Update: Rackspace Files IPO, Will Set Price Via Auction
Erick Schonfeld
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Web hosting provider Rackspace filed for an initial public offering with the SEC last night, as we predicted it would. The company will try to raise $400 million, and it intends to set the IPO price through an auction, much like Google did. The underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse, and WR Hambrecht & Co. (the leading proponent of such IPO pricing). Pricing through an auction is designed to make sure the company raises the most money possible instead of giving up a first-day pop to investors who are allocated shares by the investment banks doing the deal. Shares will still be allocated to such clients, but anyone who bids beforehand in the auction at or above the eventual IPO price will also get shares. All in all, it is a much more efficient way to price an IPO and more companies should do it.
With the filing we also get a clearer picture of Rackspace’s business and financials. Its revenues grew 62 percent last year to $362 million, but it posted net profits of $17.8 million, which were down 10 percent from the year before. Cash flows from operations, though, remained healthy at $105 million last year, up from $61 million in 2006. (Click on the table below for a bigger image and more data):
The decline in profits was because the company spent a lot more staffing up and spending more on sales and marketing. About half of the $53 million increase in its cost of revenues last year was attributable to the fact that it nearly doubled the number of employees to 2,021 (of that, data center employees went from 576 to 994, and sales and marketing headcount went from 224 to 353). Servers, software licensing costs, bandwidth, power and rent made up most of the rest of the increase.
Another interesting tidbit: that truck accident that took down one of its data centers in Texas last November cost the company $3.4 million in credits to customers.
At the end of the year, it had 29,193 customers, compared to 12,677 the year before. But nearly all of that growth was due to its acquisition of Webmail.us (i.e., they are hosted e-mail customers, not hosted Website customers). Rackspace has 36,692 servers across seven data centers, 114,749 square feet of data center space, with a 61 percent utilization rate. The company makes $3,504 a year per square foot, a number that has been growing nicely, illustrating that Web hosting is a scale business with increasing returns the more servers that can be rented out.
Good for them
Note that the $3,500 a square foot is because they’re selling managed hosting and services. The shared hosting and dedicated server companies don’t make that kind of return. That’s why many hosting and colo companies are looking to move up the value chain and add services (especially security).
The S1 says they had $39.6 million in equity capital.
We’ve been using Rackspace for 5 years. With the exception of the truck incident, absolutely phenomenal service. After 4 hosting providers, the best I’ve seen yet. Pricing is slightly higher, but its definitely worth the cost.
Only issue I see is the potential encroaching of Amazon and Google with their some of their web services offerings. But, with Rackspace’s strong SLA’s and customer service, they should be able to fend them off (at least in the near-term).
I wouldn’t invest in them, the cloud is the way to go nowadays.
@ LP (#4) - Rackspace has a cloud - it is called MOSSO.
Their numbers don’t look very good. After substantial increases in top line revenue their bottomline couldn’t increase. As a public company they won’t be able to get away with down years. This is a dog as a public company.
wrong move, wrong move….their stock will go down with every single outage and DDos attacks.
@5 and it sucks and noone uses it.
I think they just want to cash out before the market becomes overly competitive. Right now if you want their level of reliability rackspace is on the top of your list. And even then its perceived level of reliability, the truck incident showed that even the 100% up time sites go down.
But in a few years a lot of secondary providers will start competing with them. i.e. I currently use LiquidWeb because they give you almost identical level of service/uptime, for half the price and without the elitist attitude you get at rackspace. Give Liquidweb a year or two and I have no doubt that they’ll start taking business away from Rackspace(you know those big spending corporate customers).
Then you have Cloud Computing…sure right now the big companies aren’t using them because they haven’t been vetted yet. But in a couple of years you’ll see all those major customers that are currently using rackspace migrate a lot of their stuff to cloud computing.
There is a reason rackspace doesn’t advertise their rates, and you know the old saying…if the price is not listed, its too expensive for me.
Just for my information, say I wanna take my LLC in California and change it’s status to a corp, to go public on X exchange. Can you just set up an online dutch auction and forgo the investment bankers completely, or is it just a supplement to the investment banker role?
Will the FTC allow a purely digital initial price set or no?
With everybody listed that’s underwriting this my guess would be no.
Can Mike Arrington elaborate on this process since he’s an ex-attorney?
I am interested in this topic and I feel that this blog post badly explains it.
I of course meant the SEC, not the FTC. I type at thinking speed and sometimes I make mistakes.
http://www.techcrunch.com/wp-c.....t-full.png
BTW, these numbers are pathetic. BeerCo Software corp. Canada netted more than rackspace and I have the tax returns to prove it. It couldn’t even come close to the TSX minimum of 10M.
