedded in Rackspace’s sales teams, marketing teams, and research and development. They sell together, deliver together, and develop new products together.
The transformation has been so complete that last year there were reports, never officially confirmed, that Amazon was in talks to invest in their onetime competitor. (Jones declined to comment on the matter, and said it was company policy not to discuss industry speculation).
In a more verifiable indication, Rackspace got a shout-out at Amazon Web Service’s 2020 innovation conference, a gathering of Amazon partners and clients. Rackspace representatives gave two presentations at the event, and Doug Yeum, AWS’ so-called “channel chief” in charge of coordinating the behemoth’s many alliances, praised the company as an example of successfully transforming into a “cloud-first” enterprise.
“Reinvention requires strong leadership,” Yeum said told the audience. “These leaders have strong conviction about the cloud, set big audacious goals for their companies, and as they transformed, they were not afraid to cannibalize off their existing businesses if necessary.”
Analysts said Rackspace has not made as much progress with Google and Microsoft.
Ashwin Shirvaikar, an analyst at Citi, said Rackspace is just outside the top five partner list with Microsoft, and further down the list at Google. But, he said, “it’s a steady process. These things don’t happen overnight.”
Rackspace’s transformation hasn’t come without challenges.
Traders’ awareness of the company’s transformation has been slow, analysts said. When Rackspace Technology debuted on NASDAQ in August 2020, it was the worst first-day performance on a U.S. exchange this year for a company raising at least $100 million, according to data compiled by Bloomberg.
One analyst, who asked not be named, likened it to “scar tissue” from the company’s old, less financially viable model. “The market wants to see them build a positive track record before they give them full credit for it,” he said.
Rackspace used the money from its initial public offering to pay down debt it has accrued through its acquisitions. The debt, at $2.9 billion, is not onerous, Shrivaikar said, though he would “be more comfortable” if the company had less of it on its balance sheet.
Several investors noted that they wanted to see the improvements in the company’s margins, which have shrunk under the new model, even as it sheds the capital intensity and real estate investments needed under the legacy business.
Some also pointed to an indication that more dramatic changes may be in store for the near future.
In a filing to the U.S. Securities and Exchange Commission made in March, the company outlined severance benefits for executives like Jones in the event that Rackspace is bought out. The development has fueled speculation that the cloud-computing company could soon be the target of an acquisition.