Web hosting leader, Rackspace, readies for IPO.

So what does a hosting company do with an extra few hundred million bucks? That may soon be the question facing Rackspace pending the outcome of official documents filed on Friday with the United States Securities and Exchange Commission, presumably leading up to an initial public offering or IPO. This follows similar paperwork filed in the year 2000 which was anticipated to lead to a Rackspace stock offering at that time. However, the ‘dot com bust’ and prevailing business conditions prevented an IPO from going through.

For those not familiar with this managed hosting company’s business model, here’s part of the overview from the company’s just-filed S-1: ”Rackspace Hosting is the world’s leader in hosting. We deliver websites, web-based IT systems, and computing as a service. Our rapid growth is the result of our commitment to serving our customers, known as Fanatical Support, and our exclusive focus on hosting. Our financial success is the result of responsible financial management and our disciplined, just-in-time approach to capital investment. During 2007, we had net revenue of $362.0 million. As of December 31, 2007, we served over 29,000 business customers of all sizes with more than 36,000 servers, over 700,000 business email accounts, and more than 32,000 cloud hosting domains. To deliver on our Fanatical Support Promise to our customers, we have created a culture that encourages passionate, engaged employees who we call “Rackers.” In 2008, Fortune magazine ranked Rackspace Hosting #32 on its list of ‘100 Best Companies to Work For’.

Hosting providers offer services to support websites, web-based IT systems, and computing. The equipment required (servers, routers, switches, firewalls, load balancers, cabinets, software, wiring, etc.) to deliver services is typically purchased and managed by the hosting provider. As a result, hosting providers reduce customers’ initial capital investment and ongoing operating costs. Hosting also reduces the complexity of deploying and managing IT systems and computing, and changes the way companies purchase these products and services. Rackspace offers a full suite of hosting services, including dedicated hosting, managed hosting, and email hosting, as well as emerging services such as platform hosting and cloud hosting.

Tier1Research estimates the worldwide hosting market to be $12.3 billion in 2007, with projected annual growth of 26% from 2007 to $24.4 billion in 2010. This revenue comes from three major categories – managed hosting, dedicated hosting, and shared hosting. In 2007, Rackspace Hosting was the world’s largest hosting provider by revenue, based on Tier1Research data for these categories.

Historically, our business has generated high revenue growth and has grown significantly faster than the overall hosting market. Over the past five years our net revenue has grown from $56.6 million in 2003 to $362.0 million in 2007, representing an annual growth rate of 59.0%. We have also been able to generate strong profitability. During that same five year period, our net income grew from $208,000 to $17.8 million.”

According to published reports, Rackspace is seeking to raise up to $400 million from the IPO. So what exactly would a hosting company like Rackspace do with all that cash? Here are a few wild guesses:

Create a huge Windfall for Early Investors and Employees - The early investors in Rackspace have almost certainly been awaiting the payoff for their investment patience. An IPO will go a long way towards generating the types of returns that early investors expect. Among those certain to benefit are the employees. Higher level management has the potential to see a substantial reward in stock options with true liquidity. Even the line level employee may see generous appreciation in stock options granted pre-IPO.