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Rackspace ‘on trajectory of death,’ founder Richard Yoo says | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware


Richard Yoo, who founded and helped build the website hosting company that became San Antonio’s premier technology firm, believes he’s watching its collapse.

The reputation of the company now known as Rackspace Technology, he said, “is eroding rapidly” after years of shifting business plans, executive shuffles, financial losses, staff cuts and, finally, the Dec. 2 ransomware attack that left tens of thousands of customers without access to their email, contact and calendar data.

“This is the beginning of the end,” Yoo said last week. “It’s already just a midsize business in San Antonio. This is not a company that’s on a trajectory of growth. They’re on a trajectory of death. It will not be around.”

He puts the blame for Rackspace’s deepening financial struggles — it’s posted a steady string of quarterly losses, and the value of its stock has fallen 80 percent in the past year — on its replacement of tech-oriented leadership with board members and managers “who don’t have any connection with the product.” He said there’s “no culture” at the company after it laid off hundreds of local staffers while it expanded globally. And he scoffed at the idea of being a “Racker,” saying he never adopted the term the company uses for its employees and identity.

Yoo’s assessment isn’t universal among former Rackers.

Lanham Napier guided Rackspace Hosting Inc. through a period of unprecedented growth after taking over as CEO in 2006.

BILLY CALZADA, SAEN staff / San Antonio Express-News

Former CEO Lanham Napier, who prides himself on being a Racker and backs the company’s “Fanatical Support” workplace culture, said Rackspace has “talented people with the right bones” to guide it out of its current situation.

“Rackspace is down, but it’s not out,” he said. “It’s time to rally.”

Napier paraphrased a quote from fictional boxing champ Rocky Balboa: “What determines who the champ is is not how hard you hit. It’s how hard you can get hit. Because life is going to hit you hard, man. Can you get up and keep going or not?”

He paused before continuing.

“Rackspace is in one of those moments,” he said. “It got hit and it’s got to get up and keep going.”

Others keeping quiet

Though the company’s situation is a topic of discussion in San Antonio tech and business circles, many of the company’s former leaders and employees said they’d rather not weigh in.

Co-founders Dirk Elmendorf and Patrick Condon, who started the original company with Yoo, declined to be interviewed. Graham Weston, the San Antonio real estate billionaire who helped fund the company’s startup and was later CEO and chairman, didn’t respond to a request for comment. Lew Moorman, a former president and chief strategy officer who left the company six years ago, said he had no interest in commenting.

“Ancient history for me, and I know nothing about what is going on,” he said.

As a publicly traded company, though, Rackspace’s financial situation is widely known. While it has reported revenue increases for 12 straight quarters, its losses have widened over the same period. And even before last month’s ransomware attack accelerated their decline, Rackspace shares were falling sharply as the losses mounted and it restructured and changed leadership.

Putting that record behind it will be a challenge, most former Rackers agreed.

Cat Dizon, a former Racker, says the company has a big job ahead to emerge from recent challenges.

Cat Dizon, a former Racker, says the company has a big job ahead to emerge from recent challenges.

Courtesy of Alamo Angels

Cat Dizon, who was at Rackspace from 2005 to 2017 as director of corporate strategy and development and head of business and staff operations, said the company has a big job ahead to regain credibility with customers in the wake of the ransomware attack.

“Any type of incident at that magnitude is going to take some time to recover on the financial and reputation fronts and restoring the trust of customers,” said Dizon, who founded venture capital firm Active Capital in 2017 with Rackspace co-founder Condon. “It’s going to be a long road.”

Though Rackspace’s performance is a topic of discussion in local tech circles, she said it’s usually at “a macro level” relative to a national industry slowdown and drumbeat of layoffs from giants such as Meta and Amazon.

Kevin Jones, who had most recently served as CEO of MV Transportation, was named Rackspace CEO in 2019. He was replaced in September 2022 as a company restructuring was under way.

Kevin Jones, who had most recently served as CEO of MV Transportation, was named Rackspace CEO in 2019. He was replaced in September 2022 as a company restructuring was under way.

