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Rackspace shares pummelled by CEO retirement shock

Lanham Napier hangs up his hat

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Hosting provider Rackspace delivered good results on Monday along with the shock news that its chief executive Lanham Napier would be stepping down.

The Texan hoster-turned-cloud-seller reported a solid set of results for its fourth quarter of 2013 with net revenue of $408m, up 16 per cent from the fourth quarter of 2012 and above analyst expectations of $404.56m, and a net income of $21m, down 30 per cent from the fourth quarter of 2012.

Shares were pummeled by the dip in net income, and even more so by the announcement of Napier's exit, trading down over 10 per cent in after-hours trading, with analysts peppering outgoing chief Lanham Napier and incoming chief (and longtime Racker) Graham Weston with questions.

Napier said he was choosing to leave the company now because it was in "a good place" and the numbers looked "pretty darn formidable to me".

Another way of putting it is that Napier decided to announce his departure alongside the poor net income results as a way of serving investors a slug with a side of sugar.

During the quarter, the company saw good growth for its traditional business with revenue for dedicated hosting growing from $280m in the previous quarter to $291m. Its strategically important public cloud division, meanwhile, grew 7.2 per cent to $116m, compared to previous quarterly growth of 9 per cent. Not bad – but the company is caught in a fast-moving market dominated by capital-rich companies such as Microsoft, Amazon, and Google who are all seeking to grow their respective clouds as rapidly as possible.

One approach Rackspace had taken to drum up business was a surge in marketing spending, but this appears to be slowing as sales and marketing costs fell to $1.7m from $2.1m in the previous quarter.

Analysts on the company's financial call were skeptical about the company's prospects to meaningfully grow both its dedicated and public cloud assets in a market which seems to be favoring the latter. Rackspace, meanwhile, believes "the future is dedicated," new CEO Graham Weston said on a call discussing the results.

By the end of the quarter, Rackspace had 103,886 servers deployed, and was making $1,322 in monthly revenue per server – up just under one percent year-over-year. The company said it plans to try and increase its revenue-per-server further throughout the coming year. ®

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