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Shift to clouds pumps up Rackspace Hosting

Managed hosting growing, too

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The customers and money keep rolling in for OpenStack cloud fabric co-sponsor Rackspace Hosting.

In the third quarter ended in September, revenues at Rackspace grew by 32.5 per cent to $264.6m. Managed hosting, the traditional unvirtualized hosting business that the company was founded to do, still represents the largest piece of the company's business at $213.9m, and is still growing – by a very healthy 23.7 per cent in Q3, in fact.

But the compute and storage cloud business, which Rackspace is in the midst of transferring from its homegrown code to the OpenStack cloud fabric that it created in conjunction with NASA, exploded by 89.3 per cent to $50.7m in the quarter. Net income was just a tad under $20m, up 69.2 per cent year-on-year.

For the three months, Rackspace had sales of $741.8m, up 31.1 per cent, and is well on its way to break $1bn in sales this year.

Rackspace sells compute cycles and gigabytes of data for a living, so it spends heavily on infrastructure and the people to support it. At the end of the quarter, Rackspace had 161,422 customers, up 36 per cent, and had 78,717 servers in its two data centers (a big one in San Antonio and a little one in London), up 23 per cent. So right there, you can see that the shift from managed hosting to virtualized cloud computing is helping to boost the utilization on Rackspace's machines, therefore increasing its profit margins because it doesn't have to buy as many servers as it used to in the old days.

The hypervisor is the new rack and the VM is the new server, is the best way to think about it.

Rackspace might be "maniacal" about tech support, but it is limiting its hiring not only to control costs, with its workforce only growing by 21.4 per cent in the quarter to 3,799 employees – or "rackers", as they are called in the peppy speech of company employees.

But this isn't just a matter of cost control. Lanham Napier, president and CEO at Rackspace, said in a conference call with Wall Street analysts on Monday that the company was in a talent war with other cloud builders, including hyperscale web operators, telcos, and traditional hosting providers that are building clouds, or the IT suppliers that want to.

In the third quarter, Rackspace financed $23.2m in equipment and bought another $53.6m in gear to support customers' gear. The company also shelled out $16.7m to expand its data centers, and another $14.3m in capitalized software costs. For the full year, Rackspace expects to spend somewhere between $350m to $360m on capital investments, which is at the high end of its range and which is driven by increasing customer demand. Rackspace is not, says Napier, adding servers to its data centers and hoping to get business for them.

Rackspace ended the quarter with 227,988 square feet of data center space, up 56.9 per cent from the year-ago period, and 69 per cent of its was being utilized by racks of servers. Napier said that starting next quarter, Rackspace would stop measuring utilization in terms of floor space and shift to counting megawatts of power available and used, because floor space count is increasingly meaningless as servers became more dense. Power is the limiting factor in any data center these days.

Well, that and the economy.

Napier said in the call that the quarterly customer-base growth was at nine-tenths of a percent throughout 2011, which is about twice that of 2010 but still less than the 1.5 per cent monthly growth rate that the company had back in the days before the Great Recession hit in early 2008. ®

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