Courtesy of Rackspace

Culture changes

Despite disagreement among former Rackers about the company’s future, many agreed with Yoo that the company’s culture has shifted as Rackspace made local cuts, brought in new blood and went through changes in top leadership.

The company laid off about 700 employees in July 2021 — a number then said to represent about 10 percent of its global workforce of 7,000. Many of those had been based in San Antonio.

The changes continued last year as Rackspace kept trying to work out where it stands in the rapidly evolving cloud computing market. Discussing the latest quarterly loss in May, then-CEO Kevin Jones raised the possibility of selling off parts of the company. Rackspace, he said, had completed a “strategic review” after hearing from a potential buyer interested in one of its businesses.

“We concluded that a sum of the parts of Rackspace Technology could be greater than our current enterprise value,” Jones said.

In August, he said a plan to restructure the company into separate units providing public and private cloud services would be in place by the fall.

Amar Maletira was named CEO of Rackspace Technology Inc. on Sept. 26 to step up the company’s restructuring plan, which he’d been instrumental in crafting.

Amar Maletira was named CEO of Rackspace Technology Inc. on Sept. 26 to step up the company’s restructuring plan, which he’d been instrumental in crafting.

Courtesy of Rackspace Technology Inc.

By September, Jones was out as CEO, replaced by Amar Maletira, who’d been president and chief financial officer. His role, the company said, was pushing ahead the reorganization plan that was to begin this month.

In October, the company said it would move out of “The Castle,” its 1.2 million-square-foot headquarters in a former mall in the suburb of Windcrest. The move will downsize the company’s footprint to an office space of 75,000 to 90,000 square feet on the far North Side.

In early November, Rackspace said it named Shashank Samant as lead director of its board. Also that month, it named Bobby Molu its next CFO, taking over Maletira’s previous role. Molu, CFO of international markets at Mastercard, was set to begin this month.

Amid all the changes and despite her continuing place in San Antonio tech, Dizon said the company’s presence is less apparent than it used to be.

“I just don’t run into any new Rackers,” she said. “It could mean that they’re not where I am or they’re not completely plugged into the technical community. I just don’t see the same number of employees that I’m used to.”

Dax Moreno, who was an early Racker and remains a fan of the company, wonders about the company’s place in San Antonio’s evolving tech community.

Dax Moreno, who was an early Racker and remains a fan of the company, wonders about the company’s place in San Antonio’s evolving tech community.

Dax Moreno

Waning influence?

But its impact continues to be felt.

Dax Moreno, a Rackspace sales manager from 2003 to 2010, said he follows the company the way alumni of a major university follow their alma mater’s football program. And, like Dizon, Moreno has built his Rackspace experience into new ventures.

“As Rackspace matured and went through iterations, people like me went out into the community and into new industries or other groups or organizations, taking what we learned from Rackspace into those places,” said Moreno, now principal of consulting firm Verity SA.

Though he still considers himself a Racker, Moreno questioned the company’s continuing stature in a city that’s working to build a broader tech sector.

“When I look at Rackspace, I look at it as a place for which I have amazing love, respect and admiration,” he said. “But I also understand its place inside this larger puzzle that the city is putting together.”

With the company’s recent challenges, he said, more questions arise.

“Will it recycle? Will it become something different and bigger? Or will it be sold?” he asked. “Or will it have this rebirth and kind of rise up from the ashes?”

Such questions are being voiced by other former Rackers, too, including some of its former leaders.

Napier, who declined to disclose whether he holds stock in the company, said he “is a San Antonian who loves Rackspace and cheers for them.”

Graham Weston, Dirk Elmendorf and Lew Moorman take part in a panel discussion during the 2017 Tech Bloc rally at Rackspace.

Graham Weston, Dirk Elmendorf and Lew Moorman take part in a panel discussion during the 2017 Tech Bloc rally at Rackspace.

Darren Abate, FRE / Darren Abate/Express-News

Origins

Yoo, who said he “isn’t a direct shareholder,” calls himself “the guy who essentially started Rackspace.”

