Rackspace Stock Tumbles After Q2 Report


Rackspace, which has been at the center of months of wild M&A speculation, gave investors little of what they really wanted to hear in the company's quarterly earnings report.

The cloud hosting provider said Monday it was taking the lead in a new category of premium cloud services, but refused to provide an update on the "strategic partnership" it hired Morgan Stanley to explore in May.

Investors sent the company's shares down about 6% Tuesday, a day after Rackspace reported better-than-expected second-quarter results. The company had a recent market value of $4.19 billion.

[Related: New Cloud Tiers Position Rackspace For More Managed Services Offerings]

CEO Graham Weston and his team put a positive spin on the company's outlook with assertions of a record quarter in terms of incremental net revenue, a slew of new customers and better-than-expected growth of its cloud platform. They kept the conversation, in Monday's earnings call with analysts, focused on the overall strategy of aggressively pursuing market dominance in the more-expensive category of "managed cloud services."

"Mainstream customers are demanding services that Rackspace is world famous for providing," Weston said during the call.

One Rackspace partner told CRN a number to watch was the ratio of net revenue to property and equipment expenditures.

"If you believe that the hosting business is all about spreading the same fixed assets across more and more customers, I should expect the ratio to go up. What I see is that it is trending down now," Jeff Chandler, president of American Technology Services, told CRN.

The ratio improved from 2011 to 2012, and has for the most part held strong since then, though it has dipped just a bit of late, Chandler said.

"If Rackspace is adding fixed assets faster than the revenue calls for, they will see depreciation hurt earnings. It appears that is what is happening. Are they getting ahead of themselves with building out capacity? Hard to tell, but something to watch," Chandler told CRN.

Rackspace execs spent a good part of the earnings call touting the managed cloud strategy they unveiled earlier in the year, an outcropping of the company's fanatical support philosophy and what they said they believe will be the key differentiator for the business.

"The key point is that there is an emerging industry for service providers that offer value-added services in conjunction with computing infrastructure," Weston said, noting Gartner recently named Rackspace the leader in that premium category of cloud providers.

Weston made clear his company has no interest in competing with commodity players to offer bargain-basement prices.

As part of its new strategy, Rackspace announced a pricing model that unbundles the costs of infrastructure from the support that comes with it to highlight the added-value the company provides over its competitors. Rackspace also announced the launch of a program to lure developers looking to shield themselves from the headaches of managing their public cloud infrastructure.

"We are playing a different game than they are and this strategy is working," Weston said.

Rackspace generated a company record in revenue per server, adding 1,428 servers in the quarter for a total of 107,657 throughout its data centers, according to Weston.

The San Antonio-based company reported second-quarter revenue up 4.8 percent from the previous quarter, and 17 percent year-over-year. The company also forecast sequential net revenue growth in the coming quarter of 3 to 4.5 percent to between $454 and $461 million.

PUBLISHED AUG. 12, 2014

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