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Rackspace claws fistful of bucks from Amazon-ruled cutthroat cloud bearpit

Web biz squeezes just $3 extra revenue out of each server

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Rackspace is making less money than before on higher revenues as a vicious cloud market takes a cleaver to what was previously a steady business.

The Texan web-hoster-turned-cloud-provider reported a net income of $16m on revenues of $389m on Monday for its third quarter of 2013, missing analyst expectations on profit but just beating them on revenue.

Net income was down 40 per cent from $27m in the same quarter a year ago. Revenues were up 16 per cent, scrambling over analyst projections of $387.4m. Earnings per share were $0.11, far below analyst estimates of 16 cents.

Rackspace's shares were down 7.22 per cent in after-hours bloodletting trading.

Several key indicators displayed warning signs, with strategically crucial public-cloud revenues inching up nine per cent for the quarter from $99m to $108.4m. The company's traditional dedicated hosting business – and, we reckon, main profit center – crept up a mere 1.5 per cent to $280.2m.

These results stand in stark contrast to cloud rival Amazon Web Services, which booked revenues of $1.011bn in its cloud-containing "other" category last quarter, compared with $892m in the quarter before, representing a 13 per cent climb.

Scale aside, in the hyper-competitive market for cloud computing, growth matters, and for Rackspace to be growing slower than Amazon means it can't take advantage of as great economies of scale when ordering in new hardware, nor can it gain as much insight into how its distributed systems behave under large-scale load.

Marketing costs remained high at $50m as the company continued a messaging splurge it began last quarter, when costs rose to $52m. This also bit into profits, and highlights how the company has been forced to spend big bucks on peddling its "open cloud" vision to punters.

The average monthly revenue per server for the quarter rose to $1,290, up from $1,287 the company was making a year ago. Given the near-30 per cent rise in Rackspace's public cloud business since then, we would expect a far greater rise in revenue-per-server due to the cost-savings afforded by the growth of virtualized multi-tenancy that cloud computing is built on. As this hasn't happened, we surmise the company is having a hard time making its OpenStack-based infrastructure scale cheaply, and that competitive cloud pricing is biting into its lucrative dedicated server revenue.

During the quarter the company grew the number of servers it has under management from 98,884 to 101,967.

Things may change next quarter given the recent launch of the company's beefy "Performance" range of high-memory, solid-state-drive servers, though these could ultimately further add to the company's cost base as well. It may also put its recently acquired Israeli-made ZeroVM technology to work to give it a new storage and compute service, though integration difficulties could make this take several months.

All told, the results stress the new business realities bought about by cloud computing: it's harder to make money, growth is crucial, and profits are being sliced by a competitive market defined by Amazon, whose seemingly endless price cuts put downward pressure on all other providers. ®

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