As he recalled it, the company started at the dawn of the internet revolution when he dropped out of Trinity University in 1995, rented a small garage apartment on Hildebrand and called Southwestern Bell (now AT&T) to install phone lines. He bought modems, set up a Linux operating system and began selling internet access to former classmates for $30 per account. He wasn’t old enough to legally drink alcohol when he launched what was then called the Cymitar Technology Group.

Soon, he started receiving inquiries from companies about setting up email and websites to sell their products on the internet. He tapped Elmendorf, known for building web apps, “to figure out how to take currency online.” He took a call from Condon, then in Silicon Valley, who wanted to lend his financial experience to the group.

They met with Morris Miller and Weston, real estate partners, to discuss funding for a startup meant to rent server space to businesses needing to run websites.

The company, renamed Rackspace, launched in December 1998.

Napier entered in 2000. The Houston native, who said he had worked as a Merrill Lynch analyst and received an MBA from Harvard Business School, became the company’s CFO. He said he helped create the term “Racker” and was enthusiastic about the company’s philosophy of providing “Fanatical Support” to customers.

In his book “Billion or Bust!” Napier said he held several titles over the next six years, including CEO. He also recalls navigating the company’s near fall as the dot-com bubble burst, earlier board conversations about selling the company, consideration of moving its headquarters to Austin and the switch from a tech-driven Linux culture to Microsoft systems. Through it all, he wrote, he was pushing a “vision in which Rackspace would become to San Antonio what Dell was to Austin.”

Rackspace celebrated a rebranding as part of its restructuring in 2019 at its Windcrest headquarters. It said Thursday it’s completed its investigation into a ransomware attack last year, and is shutting down the service hackers hit.

Rackspace celebrated a rebranding as part of its restructuring in 2019 at its Windcrest headquarters. It said Thursday it’s completed its investigation into a ransomware attack last year, and is shutting down the service hackers hit.

‘Ruined it’

Yoo said he left Rackspace in 2006, “tired of dealing with the growth of the politics of running a big company.”

The company had morphed from “a bunch of college kids drinking beer pounding code all night, connecting wires, solving problems” to a place of “blue shirts and khakis and name badges — a scene from the movie ‘Office Space,’” the cult comedy that savages tech office culture.

“When people started calling themselves Rackers, it was a cultural change where they were trying to create or define a framework for something that was largely mostly organic before,” he said. “And by defining it, they kind of ruined it.”

By 2008, the company had moved into The Castle. Also that year, the company went public for the first time. It lost about 60 percent of its market value amid fierce competition from heavyweights Amazon, Microsoft and Google.

Napier stepped down as CEO in 2014. Two years later, New York powerhouse Apollo Management Group took the company private in a $4.3 billion deal. Rackspace shifted its business model to begin working with the tech giants it had been competing with to help its customers move their data to private and public clouds.

Rackspace spent $1.7 billion acquiring four business from 2017 to 2019. The next year, Apollo took it back to the stock market with a second initial public offering. Since then, Rackspace’s shares have plummeted — and its survival has been called into question.

Napier said the company has struggled since it was sold and recapitalized and took on heavy debt.

“There are seasons in life for humans, and there are seasons in life for companies and Rackspace is going through a bunch of change,” he said. “But with stock down more than 80 percent, something didn’t go right.”

Yoo said the company has been on the ropes since Apollo bought it.

“When Apollo moved in, they were already carving out parts of the business and selling them off,” he said. “This is a situation where if the stock price continues to fall and their debt continues to mount, they have to solve this problem mechanically, because you’re not going to be able to suddenly improve the product and make it a market success that everyone’s gonna pay beaucoup bucks to become a customer of Rackspace.”

He paused.

“I don’t want Rackspace to fail,” Yoo said. “I do feel like the demise of Rackspace is evident. It’s happening. That’s not me being negative. It’s just that they’re not doing anything to ensure that it’s not going to happen.”

eric.killelea@express-news.net

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