Rackspace Hosting eliminated as D.E. Shaw position



D.E. Shaw and Rackspace

D.E. Shaw bought new positions in Alibaba Group Holding Limited (BABA) and Liberty Media Corporation (LMCK). Notable position decreases were in WellPoint (WLP), Rackspace Inc.(RAX), and Potash Corporation of Saskatchewan (POT). The fund increased positions in Hewlett-Packard Company (HPQ) and Pfizer, Inc. (PFE) and decreased positions in AbbVie (ABBV), SanDisk Corporation (SNDK) and Occidental Petroleum Corporation (OXY).

D.E. Shaw exited a position in Rackspace Inc. (RAX), which accounted for 0.016% of the fund’s second-quarter portfolio.


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Rackspace: A leader in managed cloud

Rackspace Inc. (RAX) is a leader in managed cloud and the founder of OpenStack, the open-source operating system for the cloud. It offers a diverse portfolio of cloud computing services, including public cloud, dedicated cloud, private cloud, and hybrid cloud. All of its services are committed to open technologies. The equipment, including servers, routers, switches, firewalls, load balancers, cabinets, software, and wiring, that is required to deliver services is typically purchased and managed by the company. Rackspace is headquartered in San Antonio, Texas, and operates data centers on four continents.

Rackspace sees activist interest from various hedge funds

In May, Rackspace (RAX) said it “has been approached by multiple parties who have expressed interest in exploring a strategic relationship with Rackspace, ranging from partnership to acquisition.” The company hired Morgan Stanley “to evaluate the inbound strategic proposals and to explore other alternatives that could advance Rackspace’s long-term strategy.”

The company has seen investor concerns over increasing competition from technology companies including Amazon, Hewlett-Packard, Google, IBM, and Microsoft. These companies have made substantial investments in cloud-computing offerings and initiatives.

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Rackspace gives up on efforts to find a buyer

In September, after months of speculation that Rackspace might be acquired by CenturyLink, Inc. (CTL) and that Hewlett-Packard was also interested, the company said it was no longer exploring merger and acquisition options. The company declared its commitment to remain independent. A press release stated, “Based on Rackspace’s reaccelerated revenue growth and its potential trajectory for the coming year, the board concluded the company is best positioned to maximize shareholder value by executing its strategy as the #1 managed cloud company.”

Rackspace also abandoned plans for a share buyback and noted, “It is prudent to maintain flexibility at this time to ensure that the appropriate investments can be made to drive our strategy forward.”

New CEO and chief revenue officer

Rackspace (RAX) has announced that the company’s president, Taylor Rhodes, will be the new chief executive officer and member of the board of directors. Rhodes takes over for Graham Weston, cofounder and chairman of the board.

In addition, the company promoted Todd Cione, former SVP of Americas sales at Rackspace, to chief revenue officer. In this new role, Cione will oversee the operations of the Americas sales and global marketing organizations, uniting the functions to work seamlessly and strengthening the company’s go-to-market strategy.

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Robust 3Q14 revenue and earnings

Rackkspace’s net revenue for the third quarter of 2014 was $460 million, up 4.2% from the previous quarter and up 18.3% from the third quarter of 2013.

Net income was $26 million for 3Q14, up 14.6% from the previous quarter. Net income margin for the quarter was 5.6% compared to 5.1% for the previous quarter.

For the fourth quarter of 2014, the company is forecasting total net revenue to range between $469 million and $476 million. This range includes an expected negative foreign currency impact of approximately $5 million in the quarter, or 110 basis points of sequential growth.

Rackspace’s CEO said, “We are pleased with our operating performance this quarter and encouraged by the momentum we are seeing in the business, we are poised to capitalize on the massive opportunity ahead in the managed cloud market, where we see increasing demand for our managed services and expertise. And while we made strong progress this year, we’re determined to continually improve our execution and seize our future.”

The next article in this series discusses D.E. Shaw’s exit from its position in Potash Corporation of Saskatchewan (POT).


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