Jeff Kauten

Staff Attorney

Office of Technology

Rackspace Technology, Inc.

Amendment No. 1 to Registration Statement on Form S-1

Filed July 20, 2020

File No. 333-239794

the general conditions of the securities market and the recent market prices of, and the demand for, publicly traded common stock of comparable companies;

the Company’s financial condition and prospects;

estimates of business potential and earnings prospects for the Company and the industry in which it operates;

recent performance of IPOs of companies in the technology sector; and

an analysis of the typical valuation ranges seen in recent IPOs for companies in the Company’s industry.

Grant Date

4/22/2019

5/24/2019

5/31/2019

7/29/2019

8/1/2019

8/5/2019

8/12/2019

9/16/2019

9/17/2019

9/23/2019

12/13/2019

1/6/2020

1/8/2020

1/13/2020

2/24/2020

3/16/2020

5/4/2020

6/29/2020

Grant Date

4/22/2019

5/24/2019

2/24/2020

5/4/2020

For financial reporting purposes in connection with the current IPO process and with benefits of hindsight, the Company assessed the fair value of the Company’s common stock in connection with the May 4, 2020 and June 29, 2020 grants as discussed herein.

the Company’s results of operations, financial position and achievement of enterprise milestones;

the composition of, and changes to, the Company’s management team and Board;

consideration of the lack of liquidity of the common stock as a private company;

a discount for lack of marketability was not directly applied given that there were no differential rights attributable to different shareholders (as the Company has only one class of shares – i.e., common). As the equity value considers the rate of return for the investors, an illiquidity discount has already been factored into the concluded equity value (in the form of the discount rate);

the Company’s stage of development, business strategy and the material risks related to its business and industry;

the valuations of publicly traded companies in the Technology Services sector, as well as recently completed mergers and acquisitions of peer companies;

external market conditions affecting the Technology Services sector; and

the likelihood of achieving a liquidity event for the holders of the common stock, such as the IPO, or a sale of the Company, given prevailing market conditions.

The Company’s Board of Directors approves the fair value of common stock for the grants issued based on part by the valuation analysis prepared as of the previous period (e.g. June 30, 2019 valuation for six months ended December 31, 2019, December 31, 2019 valuation for three months ended March 31, 2020 and March 31, 2020 valuation for three months ended June 30, 2020), considering the information that was known or knowable at each valuation date. The valuation of equity was based on the enterprise value estimated using the discounted cash flow method, corroborated by the guideline public company method, less the fair value of the Company’s liabilities.

The primary driver for the fluctuation in the Board-determined fair value of the common stock between the grants made in the three months ended December 31, 2019 (based primarily on the June 30, 2019 valuation analysis) and the grants made in the three months ended March 31, 2020 (based primarily on the December 31, 2019 valuation analysis) was the Company’s improved financial results. Specifically, the Company’s new leadership team implemented certain revenue growth and cost saving initiatives across the organization, which resulted in a steady increase in customer bookings since June 2019. Additionally, the Company exceeded its 2019 Adjusted EBITDA budget and, accordingly, the Company revised its forecasts upward.

The Company’s March 16, 2020 grant has a fair value of common stock of $13.62 per share based on the December 31, 2019 valuation analysis. The December 31, 2019 valuation analysis presented a low-and-high range of values based primarily on a sensitivity of the discount rate ranging between 12.5% and 13.0%. The Board determined the fair value of common stock for purposes of grants made during the three months ended March 31, 2020 in consideration of the December 31, 2019 valuation analysis, as well as the performance of the business relative to market conditions.

For informational purposes, a discount rate of roughly 10.5% would be required to derive a common stock value equivalent to the mid-point of the IPO Price Range based on the forecasts considered in the December 31, 2019 valuation analysis, all else equal. It is important to note that the mid-point of the IPO Price Range does not take into account the potential for alternative outcomes that could yield lower valuations, such as the Company continuing as a private company without access to the new issue market, etc.

Although the stock market experienced volatility during the time-frame between December 31, 2019 and March 31, 2020, indicating a potential decline in the value of the common stock, the Board determined the value of the common stock remained stable throughout the quarter-ending March 31, 2020 as the Company benefited from improved operating performance (e.g., increased bookings, realization of revenue growth and cost saving initiatives, etc.). As previously mentioned, the company continued to benefit from implemented certain revenue growth and cost saving initiatives across the organization that began in 2019, which resulted in a steady increase in customer bookings since June 2019.

