Scott Ball / Rivard Report
Rackspace has undergone plenty of change over the past two years. The San Antonio tech company, though, remains at its cavernous Windcrest headquarters, a former shopping mall now nicknamed The Castle.
On the second floor just above the escalator sits CEO Joe Eazor, who took the reins of the company a few months after it was acquired by private equity firm Apollo Global Management and taken off the New York Stock Exchange.
Since then, the company has shifted its business strategy – becoming more of a technology services company specializing in managing cloud hosting for businesses that use myriad cloud providers, including Amazon Web Services, Microsoft Azure, and Google Cloud Platform. Rather than attempting to beat its tech giant foes, Rackspace decided to join them. Still focused on its “fanatical support” model of customer service, the company aims to help clients manage their cloud infrastructure in an unbiased way – meaning they recognize the strengths and weaknesses of the public cloud platforms on the market and won’t, as a matter of course, try to steer customers to their own cloud product.
In addition to its strategy shift, the company has seen plenty of longtime Rackers depart the Castle. Staff turnover has followed Eazor’s appointment, and many of the company’s executives are new. The enterprise has also restructured its workforce with three layoffs in the past three years, the latest wave coming in February when the company trimmed its staff by 3 percent. But Rackspace remains in hiring mode, with about as many new job postings as workers that were laid off several weeks ago.
Eazor sat down for a wide-ranging interview with the Rivard Report about those changes and whether he expects the company to go public again.
Rivard Report: You’re going on two years as Rackspace’s CEO. How have things been going since you came on board?
Rackspace CEO Joe Eazor: Good. I think you know the history of the company … but [it] sort of had lost its footing, which is what led it to go private. Going private is usually a sign that a company has, somehow or another, had a stumble or two, and Rackspace was no exception. [Private equity firm] Apollo [Global Management] acquired it, and six months after they bought it I show up. We started remaking the company, and I feel very good about our progress. There’s still a ways to go, in my opinion. We really want to be the best tech services company in the world and we want to be recognized [as] that. We want customers to say that. We want industry analysts to say that, et cetera. While we’ve made progress that’s my goal for us.
RR: You’ve embraced as a company this idea of providing “unbiased support” instead of trying to go toe to toe with the Amazons, Googles, and Microsofts of the world. Talk about how that transformation happened.
JE: When I came here I had seen this industry from a lot of different angles back from EDS, HP, and EarthLink days. It became clear that our customers are trying to sort through all the options. They have all this money they’ve spent over years and years that runs the business today yet they want to go into this new place in the future. It became clear that if I look at the industry no one was helping solve that problem. How do I go and operate today but still at the same time get to the future? How do we close that gap? The reason I was excited about coming here is I feel like there was no one better positioned to do that than Rackspace. So part of the strategy has been “OK, let’s build out the portfolio of offerings” then we can help companies get from today to tomorrow, look at all the different options, and then help them execute, implement, and operate it.
RR: What does the rebranding effort signal to Rackspace’s customers?
JE: For our customers, we want to accelerate the value of the cloud wherever they’re at. … Customers didn’t have a good sense for how Rackspace had changed and potential customers on the market. We felt it was important as part of educating the new marketplace and the new Rackspace to refresh the brand and the positioning, if you will – also to help employees get a sense for ‘This is a new company, we have a new set of value propositions, we’re committed to the future,’ and I think the rebranding is all about that. It’s about the new value propositions, the new positioning in the market. It’s all about educating people on that. Even the ‘R’ and the colors we use [in the Rackspace logo] all symbolize something new and different.
RR: The recent round of layoffs was explained as a retooling of sorts. Expound on that realignment.
JE: The company had overinvested in areas that were no longer where the market is or where it’s headed. So we’re constantly looking to realign our investments to solve the problems our customers need solving, so sometimes that requires pruning back in one area and investing in another area.
RR: Can you provide some examples?
JE: We haven’t made that public. I’ll stay away from specific examples. But it’s things that were more traditional in nature. Unfortunately, the real effect on that is it affects people sometimes. But it’s a natural course of rebalancing and growing the company. It’s a tough thing that happens, but we had to rebalance our investments.
RR: Do you anticipate any more layoffs this year?
JE: We never answered that question.
We didn’t really consider that a round of layoffs it was just a repositioning – carrying too much investment in areas where the market’s not there anymore. … It’s completely repositioning versus layoffs to cut costs.
I will never say never on these things, but we’re not sitting here planning large-scale layoffs.
RR: I’ve read and heard that the company is profitable again. How has Rackspace put itself on a positive track?
JE: There’s multiple measures of profitability. From an operating profit perspective the company was always profitable and perhaps it got ahead of its capital expenditures and therefore hurt its cash flow.
There was a lot of investment in areas that weren’t generating growth and therefore were hurting the cash flow of the company. So most of our improvement in profitability has been in cash flow, which has been driven by focus – just making sure we’re investing where we want to go and not continuing to overinvest in areas where the market doesn’t need it anymore.
We’re also smarter about how we make decisions – much more operating discipline in place. We have brought a new set of methods, really, good old-fashioned best practices, capital decisions, and spend decisions, and just how we run the business is much more focused on productivity. So I don’t mind spending a dollar as long as it’s productive and generates more than I spend.
RR: How does your experience at Rackspace differ from your time at any other tech company?
JE: We have more potential at this company than any other tech company I’ve worked for. That’s exciting to me. It’s unfortunate we lost our way a little bit. The impact we can have for our customers is phenomenal. I’m committed to make sure Rackspace delivers that value to its customers.
The other thing is it’s probably the best culture I’ve worked in. It’s a great culture, and I think part of that is because it’s in San Antonio. The people that built the company did a great job of building a wonderful culture, but I don’t think they could have done that in another town. One of the reasons this company was able to create this culture is because San Antonio – there’s a certain culture to the city, familial, good core values. So the founders of this company did an excellent job, and being in San Antonio has really helped. That makes it a great place to work, and I think that is another big difference.
RR: An eventual exit from the Apollo portfolio seems to be in the cards. What have conversations with the private equity firm been like as Rackspace builds its earnings?
JE: We’re here to build a great company, and some of those things take care of themselves. Going public again is certainly an option for us. We’re big enough; we have scale. If we can continue to put some of the things in place that I want to put in place, that is not an illogical exit. The timing is dependent on so many variables. It’s not imminent, so we’re not sitting here planning it next quarter.
The difference between this and a lot of companies that go private is this is a long-term success story. The market is so much bigger than what we are. We’re barely scratching the surface in some new geography. As we continue international expansion we have so much more share of wallet or market share than we could get in the U.S. even. Latin America is wide open, Asia-Pac, and the rest of continental Europe. And the value proposition we have is fairly unique, especially with our fanatical support. This is an industry of poor customer service. We really differentiate on that factor.
The best vote of confidence for long-term success is going public again, but you never know. I mean, I don’t own the place; Apollo does.