Bloomberg News

Rackspace Founder Hits Road to Soothe Investors After CEO Leaves

February 14, 2014

Rackspace Hosting Inc. (RAX:US) co-founder Graham Weston, who took over as chief executive officer this week, is meeting with shareholders face-to-face after the company’s stock plunged on news of his predecessor’s retirement.

Weston came to San Francisco, where investors gathered for Goldman Sachs Group Inc.’s technology and Internet conference. The returning CEO said he’s sitting down with about a dozen shareholders to reassure them about the company and that he’s “energized.” Taylor Rhodes, Rackspace’s recently appointed president, spoke at the conference.

Rackspace shares tumbled (RAX:US) 19 percent on Feb. 11, the day after Lanham Napier, the company’s CEO for eight years, said he’s retiring immediately. Weston, who founded San Antonio-based Rackspace in 1998 and has remained chairman, said that while the news surprised investors, he wanted to avoid following the path of Microsoft Corp., which announced Steve Ballmer’s departure as CEO without having a successor in place.

“I saw what Ballmer had done and didn’t think it was all that beneficial,” Weston, who is interim CEO and turns 50 next month, said in an interview. “They were in limbo. We wanted to show we have a leader who’s energized and ready to plow ahead and excited to be there.”

Microsoft, the world’s largest software maker, named 22-year company veteran Satya Nadella as CEO on Feb. 4, more than five months after Ballmer said he would retire.

Rackspace, which provides servers and software that let companies offload their back-end computing and storage needs, reported fourth-quarter revenue that topped analysts’ estimates at the same time it announced Napier’s departure. Napier left voluntarily, without any pressure from the board, Weston said,

“Our transition was misunderstood” by investors, he said.

Founder’s Return

Weston served as CEO from 1999 until 2006, when he promoted Napier. The company said that it’s retained a search firm to find a long-term successor, though Weston said there’s no timeline and that the board will look at internal and external candidates.

“There’s no perfect time for a transition like this one,” Napier, who led Rackspace through its 2008 initial public offering, said on a conference call with analysts after the announcement. “I believe now is as good a time as any.”

Weston is inheriting some big challenges. Rackspace has lost almost half its market value in the past year as Amazon Web Services -- from Amazon.com Inc. -- cut prices for its cloud-computing services and bolstered investments. Microsoft with it Azure product and Google Inc. are also vying for business as companies move from owning and operating servers to renting space in the cloud.

‘Dim View’

“We have a very dim view of the company right now,” said Michael Bowen, an analyst at Pacific Crest Securities in Portland, Oregon, who has the equivalent of a hold rating on Rackspace. “They’re getting killed by AWS, Microsoft Azure and Google, and I don’t think that’s going to stop.”

Rackspace’s sales (RAX:US) climbed 17 percent in 2013 to $1.53 billion, with $415.2 million coming from cloud computing. Revenue growth has slowed (RAX:US) each of the past two years.

Rackspace, seeking to distinguish itself from Amazon, Microsoft and Google, pitches a private-cloud option, which lets clients have dedicated servers where files can be accessed from anywhere and on a multitude of devices. In a public cloud, customers share space on servers, or companies can take a hybrid approach using Rackspace’s technology.

In 2010, Rackspace introduced OpenStack, a platform that any business can use to develop its own private cloud. Recent customers include Fidelity Investments and Workday Inc. (WDAY:US)

“There are companies that want the speed and benefits of the cloud but aren’t willing to compromise on security and performance,” Weston said.

Nobody has more at stake in making the business work than Weston. He’s the largest individual investor (RAX:US) and third-biggest owner, with a holding valued at $616.7 million.

The opportunity for expansion is great enough that “selling the company is not on my list,” he said.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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Companies Mentioned

  • RAX
    (Rackspace Hosting Inc)
    • $45.89 USD
    • -0.02
    • -0.04%
  • WDAY
    (Workday Inc)
    • $87.87 USD
    • 0.50
    • 0.57%
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