Rackspace Numbers Show New Cloud Math

Rackspace has stepped to the head of the class of popular cloud hosting providers, making its presence in the attention-grabbing segment felt as strongly as the other monster there, Amazon.com.

Earlier this week, Rackspace, of San Antonio, Texas, announced its third-quarter earnings which gave investors and analysts a lot to cheer. For one thing, the company reported 17 percent top-line growth from the same quarter a year earlier, as well as cloud-specific revenue growth from $13.1 million to $15.3 million, year over year.

While the news was all good, and the numbers move in the right direction for Rackspace, the quarterly report also presents a somewhat bracing reality check against all the hype this industry has been hearing around cloud-based computing.

For starters, while Rackspace's cloud business is growing, it still only represents about 10 percent of its entire revenue -- revenue that is still primarily focused on more traditional managed hosting. And, while Rackspace is one of the top cloud companies in the business right now, $15.3 million is equal to about one good hour of revenue for a company like Hewlett-Packard.

But, from Rackspace's earnings press release, here's a nugget that bears attention:

"Total server count (in the quarter) increased to 54,655, up from 52,269 servers in the second quarter of 2009, and total customers increased to 80,944, up from 70,803 in the second quarter of 2009."

While Rackspace picked up 10,000 new customers, it only added about 2,400 new servers. Looking at that formula, it's easy to see why the likes of HP, IBM, VMware and Citrix are paying such close attention to the cloud model. What will also bear attention is customer satisfaction with this model. So far, so good, as far as Rackspace is concerned. However, businesses that have to share servers with other businesses may start asking questions about application response time, latency and other performance issues.

A business that has to wait three minutes to bring up a customer's data in a CRM application may find that to be two minutes and fifty-five seconds too long to retain the customer.

That doesn't seem to be a problem for Rackspace, nor would it be for any company that can pick up 10,000 new customers anywhere in a sluggish economy.

The math works out great for a company that is attracting thousands of customers. Over the next several quarters we'll see if it works for the same company trying to keep them happy.