Rackspace IPO an Important Sector Indicator

Internet infrastructure specialist Rackspace, Inc. has filed for an IPO in which it hopes to raise $400 million. The shares will be sold through a "dutch auction" process similar to that used by Google (GOOG) in 2004. The offering could serve as an important indicator of future IPO prospects for the managed hosting sector, which has been a focus for investment by venture capital and private equity firms.

Rackspace is the world’s largest privately-held managed hosting specialist, and has become known for its strong brand, built on a commitment to "Fanatical Support." The San Antonio, Texas company filed for a public offering in 2000, only to withdraw its plans after the dot-com crash chilled the market for Internet-related IPOs.

Rackspace, which will trade on the NYSE as RAX, has raised $39.6 million in equity capital from investors including Norwest Capitol and Sequoia Capital, and is in the process of a $100 million overhaul of a former shopping mall near San Antonio to serve as its headquarters.

The company's revenue has grown from $56.6 million in 2003 to $362.0 million in 2007, while net income grew from $208,000 to $17.8 million in the same period. Expenses have increased from $122 million in 2005 to $331.4 million for 2007, as the company tripled its employment to the current 2,021. Rackspace expects to add another 4,000 jobs by 2012.

IBM (IBM) is the market share leader in managed hosting, according to Gartner, followed by AT&T (T), Rackspace, Savvis (SVVS) and Terremark Worldwide (TMRK).

The RAX offering will be closely watched by private equity firms that have acquired managed hosting providers. These include ABRY Partners, which has acquired Hosted Solutions and Houston's CyrusOne, and Managed Data Holdings, which was formed by Catalyst Investors and Great Hill Partners and has bought managed hosting companies in the LA and Denver markets. Datapipe is another growing managed hosting provider that would be buoyed by a successful IPO for Rackspace.

Rackspace made headlines last November when a data center in Grapevine, Texas lost power, knocking many popular sites offline and resulting in $3.4 million in credits to customers, according to the SEC filing. Rackspace has historically been among the most reliable providers in the world over the last six years, according to Netcraft, which provides monthly ratings of uptime performance for hosting companies.

In addition to its core IT infrastructure services, Rackspace owns the Mosso cloud hosting service and enterprise e-mail specialist MailTrust (formerly Webmail.us) which it acquired last year.