My new LLC in Cali just started and even it is outselling Rackspace in it’s first year. It was registered on the 4rth of this month, 2 weeks ago.
What gives?
@Chris: you know those numbers are in thousands right?
@12 - heh, I’m guessing he didn’t notice that bit.
@12, you got me. I didn’t read it as a Q1,2,3,4 report, but rather as a fiscal profit/loss report like the ones I print out in Quickbooks Pro. It didn’t strike me to read the numbers as a Q1 report in the thousands.
BTW, I erred. The new LLC I’m managing was registered this past April fool’s day on the 1rst. Not on the 4rth. I guess it’s not outselling Rackspace.
…. yet. In California, nothing can stop you. I already had Wamu offering lines of credit we don’t need when we did our initial deposit.
At any rate, since those are numbers in the thousands, congratulations Rackspace!
The whole dutch auction vs. investment bank valuation of the IPO still hasn’t been explained for this one vs Google.
Any thoughts on that @12 and @13 ???
#2 (Rich Miller) - how do you know that shared hosting doesn’t have #’s like that? Think about it - instead of billing one client for a single box, you can bill however many you can fit on that box, potentially hundreds. Just revenue numbers alone, I’d estimate 2-3 times of potential revenue selling shared hosting than Rackspace’s services. It’s just simply more lucrative. There are an endless number of reasons why they don’t sell shared hosting, but the point I want to make is that looking at your revenue on a square foot basis would mean shared hosting probably has higher numbers.
Did some expert say earlier that this ISP kind of biz is lousy and low margin?
Short the stock or buy the PUTS and make merry…..
TC should have section devoted to finance.techcrunch.com
-ANurag
eric…
um, no offense.. but can you point to actual live vetted analysis that proves that an auction is better/more efficient than a regular ipo?
if we were to simply use google, then an auction didn’t do any better/worse, did it??
the auction, in theory should provide for a more broad allocation of the shares, but it by no means states that it’s more “efficient”.
peace…
i dont think of investing in them. Are they going to survive next 3 years. who know….
They went through this before a few years back and pulled out, I wonder if they’ll get through this time.
@8 - Rackspace have an excellent track record having seen off many competitors for years. The cycle I’ve observed is new providers arrive with awesome tech, service and pricing; all of which is possible because of the low overhead of a small IDC, and most importantly a small customer base that can be supported incredibly easily. Cost sensitive clients flock in and the operation starts to fail on support; then they need a new data center and find that all that empty space, power and connectivity is hard to pay for… That usually marks the end of the story.
RS have however gone past that and proven that they can scale profitably and improve levels of support.
Whether the market remains in the future is another matter. Smaller, faster servers make for higher revenues per square foot. Cloud has been bandied about for years as the next big thing (once people stopped talking about managed services), we’ll see…
Didn’t GoDaddy do the same exact thing?
I’m sure Rackspace will raise their targeted $400 mil and then some. These guys host many of the web 2.0 start ups today because they are known for their reliability and support.
However just because they are Rackspace doesn’t mean their stock will stay up and not have wild fluctuations. For good examples look at SVVS, LLNW, INAP, NAVI as all of these stocks have been pounded into the ground and have dropped a lot more than the S&P.
Erick - “Revenue per square foot” (which you suggest is important) is a hilarious metric — the servers are stacked vertically too!
@20. Yes they have excellent track record, but the truck thing showed that all their guarantees are worthless. They can have the same power outages as any other provider. The only difference is Rackspace will pay you a few pennies for those outages from the start, and other providers will pay you a few pennies after 30 minutes of downtime per year.
And honestly I don’t see Liquid Web as that small. Go on any webmaster forum and its pretty much considered a top level provider, right up there with rackspace. If you ask whats better LW vs [any competitor except Rackspace] you’ll always get that LW is better. And unlike RS they are actually there among the little guys, doing promotions, resolving issues, while RS is nowhere to be found because they don’t give a crap about the little guy and instead focus on big corporate clients. And VC backed startups that have been drinking their koolaid.
As far as data centers are considered, Liquid Web is already up to 2 datacenters and they don’t seem to have a problem scaling/getting users/keeping the same level of support.
