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Rackspace: We’re Not Selling but We Do Have a New CEO
Inside a Rackspace data center. (Photo: Rackspace)

Rackspace: We’re Not Selling but We Do Have a New CEO

Stock market not convinced decision to press on with current strategy is sound

Rackspace leadership announced they will not be selling the company. After reviewing a number of “alternatives,” the company’s management decided to press on with its strategy to pursue greater share of the managed cloud market and appointed its president Taylor Rhodes as new CEO.

The stock market didn’t immediately buy the vision. The Windcrest, Texas-based company’s stock was down nearly 17 percent in afterhours trading on Tuesday following the announcement.

In May Rackspace disclosed that it had been approached with a number of partnership and acquisition offers and hired consultants (including Morgan Stanley) to help it review the offers. Now that the review is over, the management has decided to continue pursuing its current managed-services-focused strategy, announced earlier this year.

Rhodes, who’s been with the company for eight years, will replace co-founder Graham Weston, who will continue as non-executive chairman of the board.

In a conference call with analysts Tuesday Rhodes said the company made the decision to preserve flexibility in a market that is large but still in its early stages.

“This is about preserving our options,” he said. “We have a much greater opportunity to create shareholder value in stand-alone mode.”

He cited the company’s strong performance this year, during a time when large cloud providers cut their prices drastically, apparently referring to the cloud services price cuts announced by Google, Microsoft and Amazon earlier this year. Rackspace reported a 16-percent year-over-year revenue increase in the first quarter and a 17-percent increase in the second quarter.

The fact that Rackspace revenue grew at a time when its competitors were slashing prices was proof that “we’re playing in a different market,” Rhodes said.

But revenue numbers alone are not the best indicator of health. Being a hands-on IT infrastructure service provider, Rackspace is in a low-margin business. Building data centers, populating them with hardware and sophisticated management systems and keeping a big staff of support engineers available around the clock costs a lot and makes it hard to turn a big profit. Rackspace’s net income margin was 6 percent in the first quarter and 5.1 percent in the second quarter.

Addressing the margin question, Rhodes said the company was now ready to start growing its margin after completing the task of repositioning itself. “We still have many levers to pull,” he said, adding that those levers would not include “draconian measures.” One of the quickest ways to increase margin is to lay off a portion of staff.

Billing itself as a “managed cloud company,” Rackspace is a lot more hand-on with its customers’ cloud infrastructure than the big public cloud providers are. The company offers some level of managed services even with the most basic of its cloud offerings, and options of having Rackspace engineers manage customers’ infrastructure extend all the way up the application stack.

But managed cloud services is a crowded market with some heavyweight competitors. While Gartner considers Rackspace a leader in the category, it has at least one other leader to contend with in North America – a company called Datapipe – and a slew of leaders in the European market, including Interoute, Colt, Verizon, CenturyLink, Claranet and BT Global Services.

While Rackspace has rejected recent acquisition and partnership offers, Rhodes did not rule out the possibility of entertaining such options in the future. “It’s on the table,” he said. “It will not be executed at this time.”

For now, however, he said he was glad to have put acquisition talks aside. “I’m so excited to not have this conversation with prospects and customers anymore,” he said. “We are pumped to put this behind us.”

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