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Clouds puff up Rackspace in Q1

Last pure-play clouder standing

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The shift from traditional hosting to cloud computing is puffing up Rackspace Hosting, boosting both its top and bottom lines in the first quarter and making it likely that the company will soon pass through $1bn in annual sales.

In the quarter ended in March, Rackspace had total sales of $230m, up 28.6 per cent and thanks to cost control, the inherently more efficient use of servers that virtualized server slices allow over dedicated hosting, and an increasingly reliance on whitebox servers instead of brand-name boxes, net income for the company spiked 40.9 per cent to $13.8m.

Managed hosting is still where Rackspace gets most of its money these days, however excited it might be about its prospects in the cloudy infrastructure racket. Managed hosting represented $192.9m in revenues, up 20.9 per cent in the quarter, while cloud revenues rocketed up 92.6 per cent to $37.1

"More and more of our customers are using both our virtualized and dedicated infrastructure offerings, and we are changing the way we deliver our services as a result," explained Lanham Napier, president and CEO at the hosting company in a conference call with Wall Street analysts.

Napier said that that about 20 per cent of the dedicated hosting customer base at Rackspace had bought cloud services from the company, and it plans to push growth in 2011 by selling into its base of existing customers, selling clouds to hosting service buyers and additional cloud services to those who buy an initial virtual server slice. These new cloud services include RackConnect networking between dedicated servers and cloud slices, Critical Sites higher service level agreement levels, and Cloud Load Balancers for doing load balancing as a service across nodes on Rackspace's network.

Rackspace added more than 12,000 new customers in the first quarter, a record level for the company and besting the 11,500 it set in the fourth quarter of last year. The company's installed base of customers grew by 0.9 per cent per month in the March quarter, and the rollout of cloud services in the United Kingdom for the EMEA market certainly helped, with 3,000 new customers added since the product was launched in January. Rackspace ended the quarter with 142,441 total customers up 43 per cent from the year-ago period, and the server base was at 70,473, up only 17.7 per cent, and the employee headcount was 3,492, up only 20.2 per cent. With installed base growth being the fastest metric on the Rackspace balance sheet, you can understand why the company is maniacally focused on selling more products and services into its customer base. It is the easiest and most profitable thing for the company to do.

In the quarter, Rackspace had $77m in capital expenditures, which included $46m for servers, networking, and storage to support customers; $9m for data center expansion; $3m for expanded office space; and $18m for capitalized software development and related items. The company plans to spend somewhere between $275m and $335m in capital expenses for 2011, and will come in at the high end of that range at current revenue and customer growth rates.

Napier said that to help cut costs, Rackspace is moving toward whitebox machines as it builds out its cloud, much as it will be shifting to the OpenStack open source cloud fabric it co-launched with NASA last year for much the same reason. He said that the OpenStack project has seen more than 20,000 downloads to date and has over 60 vendor partners helping to develop and commercialize the cloud fabric.

In the call, Napier didn't seem all that concerned about the consolidation in the industry, as CenturyLink has bought Savvis for $3.2bn, Verizon has bought Terremark for $1.4bn, and TimeWarner has bought NaviSite for $230m. He said that the consolidation in the cloud-computing space was similar to the consolidation in the wake of the "tech wreck" at the end of the dot-com bubble, where hosting companies merged to try to stay alive and get economies of scale and scope.

"It reinforces our place in the industry," Napier said. "We are the last pure-play standing."

And that, of course, is why tongues are have been wagging for months that Rackspace would be acquired. But at a $5.7bn market capitalization, whoever might want to buy Rackspace – AT&T, Dell, IBM, Hewlett-Packard – had better come with plenty of bags of cash. A deal might cost $8bn. ®

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