Rackspace Technology will buy back up to $75 million of its own stock after its price suffered a fall amid analyst concerns about the company’s trajectory.
The San Antonio-based company’s board of directors authorized the decision Thursday, according to filings with the U.S. Securities and Exchange Commission.
Stock buybacks are a controversial way for a public company to boost share prices and provide shareholder value. By reducing the total number of remaining shares, the move allows more profits to flow to fewer investors. But some investors criticize the increasingly popular move because it costs money that could have otherwise gone to other investments.
Rackspace shares were $10.03 on the NASDAQ market floor Friday morning, down by more than half of its initial offering in late 2020. Prices fell to their lowest price yet last week, the day after the company posted its fourth quarter earnings for 2021.
The report beat expectations for its revenue, clocked at more than $777 million, but long-standing concerns over profit margins and cash flow prompted several analysts to downgrade their rating of the stock.
One of them, Keith Bachman, an analyst with BMO Capital Markets, wrote in a note to clients of a “trend of disappointing margin performance,” which he said would be continued by the costly implementation of a recent partnership with a UK-based telecommunications giant, and that future deals also threaten to strain the company capacities.
Amar Maletira, president and chief financial officer of Rackspace, defended the recent deal and others like it in an investor earnings call, in response to a question from Bachman.
“We want to go after growth,” Maletira said. “When we start onboarding some of these deals, it might impact our margins in the short term, but these are the right things to do because we have shown … we can expand the sold gross margins once we land these deals.”
The company is still seeking to overcome a nearly $3 billion debt accrued through several acquisitions it made in recent years.
Nearly a year ago, the company embarked on a “massive move to offshore,” as one analyst described it in the call.
Rackspace terminated 1-in-10 of its roughly 7,000 workers last summer, replacing most of those jobs with cheaper ones abroad, many in India. The company said in filings at the time that it expected to save $95-100 million every year from the move, which would offset the $70-80 million in estimated costs for severance payments, healthcare benefits, and “other exit costs.”
The shift to offshore call centers has been criticized lambasted last week by an industry columnist and business owner who wrote that it had resulted in a “plunge in quality,” drawing on his personal experience as a client of the company’s cloud services. He said tens of thousands of his company’s emails on Rackspace’s cloud were deleted without explanation, and described his subsequent attempt to cancel his account as a chaotic process that took months.
Rackspace’s re-entry to the public market has been a bumpy ride, as it continues a transformation under the ownership of private equity giant Apollo Global Management.
The company, which went public the first time in 2008, left the market in 2016, shortly after Apollo bought it in a multibillion dollar deal. At that time, Rackspace was largely still in the business of traditional server hosting. Insulated from the market, Apollo accelerated Rackspace’s transformation into a white-glove service that helps businesses transition to cloud-based computing, then it put the company back on the market in late 2020.
Stock prices soared to a record high of $26 amid rumors that Amazon — Rackspace’s former competitor, now patron — was interested in investing in the company. The alleged deal, never officially confirmed, has not materialized.