And honestly, I can’t really see how Rackspace can be that much better than them at service. If I need to call, no matter the time of day I get a response within 2 rings. If I need to email, the first reply comes in 10-20 minutes after which its back and forth like instant messaging through email between myself and the support guy until my issue gets resolved. So what happens with Rackspace? Rackspace picks up a phone after 1 ring? And its 5 minutes instead of 10 for emails? I dunno about you but not getting gouged, not getting nickel and dimed for every little thing, and not getting the high and mighty attitude is worth to me, having to wait that 1 extra ring and that extra 5 minutes for a reply.
And no I don’t work for Liquid Web, I’m just a VERY satisfied customer who has been treated right from day 1(well day 0 actually, they were just as good and patient when I was asking questions)
Well..I’ve just sent them a termination notice. My bandwidth costs had risen to more than $20K per month…I moved web host (didn’t notice that they weren’t as FANATICAL as Rackspace and saved my company $15K per month AT LEAST. Good luck with your IPO Rackspace (NOT).
@Andrew You are SO right….if anyone is looking for a data centre in the UK…I’ve had the same experience with RapidSwitch….in fact they are faster and more responsive than Rackspace…AND you get 10TB/Month with every server !! And NO NO I don’t work for Rapidswitch.
@Gamerguy what was your server/bandwidth setup with them? I’d like to see how much everything cost.
Thats one of the big things that I dont like about Rackspace…you can’t even see their prices w/o contacting their sales people which will push you to make their sale.
Interesting how the bankers want to dutch auction this issue. They don’t want to take this is deal on.
28 - It is a management decision to use an auction offering, do a little research on how the game works will you? I’m sure they could have gone the traditional route with no problem. Btw, take a look at some of the past auctions from WRH and they’ve performed their capital raising function quite well.
Personally/professionally, I don’t have any relationship with rackspace and I think it looks attractive enough to consider investing in.
What I most see happening is that whatever level of service Rackspace has, it will probably go down once it’s public. As well as the number of employees is likely to drop as well. I’m sorry to hear they’re selling out.
#29. If you read the prospectus you’d see why Goldman doesn’t want to risk its capital to sell this issue. The other investment banks are selling it through their wealth management divisions (i.e. selling it to individual investors), because they don’t think institutional investors will buy it. Good luck.
With such a quiet IPO market for venture-backed companies last quarter, it’s at least good to see one braving the waters. I hope they do well.
@20
The difference is Rackspace gets the MOM alert and solves the problem when you are sleeping. You wake up and enjoy your breakfast.
So if they want to raise 400 million, what would the stock price have to open at? Anybody have a guess what the stock price will be first day on the market?
Wyatt
They just need more rackspace for the more customers coming through their door - good idea for a web hosting company to go IPO but why aren’t they grown to a higher level? And that many customers can bring in that much money?
@31 - If you have really seen the actual prospectus, then you probably shouldn’t be posting about it on message boards, since Goldman just told me it has not been made public yet.
What you may be referring to is the S-1 filing with the SEC (available on their web site). This is a draft registration statement. You can tell it is a draft because certain numbers, such as the price, are blank. It is normal to have several of these before the one that is effective.
However, I can’t find anything in there that supports your claim that RAX will not be marketed to institutional investors. Please figure out what document you are looking at, and (assuming it’s public) let us know what document to go to and what page (the S-1 is over 100 pages). Thanks.
My company has been w/ RS for over 4 years and has worked with over 20 hosting companies over the last 10 years (we are technology company). We spend over 2k per month for hosting (multiple boxes) which is well worth it for the level of service we demand. NO other managed hosting provider has their culture or dedication to customers like RS - think the Nordstrom’s customer service model brought to hosting.
I’m buying the stock based on their strong committment to the customer, you really can’t find another group with their dedication. RS is going to be around for many years - the management team is top shelf, the employees are exceptional - these guys are winners.
This site is recommended in case of the auction. http://auction.arekashite.com/
“All in all, it is a much more efficient way to price an IPO”
What is your basis for this statement? Theoretically, auctions don’t work very well in environments similar to IPOs. In practice, country after country has tried and had problems with this method. This is the one IPO method that has consistently done poorly around the world. What makes the US think that we’re so different, without even looking at the hundreds of IPO auctions that have been done internationally? Have you read the research on either the theory or the actual track record for this method?
What incentive do people have to put a lot of time and effort into evaluating shares in this type of auction? How many people understand the complicated theory behind bidding strategies? How much should you shave your bid for the winner’s curse, given that you can’t pin down to the nearest hundred, or even to the nearest thousand, how many bidders there will be? Perhaps you could walk me through when and why this method is a good idea, given that it takes work to come up with a reasonable estimate of the value of these shares, and given that the auction is open to potentially millions of free riders that have no clue what they’re doing and don’t want to do all that hard work.