Dow Jones Industrial Average (“DJIA”) and Dow Jones U.S Technology Index (“DJUSTC”) exhibited considerable market volatility during the first calendar quarter of 2020 due to underlying economic uncertainties associated with COVID-19, as evidenced in the below daily price return chart:

As the markets had the opportunity to further react to the impacts of COVID-19 in the last two weeks of March 2020, it became apparent that the pandemic would not be resolved quickly, and values remained depressed. The March 31, 2020 valuation analysis presented a low-and-high range of values based primarily on a sensitivity of the discount rate ranging between 14.0% and 15.0%, reflective of an increase relative to the discount rate utilized in the December 31, 2019 valuation analysis to account for the increased market volatility and uncertainty associated with COVID-19 as evidenced in the illustrated price movements of the DJIA and DJUSTQ.

The Board-determined common stock value associated with the grants in the three months ended March 31, 2020 fell within the high-end of the range of values reflected in the March 31, 2020 valuation analysis. As such, the Board considered the common stock value utilized for grants throughout the three months ending March 31, 2020 to be reasonable. It is important to note that the Company did not hire underwriters until May 2020, and prior to that point, the Company did not have clear expectations for the value that might be realized upon an IPO.

Given the market volatility and uncertain sustainability of an economic recovery, both of which may have impacted the Company’s IPO prospects, the Board determined the low end of the range reflected in the March 31, 2020 valuation analysis to be a reasonable estimate for the fair value of the common stock in connection with the May 4, 2020 and June 29, 2020 grants.

Subsequent to March 31, 2020, the DJIA and DJUSTC market indices again exhibited considerable market volatility as it became apparent that companies in certain industries, including participants within the Company’s industry, were maintaining or improving performance, as evidenced in the below daily price return chart:

With benefit of hindsight, Company management noted that market capitalizations for the guideline companies increased subsequent to March 31, 2020, as it became apparent that companies in certain industries, including participants within the Company’s industry, were maintaining or improving performance during this time-frame. As the potential impacts of COVID-19 became better understood relative to the Company’s operations, certain sustainable trends became more apparent with the passage of time, including (but not limited to):

anticipated acceleration of digitization trends and technology adoption rates in the broader economy which would prove beneficial to the operations of the Company;

anticipated needs of cloud infrastructure customers to support work from home solutions and offerings, video and music streaming, online gaming, etc.; and

customer demand accelerated in the form of increased bookings as customers focused on public and hybrid cloud solutions to address challenges associated with on-premise operational constraints resulting from COVID-19.

For financial reporting purposes in connection with the current IPO process and considering the factors above, the Company assessed the fair value of the Company’s common stock in connection with the May 4, 2020 and June 29, 2020 grants by interpolating between the fair value per share as of March 31, 2020 which reflects the fair value utilized in the grants for the three months ended March 31, 2020 of $13.62 per share, and the mid-point of the expected IPO Price Range. In applying this linear interpolation, the Company determined a deemed fair value per share for financial reporting purposes of $[***] and $[***] at May 4, 2020 and June 29, 2020, respectively. The Company utilized linear interpolation for the calculation of the fair

value as no single event caused the valuation of the Company’s common stock to fluctuate. Instead, a combination of Company-specific factors, including its progress toward an IPO, more certainty around the Company’s business and financial position as well as external market factors, led to the changes in the fair market value of the underlying common stock.

The Company does not believe it is appropriate to utilize linear interpolation for the fair value of common stock prior to March 31, 2020, as the Company believes the fair value of the common stock utilized the appropriate information available at those grant dates for financial reporting purposes and are reflective of fair value.

Unlike the valuation methodologies used in connection with the Company’s historical equity issuances, the IPO Price Range does not take into account the potential for alternative outcomes that could yield lower valuations, such as a sale transaction at differing valuations, the Company continuing as a private, stand-alone entity, etc.

The IPO Price Range represents a future price for shares of common stock that, if issued in the IPO, will be immediately freely tradable in a public market, whereas the estimated fair value of the common stock associated with historical option grants appropriately represents a contemporaneous estimate of the fair value of shares that were then illiquid and might never become liquid. Even if an IPO were to be successfully completed, the common stock associated with historical option grants to executive officers would remain illiquid at least until the expiration of the 180-day lockup period following the IPO.

In June and early-July 2020, the Company held “testing-the-waters” meetings, at which the Company received feedback from potential investors related to deal appetite. During that time-frame, several companies have executed IPOs, which have performed better than expected and have given investors renewed confidence in the new issue market.

Improvements in the capital markets provided for increased investor appetite for an IPO relative to the market dynamics known as of the significant grant dates in 2020.

The Dow Jones Industrial Average (“DJIA”) exhibited considerable market volatility given underlying economic uncertainties associated with COVID-19, as evidenced by a 37.1% decline in value from market highs of February 12, 2020 to market lows of March 23, 2020. As the potential economic and societal impact of COVID-19 became better understood, the DJIA experienced a 48.3% increase from market lows on March 23, 2020 to subsequent highs on June 8, 2020.

