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Rackspace nears $1bn run rate

The would-be managed cloud giant

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Rackspace Hosting is growing its cloud business like crazy. It's a key player in the development of the open source OpenStack cloud plarform. And it has a large installed base of managed hosting customers. But the company isn't satisfied. It wants more.

According to Lanham Napier, president and chief executive officer at the hosting company, Rackspace wants to utterly dominate the part of the cloudy infrastructure market where customers will be demanding very high service level agreements and will pay a premium for it. That's what Napier told Wall Street in going over the financial results for Rackspace's fourth quarter financial results today.

"While at one time running IT in-house was necessary, it is no longer necessary and can be detrimental to business," Napier declared. The evolution from hosting to cloud computing was giving companies new ways to consume IT resources, and incumbent service providers are running scared because they don't have the skills to do clouds and it is not an easy thing to do, according to Napier. "There will be a giant that emerges from this business, and we want to be that giant."

Napier is not crazy enough to mean running all of the world's cloudy infrastructure, but just that portion where uptime and service is as important or more so than price. And lest you think that Rackspace wants to grow itself through acquisitions, as Hewlett-Packard and Verizon, just to name two, have done, forget that. Napier said that during the dot-com bust, a massive wave of consolidation swept over the hosting business, it just wreaked havoc. And he doesn't expect deals like Verizon's $1.4bn acquisition of Terremark last week will play out any differently.

"Frankly, I think it puts the entire customer base up for grabs," Napier said on the call, referring to this and other recent acquisitions and mergers in the hosting space.

It's easy for Napier to disparage growth by acquisition, but with only $104.9m in the bank, Rackspace can only make relatively small acquisitions, as it has with CloudKick, Jungledisk, and Slicehost, the latter two which laid some of the technical foundation for the Rackspace Cloud offering that is now being replaced by OpenStack.

In the quarter ended in December, Rackspace posted revenues of $214.7m, an increase of 26.7 per cent over the year-ago period. Net income was $13.5m, up 50 per cent, which is sure to make Wall Street happy and to make Rackspace even more expensive for some suitor to acquire. For the full year, Rackspace posted revenues of $780.6m, up 24.1 per cent, and net income of $46.4m, up 53.4 per cent.

In Q4, the traditional managed hosting business at Rackspace had 19,396 customers and generated $183.3m. Customer count was essentially flat, but customers consumed more resources and services and Rackspace raked in more dough. The number of customers using its cloud services jumped by 54.8 per cent, to 110,895 customers, and they drove a combined $31.4m in revenues, nearly double from a year ago.

Rackspace's cloudy infrastructure offering, which is being migrated to the OpenStack tools and which was initially only providing Linux images, has been providing Windows-based server slices since August and Windows accounted for 30 per cent of cloud server sales in Q4, according to Napier.

The trick for Rackspace, as it is for all service providers, is to cram as many customers as logically (virtually?) possible onto each of its servers, which cost a lot of money and need expensive data centers wrapped around them in San Antonio, Chicago, and London, in this particular case. Rackspace had a total of 66,015 servers as 2010 came to an end, up 16.5 per cent from a year ago, but sales were up by 24.1 per cent as mentioned above and average revenue per server increased by 8.8 per cent to $3,253 each.

In addition to announcing its Q4 results, Rackspace said that Bruce Knooihuizen, the chief financial officer that took the company through its initial public offering just as the Great Recession was building up a good head of steam in the summer of 2008 and helped it get through that recession, said he was going to retire from the company.

Knooihuizen did not explain why he was leaving in the call with Wall Street and said he did not have any immediate plans, but added that over the long haul was looking for another small company that he could help grow as he did Rackspace. With Rackspace breaking through $1bn and Napier bragging that he could get to the second $2bn in a much shorter span than the thirteen years this one will take, you would think Knooihuizen would want to stay on. ®

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