Rackspace

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July 22, 2020

On Rackspace S-1
40% margins
95% recurring revenue, 98% retenion
4 billion in debt
Owned by PE Apollo
Long sales contracts

Rackspace is returning to the public markets. Private equity firm Apollo Global took Rackspace private in 2016, saddling the company with $4B in debt and aggressively reorienting the product. Today, Rackspace is a services business with ~40% margins and $2.4B in revenue, of which 95% is recurring. The company hopes to be valued at $10B when it hits the Nasdaq with its new ticker "RXT." But with significant competition in the space, steep interest payments, and profit-maximalists at the helm, the company will need to execute perfectly.

Rackspace boasts $2.4B in revenue, 95% of which is recurring, strong geographic penetration, and an elite customer base (in theory). There's a catch. The company is ~$4B in debt, thanks to Apollo's purchase and financial machinations

It's worth couching these sub-par results — much of the negative feedback seems to come from old customers relying on the company's Public Cloud hosting service. As Rackspace focused on providing support for multicloud, support for basic cloud hosting seems to have degraded. Rackspace's failure to keep up with the Joneses created an almost abusively inferior solution. In one rather damning report, a customer notes that in switching from Rackspace from AWS Lightsail, the cost of service dropped from $380 a month to $15.
Across the multicloud and the ACP segment, Rackspace generated 85% of its revenue in 2019

Since Rackspace's gross margins are ~40%, the company effectively spends $1 upfront to get ~$0.32-0.38 in gross profits. Of course, customers continue to use Rackspace in future years, with the company earning recurring revenue. Quarterly revenue retention is 98%, which means that roughly 94% of revenue is retained on a yearly basis.

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