The IPO market experienced reduced activity in March and April of 2020 as investors were concerned about significant volatility given market conditions and uncertainties associated with the potential impact of the COVID-19 on the operations and financial prospects of companies in the marketplace. However, activity in the IPO market increased in mid-to-late May and June 2020 as the stock market recovered from market lows experienced in March 2020 and companies resumed efforts to access capital via the IPO markets.

Given the proximity to the anticipated completion of the IPO, the IPO Price Range assumes a successful offering. A successful offering would provide the Company with: (i) proceeds that substantially strengthen the Company’s balance sheet as a result of increased cash, a portion of which will be used to pay down outstanding indebtedness; (ii) improved access and a lower expected cost of capital through public company debt and equity markets; (iii) a “currency” to enable the Company to make strategic acquisitions and compensate employees as the Board may deem appropriate, which are reflected in the valuation reflected in the IPO Price Range; and (iv) a strengthened brand recognition in the marketplace.

The IPO Price Range reflects the fact that investors may be willing to purchase shares in the IPO at a per share price that takes into account other factors that were not expressly considered in the Company’s prior valuations as a private company, and are not objectively determinable and that valuation models are not able to quantify with any level of certainty.

The enterprise values of the guideline companies increased roughly 30.5% between December 31, 2019 and July 2020 which generally aligned with the increase in the enterprise value of the Company of roughly 25.3% over a similar time-frame. The change in enterprise values for the guideline companies likely reflects a reduction in the required rates of return by investors as market uncertainties were diminished relative to the initial concerns resulting from COVID-19 and the potential for increased demand for certain solutions of the guideline companies in support of cloud-based activities.

Guideline companies reflect public cloud computing providers, traditional global IT systems integrators, and management consultants listed as competitors within the Company’s S-1 filing.

The discount rates for the Company in the following table reflect a similar trend relative to the inherent risk and uncertainty associated with COVID-19. In particular, market uncertainty resulted in an increased discount rate evidenced as of the March 16, 2020 and March 31, 2020 common stock grants. This incremental risk premium was also evidenced by the required yields associated with the Company’s publicly-held debt (e.g., the average yield increased from 7.6% as of December 31, 2019 to 10.5% as of March 16, 2020). As general market and company specific uncertainties were reduced from March 31, 2020 to the anticipated IPO date, the discount rates gradually reduced over a similar time-frame. This gradual decline in risk was also reflected in the Company’s required yields associated with its publicly-traded debt. These factors support the reduction over time in the discount rate to 10.9% to derive a common stock value equivalent to the mid-point of the IPO Price Range of $[***] per share based on the most recent forecasts available.

The Company holds significant leverage (i.e., interest-bearing debt) on its balance sheet relative to the guideline companies. As debt is less sensitive to overall fluctuations in the market given seniority in the capital structure and fixed rates of return potential, the value of the equity of a business will be impacted more as the overall enterprise value increases. Given the Company’s significant leverage, one would anticipate the equity value to increase by a larger percentage relative to enterprise value as the overall value of the Company increases.

The implied enterprise value to EBITDA less capex multiple associated with the Company’s recent historical common stock valuations generally aligns with the market-evidenced median multiples of the guideline companies. Note, Company management believes the enterprise value to EBITDA less capex multiple reflects a representative valuation multiple of the Company’s value.

Company value summary

Implied enterprise value

% change from December 31, 2019

Subtract fair value of liabilities

Equity value (common)

Common stock per share (post-split)

% change (equity value) from December 31, 2019

Discount rate

Implied enterprise value to EBITDA less capex

Weighted average debt as % of par

Weighted average yield

Guideline company summary

Total enterprise value (US$in millions)

% change from December 31, 2019

Enterprise value to EBITDA less capex - Median

Reflects the mid-point of the IPO Price Range for the Company as of July 31, 2020.

Enterprise value reflects equity plus interest-bearing debt and debt-like items.

Reflects implied enterprise values as of March 16, 2020, May 4, 2020, June 29, 2020, and July 31, 2020 based on the concluded equity prices and balance-sheet adjustments.

Adjustments reflect most recent data available as of the particular date.

Includes adjustments for economic liabilities such as dilution of options, earnouts, etc. Assumes adjustments, dilution of options and outstanding shares remain consistent for certain dates.

July 31, 2020 percent of par based on July 20, 2020 percent of par as a proxy.

December 31, 2019 senior note yield sourced from Bloomberg, term loan yield based on best available data. March 31, 2020 yield based on March 16, 2020 yield. July 30, 2020 yield was based on information available as of July 20, 2020 yield as a proxy.

Based on market-observable enterprise values of guideline companies as of each respective date.

Source: Capital IQ

David E. Sobel