After privately in 2016 after receiving $ 32 per share or $ 4.3 billion from Apollo Global Management, Rackspace looking back at public marketsThe company Rackspace, which first appeared on sale in 2008, once again sets itself the goal of public offering 12 years after its first debut.
The company describes its business as a provider of “multi-keyboard technology” services, helping its customers “design, create and operate” cloud environments. Which the Rackspace emphasizes that the service sector is a useful context to understand its financial profile, as we will see below.
But first, some basics. S-1’s filing indicates a placeholder in the amount of US $ 100 million on how much the company can raise in a public offering. This figure will change, but it tells us that the company is likely to aim for the sale of shares, which will bring it about $ 100 million, and not $ 500 million, which is another popular indicator.
Rackspace will appear on the Nasdaq with the ticker “RXT”. Goldman, Citi, J.P. Morgan, RBC Capital Markets and other banks help support their (second) debut.
Like other companies that have become private, only later to debut again as a public companyRackspace has oceans of debt.
Cash and cash equivalents in the amount of 125.2 million dollars are reflected on the balance sheet of the company. USA as of March 31, 2020. On the other side of the ledger, Rackspace has $ 3.99 billion in debt. US, consisting of an urgent line of credit of $ 2.82 billion. US, and debt in the amount of 1.12 billion. Dollars. The United States, the company cost 8.625% of the coupon, among other debts. The term of the loan is a lower interest rate of 4% and stems from the initial acquisition of Rackspace private ($ 2 billion) and another $ 800 million, which were later taken “in connection with the acquisition of Datapipe”.
Senior bonds, initially totaling $ 1,200 million or $ 1.20 billion, were also received as a result of the acquisition of the company during the transaction in 2016; the ability of private equity to buy companies with borrowed money and then make them public again and use these revenues to limit the resulting debt profile while maintaining financial control is beneficial, albeit a bit daring.
Rackspace intends to use IPO continues to reduce its debt burden, including both term loans and debt. Exactly how much Rackspace can bet against its debts will depend on the IPO price.
These debts are taken by a company that is comfortably profitable on an operating basis, and makes it extremely unprofitable on a net basis. Note:
Image credits: SEC Looking at the far right column, we see a company with substantial revenues, albeit with a small gross margin for the supposedly tech company. In the first quarter of 2020, he earned an operating profit of $ 21.5 million from $ 652.7 million. Revenues for the quarter. However, interest expenses of $ 72 million this quarter helped Rackspace make a net loss of $ 48.2 million.
However, not everything is lost, as Rackspace has a positive operating cash flow for the same three-month period. However, the company’s debt burden of several billion dollars is still large and burdensome.
Returning to our discussion of the Rackspace business, we recall that it says that it sells “multi-cloud services”, which tells us that its gross margin will be service-oriented, that is, they will not be at the software level. And they are not. In the first quarter of 2020, Rackspace had a gross margin of 38.2% compared with 41.3% a year earlier. This trend is worrying.
The company’s growth profile is also slightly uneven. Between 2017 and 2018, Rackspace revenue increased from $ 2.14 billion to $ 2.45 billion, an increase of 14.4%. The company declined slightly in 2019, falling from $ 2.45 billion in 2018 to $ 2.44 billion the next year. Given the economy of that year and the importance of cloud cover in 2019, the results are a bit surprising.
However, Rackspace grew in the first quarter of 2020. The company’s revenue in the first quarter amounted to 652.7 million dollars, and its result in the first quarter of 2019 amounted to 606.9 million dollars. The company grew by 7.6% in the 1st quarter of 2020. This is not much, especially at a time when gross margin declined, but a return to growth is most likely welcome.
TechCrunch did not see the results of the second quarter of 2020 in its S-1 today, when I read the document, so we assume that the company will soon re-apply to include more recent financial results; we believe that it will be difficult for companies to debut at an attractive price in the COVID-19 era without sharing numbers for the second quarter.
How to evaluate Rackspace is a mystery. The company is technological, which means that it will find some interest. But its slow growth rate, large debts and low margin make it difficult to attach to a significant multiplier. More when we have it.