After becoming private in 2016 after accepting a price of $ 32 per share, or $ 4.3 billion from Apollo Global Management, Rackspace is once again turning to the public markets. First presented in 2008, Rackspace is targeting the second objective of a public offering approximately 12 years after its debut.
The company describes its business as a provider of “multicloud technology services”, helping its customers to “design, build and operate” cloud environments. This Rackspace focusing on services is a useful context for understanding your financial profile, as we will see in a moment.
But first, a few basics. The company’s S-1 file indicates a figure of $ 100 million for the amount that the company can raise in its public offering. This figure will change, but tells us that the company is likely to target a stock sale that will bring it closer to $ 100 million than another $ 500 million, another popular popular figure.
Rackspace will appear on Nasdaq with the ticker symbol “RXT”. Goldman, Citi, JP Morgan, RBC Capital Markets and other banks are helping to subscribe to its (second) debut.
Similar to other companies that have gone private, it was not until later that it started out as a public company, Rackspace had oceans of debt.
The company’s balance sheet showed cash and cash equivalents of $ 125.2 million as at March 31, 2020. On the other side of the ledger, Rackspace has debts of $ 3.99 billion, comprised of a credit facility $ 2.82 billion term loan and $ 1.12 billion senior notes that cost the company a 8.625% coupon, among other debts. The term loan costs a lower rate of 4%, and arises from the initial transaction to take Rackspace private ($ 2 billion), and another $ 800 million which was then taken “in connection with the acquisition of Datapipe ”.
The senior notes, with an initial value of $ 1,200 million or $ 1.20 billion, also came from the acquisition of the company in its 2016 transaction; The ability of private equity to buy companies with borrowed money, then make them public and use these products to limit the resulting debt profile while maintaining financial control is lucrative, if somewhat insolent .
Rackspace intends to use IPO product to reduce debt, including term loan and senior notes. The exact amount of Rackspace on its debts will depend on its IPO price.
These debts take a business that is comfortably profitable on an operational basis and make it deeply unprofitable on a net basis. Observe:
Image credits: SEC Looking in the right column, we can see a company with material revenues, although thin gross margins for a putatively technological company. It generated $ 21.5 million in operating profit in the first quarter of 2020 from its $ 652.7 million in quarterly revenue. However, interest expense of $ 72 million during the quarter helped drive Rackspace to a net loss of $ 48.2 million.
However, not everything is lost because Rackspace has a positive operating cash flow during the same three-month period. Yet the company’s multi-billion dollar debt level is still high and heavy.
Returning to our discussion of Rackspace’s activities, it should be noted that it has declared that it sells “multicloud technology services”, which indicates to us that its gross margins will be service-oriented, that is to say that they will not be software level. And they are not. In Q1 2020, Rackspace had gross margins of 38.2%, compared to 41.3% in the first quarter of the previous year. This trend is worrying.
The company’s growth profile is also slightly uneven. From 2017 to 2018, Rackspace saw its sales grow from $ 2.14 billion to $ 2.45 billion, an increase of 14.4%. The company declined slightly in 2019, from $ 2.45 billion in revenue in 2018 to $ 2.44 billion next year. Given the economy that year and the importance of the cloud in 2019, the results are a bit surprising.
However, Rackspace increased in the first quarter of 2020. The company’s $ 652.7 million in first quarter sales easily beat its Q1 2019 profit of $ 606.9 million. The company grew by 7.6% in the first quarter of 2020. This is not much, especially during a period when its gross margins have eroded, but the return to growth is still welcome.
TipsClear did not see Q2 2020 results in its S-1 today when reading the document, so we assume the company will file again shortly to include more recent financial results; it would be difficult for the company to make its debut at an attractive price in the COVID-19 era without sharing the figures for the second quarter, we estimate.
How to assess Rackspace is a puzzle. The company is tech savvy, which means it will find some interest. But its slow growth rate, its high debts and its gloomy margins make it difficult to set an equitable multiple. More when we have it.