Rackspace reported Q2 results on Monday with news the company was offloading its Cloud Sites business, though did not mention anything regarding a full sale.
Today, Cowen and Company restates an Outperform rating on the company and a $38 price target (current price $30.04). Analyst Colby Synesael projects FY 2016 revenue of $2.06B, EBITDA of $717M and EPS of $1.04.
He cites improved cost management, slowing core growth, capital-light nature of support business, focus on profitability and strong demand for newer growth offerings in the memo.
Rackspace (NYSE:RAX) registers 8.9% Y/Y normalized revenue growth, net income of $36M (6.8% margin), adjusted EBITDA of $187M (35.8% margin), cash flow from operating activities of $165M, free cash flow of $98M, capital expenditures of $82M, cash and cash equivalents of $544M and interest-bearing debt of $501M.
Regarding the Cloud Sites divestment, Liquid Web is a cloud-hosting provider with $90M in annual sales. The deal is expected to close in the upcoming quarter.
Rackspace projects Q3 revenue of $510M-$515M and FY 2016 revenue of $2.06-$2.08B.
Taylor Rhodes, Rackspace president and CEO: "Demand is scaling rapidly for the expertise and managed services that we provide to businesses that use AWS, the Microsoft Cloud, and our OpenStack private cloud. We now serve almost 600 customers on these platforms, including some of the world's largest companies. During the second quarter, we demonstrated continued revenue growth, along with higher profitability, higher capital efficiency, strong operating cash flow and record free cash flow."
Last week, Wells Fargo commented on recent Rackspace (RAX -0.1%) takeover rumors with notes supporting a $32 per share price tag. Today, Oppenheimer & Co. forecasts a similar outcome.
Oppenheimer & Co. analyst Timothy Horan maintains a Buy rating on the company and raises his price target to $32 ($29.21 current price). He notes: "...a deal in the $32 area is more likely given our assumptions that the company could cut OPEX by 20%, decrease capital intensity of the business to 10-15% of revenue and increase leverage to ~4x EBITDA. At $32, or $4.3B, 30% equates to ~$1.3B in equity.”
He does not discount the possibility of a strategic bidder coming in with a high-30s offer, though mentions Rackspace insiders may bite on a lower private-equity bid if equity retention is part of a deal.
Rackspace reports on its second quarter today after market close. Horan expects weak results and reduced guidance.
Google (GOOG, GOOGL) has bought Bebop Technologies, a stealth-mode startup that has been working on an enterprise cloud app development platform, and which was founded by VMware co-founder and Google board member Diane Greene.
Greene will now lead a new unit containing all of Google's cloud businesses, including Google Apps (productivity apps), Google for Work (custom versions of Google products for enterprises), and the Google Cloud Platform (cloud infrastructure and app platform services). CEO Sundar Pichai declares the move will "bring together product, engineering, marketing and sales and allow us to operate in a much more integrated, coordinated fashion."
Pichai provides some vague details regarding Bebop: "[B]ebop is a new development platform that makes it easy to build and maintain enterprise applications ... bebop and its stellar team will help us provide integrated cloud products at every level: end-user platforms like Android and Chromebooks, infrastructure and services in Google Cloud Platform, developer frameworks for mobile and enterprise users, and end-user applications like Gmail and Docs."
The move comes shortly after Google SVP Urs Hölze proclaimed (in remarks that may or may not have been blessed by Google's brass) the company's Cloud Platform revenue could surpass its ad revenue in five years. With 90% of Google's Q3 revenue coming from ads (and much of the rest from hardware, Google Play, etc.), that could prove a tall order.
Rackspace (NYSE:RAX) fell 6.1% in regular trading, with Hölze's remarks having been mentioned as a potential culprit. Stifel defended Rackspace, arguing the remarks were misunderstood and that Rackspace will eventually strike a deal to provide managed services for Google's cloud offerings, much as it has with Amazon and Microsoft.
Synergy Research estimates Google is the 4th-largest player in the in the broader market for public, private, and hybrid cloud services, trailing IBM, Microsoft, and 800-lb. gorilla Amazon. The company has tried to differentiate its cloud offerings by emphasizing developer needs; the Bebop acquisition fits with that effort.
A day after Rackspace (NYSE:RAX) announced a services partnership with Microsoft related to Azure, shares are rallying in response to a CRN report stating a similar deal with Amazon Web Services (NASDAQ:AMZN) is close.
CRN states a channel partner for both Rackspace and Amazon "approached his company with an offer to participate in a beta program in which Rackspace would manage and provide support for his customers hosting workloads in Amazon's cloud." The source: "They are going to wrap their managed 'Fanatical Support' around AWS and essentially become an Amazon reseller."
AWS had revenue of $5.16B over the 12 months ending March 31, and (per Synergy Research) still controls nearly 30% of the global cloud IaaS/PaaS market.
Rackspace is now up 8.5% over the last two days. Shares are still down 17% YTD.
IBM (IBM +0.1%) has acquired Blue Box, a provider of managed cloud services for companies deploying private and hybrid clouds based on the open-source OpenStack cloud infrastructure (IaaS) platform.
Cisco (CSCO +0.1%) is buying Piston Cloud Computing, a provider of software (called CloudOS) for managing and deploying services on commodity servers running OpenStack, as well as popular big data/analytics software platforms such as Hadoop and Spark. Terms for both deals are undisclosed.
