Scott Ball/Rivard Report
Cloud Sites will remain in San Antonio and Michigan-based Liquid Web will grow from more than 400 employees to approximately 550. The company currently generates $90 million in annual revenue.
“As Rackspace continues to focus on delivering expertise and Fanatical Support for the world’s leading clouds, and serving more enterprise customers, it made sense for us to sell the Cloud Sites business unit to Liquid Web,” Matt Bradley, Rackspace vice president of corporate development and strategy, stated Monday in a press release. “Through the transaction, we are also pleased to welcome Liquid Web to the Rackspace Partner Network as an email reseller.”
Rackspace President and CEO Taylor Rhodes said Cloud Sites is a non-core business unit. By selling it, the company can better focus its portfolio.
“We have been looking at the business and finding business (units) that are growing at a slower rate than our overall corporate rate, but producing healthy economics, but also these are businesses if we wanted to keep them, we would need to make substantial new investments,” Rhodes said in a quarterly earnings call with reporters Monday afternoon. “In our Cloud Sites business, it runs several hundred thousand websites for its customers and it competes in a market where if we really wanted to focus there, we’d have to make substantial investment.
“Instead, what we’ve been able to do is find a strategic buyer, Liquid Web, who will buy the company at a higher multiple than it was producing for us and allow us to both focus our portfolio as well as find a happy home for that business, and it can help us raise some incremental funds that we can invest in growth.”
Rhodes likened this sale to Rackspace’s past divestitures of Jungle Disk, among others.
Liquid Web will invest in the Cloud Sites platform, its employees and the City of San Antonio, CEO Jim Geiger stated in an email.
“Liquid Web’s number one priority is making this a seamless transition for everyone involved, most importantly our customers and new employees. Liquid Web would like to retain and grow the Cloud Sites San Antonio team, and the company looks forward to integrating the Cloud Sites technology into the company’s product development and sales efforts,” Geiger stated. “Our business case does not assume any staff reductions and, in fact, we’ll be growing our presence in San Antonio.”
Geiger said the company is looking for office space in San Antonio’s downtown, and he expects to announce a location soon.
“Our goal is to be a preferred employer in your city’s dynamic and growing tech market,” he stated. “Liquid Web will offer all Cloud Sites employees a spot on the Liquid Web team and will keep these employees based in San Antonio with plans to invest in a new facility downtown.”
Rackspace non-GAAP diluted income per share saw an increase of 31% to 38 cents in quarter two over 30 cents in the same quarter last year.
UK customers are struggling in the post-Brexit market, Rhodes said, and Rackspace earnings likely will reflect some of these effects in the third quarter.
“We expect negative impact from the Brexit vote in the UK,” Rhodes said. “We’ve seen somewhat higher churn rates and some slowdown in spending among our UK customers, some of whose businesses have suffered from the currency fluctuation and uncertainty that has followed the Brexit vote. We expect this slowdown in spending and uptick in churn, due to several specific customers, to affect our business in the second half of the year.”
Rhodes said other Rackspace business verticals will continue to grow.
“As an offset, we expect continued acceleration of our AWS (Amazon Web Services) business and significantly lower capital expenditure due to increased efficiency and lower growth-related spending on infrastructure resulting in high free cash flow,” Rhodes said. Basically, Rackspace will have money from this sale which it can invest in new ventures or use to further focus its core offerings.
AWS is a cloud computing platform offered by Amazon. Rackspace’s AWS support team is one of the largest in the world, Rhodes stated on the Rackspace blog in October 2015.
Liquid Web currently serves more than 30,000 customers in 150 countries and has been recognized among INC Magazine’s 5000 Fastest Growing Companies for the last 10 years. Liquid Web is part of Madison Dearborn Partners, LLC, a private equity investment firm based in Chicago.
Top image: The entrance to Rackspace. Photo by Scott Ball.