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Rackspace: Record revenue shows managed cloud strategy 'working'

But income still flat, execs schtum on potential buyouts

Racks inside Rackspace's Sydney Data Centre

Despite record revenue growth in the second quarter and good expectations for this quarter, profit at Rackspace Inc was flat, disappointing shareholders.

The former hosting firm said it had added thousands of new customers as it tries to transition itself into a cloud company in the midst of serious price competition from the likes of Google and Amazon, helping revenue to hit $441m, up 17 per cent from the same time last year. But net income remained flat, coming in at the same $22m the firm earned in the same quarter of 2013.

The news sent Rackspace shares drifting downwards in after-hours trading, losing 1.47 per cent to $31.31 at the time of writing.

Rackspace’s chairman Graham Weston said in an analysts’ call (courtesy of Seeking Alpha) that the company’s strategy to turn itself into a managed cloud company was working. While neither the traditional dedicated hosting revenue nor the managed cloud revenue are enjoying stellar growth, the latter is growing faster. Dedicated cloud net revenue hit $311m in the quarter, up 12 per cent from Q2 last year, while public cloud grew by 31 per cent to $131m.

Weston said that Rackspace was providing services alongside the infrastructure and there were customers out there that wanted that sort of thing, rather than the stripped down clouds offered by other firms.

“There is demand for our differentiated offering,” agreed president Taylor Rhodes. “Fanatical Support and service levels matter in the cloud era, and they demonstrate the market is beginning to understand the difference between Rackspace's managed cloud and the unmanaged cloud alternatives.”

Neither Rhodes nor Weston would be drawn on what they described as the elephant in the room – the fact that Rackspace recently hired Morgan Stanley to look into potential partnerships or buyouts for the firm. But they said that the fact that Rackspace achieved the record addition of $20m in revenue during a quarter rife with rumour proved that there were customers out there.

“We reported these results in the midst of historic price cuts by the big unmanaged cloud providers, in the midst of speculation about our strategic options and in the midst of lots of change going on the industry,” Rhodes said.

“So I feel as though if we can put these types of proof points up on the board, then it ought to start to help you all understand that there is just a different segment of the market out there.

“There is a very different market between what AWS and Google are selling, which is unmanaged cloud and what we are selling, which is managed cloud. They are different customers who have different buying criteria and I think the proof points in our numbers are showing that the market is realizing there is a difference,” he later added.

The company said it was expecting third quarter revenue to be between $454m and $461m, higher than the average analyst estimate of $454.2m. Weston said that the range was a conservative one since foreign exchange and revenue recognition could make the numbers swing a lot.

“I think that I am still very optimistic about being able to grow at a faster rate. Lots of untapped market out there and I think really the mainstream market of the cloud is going to want the managed cloud and I think that's what is going to be evolving in the years to come,” he said. ®

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