IBM, whose SoftLayer unit already offers OpenStack services, will use Blue Box to "help businesses rapidly integrate their cloud-based applications and on-premises systems into OpenStack-based managed cloud," and that the deal allows it to offer a remotely-managed OpenStack private cloud solution.
Cisco asserts Piston and its engineers will "help accelerate the product, delivery, and operational capabilities" of its Intercloud platform, which (via service provider partners) provides a network of OpenStack cloud infrastructures running on Cisco hardware and software, and within which workloads can be moved between data centers. It also expects Piston to strengthen its OpenStack private cloud offering, the fruits of last year's acquisition of private cloud services provider Metacloud.
IBM ended Q1 on a $3.8B/year run rate for its various "cloud delivered as a service" offerings. Synergy Research believes IBM is the third-largest player in the public/private/hybrid cloud services space, trailing Amazon (easily the market leader) and Microsoft.
Many tech/telecom giants have embraced OpenStack in their efforts to compete against Amazon, Microsoft, and Google's proprietary platforms. Rackspace (RAX +0.7%) remains a top independent OpenStack provider
Rackspace (RAX -5.4%) has received "only modest buyer interest" since putting itself on the block, BrightWire reports. Shares have added to the Thursday losses they saw following a re/code report stating sources have denied H-P made a bid.
BrightWire states CenturyLink (CTL - unchanged) "made an initial overture" to buy Rackspace, but adds its interest "was only casual and soon faded." Citi made the case for a Rackspace/CenturyLink deal last month.
Separately, Wells Fargo's Gary Powell says talks make him consider a Rackspace LBO deal (would involve P-E firms) unlikely, and that the market has "correctly assumed" a 70%+ probability that no strategic buyer (i.e. a tech company) will emerge.
Nonetheless, Powell reiterates an Outperform, and calls Rackspace's asset value under-appreciated. He adds CenturyLink and H-P "have not completely ruled out a potential deal with RAX."
Mark Interrante, until now Rackspace's (RAX -2.1%) SVP of products and engineering, has been hired by H-P (HPQ +0.4%) to be the SVP of engineering for the company's cloud services unit
Both H-P and Rackspace offer cloud infrastructure (IaaS) services based on the OpenStack platform; Rackspace is an early leader within the market. H-P also offers cloud app platform (PaaS) services with the help of a partnership with Cloud Foundry (a part of EMC/VMware's Pivotal spinoff). Each company faces intense competition from Amazon, Google, and Microsoft.
Meanwhile, re/code states multiple sources have "categorically denied" a TechCrunch report stating H-P made a $43/share bid for Rackspace. As it is, dealReporter had expressed skepticism about the reliability of a source providing similar info.
Acquiring Rackspace (RAX +1%) would double CenturyLink's (CTL - unchanged) data services revenue, boost top-line growth, increase "customer stickiness," and "modestly [raise] leverage," writes Citi's David Phipps, making the case for a deal.
At the same time, Phipps estimates a deal for Rackspace ($5.3B current market cap) would require ~$6B in financing, which in turn would lead to a credit downgrade for CenturyLink.
CenturyLink spent $2.5B in 2011 to buy Web hosting and cloud infrastructure (IaaS) firm Savvis. But it also took a $1.1B charge last fall for its data hosting unit. The company has since bought another IaaS firm (Tier 3), and begun moving its managed data services to its cloud.
Rackspace, a major Web host and the top provider of IaaS services based on the OpenStack platform, has reportedly hired Morgan Stanley to evaluate "inbound strategic proposals" and other options.
Both Rackspace and CenturyLink are facing intense price competition from market leader Amazon, as well as Microsoft and Google.
Previous: CenturyLink counting on data centers, network to challenge Amazon
Bloomberg reports Rackspace (RAX +9.6%) has hired Morgan Stanley to evaluate "inbound strategic proposals" and other options. Shares spiked shortly before the close, and are up another 1.2% AH.
Rackspace jumped earlier this week on a Q1 beat and solid guidance, but shares remain well off their Jan. '13 high of $81.36, thanks in part to worries about intense cloud infrastructure (IaaS) price pressure, and the impact of IaaS services on Rackspace's traditional hosting business.
Vague M&A chatter is providing a boost to Rackspace (RAX +4.2%) on a down day for tech stocks.
The Web hosting/cloud infrastructure provider is no stranger to M&A speculation. The recent retirement of long-time CEO Lanham Napier might be making investors more willing to believe Rackspace could be sold.
Cloudant's customer base includes Samsung, Microsoft, Adobe, and Fidelity. The company already relies on IBM-acquired SoftLayer's cloud infrastructure platform to deliver its services, which compete against Amazon Web Services' DynamoDB and solutions based on the open-source MongoDB.
All three solutions rely on NoSQL, a database architecture that differs from the age-old SQL (used by IBM's DB2, as well as ORCL's bread-and-butter database) through its support for semi-structured and unstructured data.
This feature, along with NoSQL's superior performance and scalability for certain apps, is leading the technology to be widely adopted for handling Web/cloud services and big data projects.
Separately, IBM is promising to invest $1B to bolster SoftLayer's cloud software/app platform offerings. Last month, Big Blue, increasingly looking to cloud services to halt its ongoing revenue declines, said it would invest $1.2B to build 15 new data centers for SoftLayer.