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Rackspace 'Laser-Focused' On Becoming The Top AWS MSP; CEO Stays Mum On Potential Private Equity Sale

The cloud hosting company delivers solid Q2 earnings and reveals before its earnings call that it is selling its Cloud Sites division, a premium web hosting service, to Liquid Web.

Rackspace CEO Taylor Rhodes credited partnerships struck over the past year with former rival cloud providers, as well as a booming private cloud business, for the relatively strong second-quarter earnings the company reported Monday.

Managed services for the world’s two largest clouds -- Amazon Web Services and Microsoft Azure -- generated enough revenue to surprise investors despite declining demand for Rackspace's own public cloud services. Earnings per share of 28 cents beat Wall Street expectations of 21 cents a share.

Those practice areas are entering a "hyper-growth phase," Rhodes said during Monday's earnings call, pumping deals into Rackspace's pipeline and driving sales among both new and existing customers.

[Related: 5 Ways Rackspace Is Transforming Its Business Through Cloud Partnerships]

The topic Rhodes wouldn’t touch in the Q&A session were recent reports from The Wall Street Journal and Reuters that the San Antonio-based company would soon be under new ownership. The CEO told investors it would be inappropriate for him to comment on speculation of a sale to a private equity firm.

Rackspace reported $524 million in GAAP revenue for the second quarter, representing 7 percent year-over-year growth. Shares were trading at $28.15 at press time, just slightly down from their value at the market's Monday close.

Rhodes said the market was making clear that established businesses are racing to move workloads out of their corporate data centers and into the cloud. At the same time, most of those businesses are realizing that managing just a single cloud implementation -- yet alone a multicloud one -- is a complex task, and they need assistance from a seasoned partner with expertise.

Rackspace is concentrating on maximizing the opportunity afforded by that role, the CEO said.

That's partly why the company is selling its Cloud Sites division, a premium web hosting service, to Liquid Web for an undisclosed price. The sale, announced just before Monday's call, is a divestiture from a noncore business.

Rhodes was bullish on the partnerships struck over the past year with AWS and Azure that he said should expand Rackspace's overall leadership of the managed cloud market.

The company, once considered a bitter AWS rival, has its sights "laser-focused" on becoming the leading AWS managed services provider. Rackspace is "shifting resources" toward certifications, sales training efforts, and a "bold marketing campaign" to drive that fast-growing business, the CEO said.


The Amazon partnership presents "a bigger opportunity than at any moment in our 17-year history," Rhodes told investors, and early results validate the decision to launch the practice nine months ago.

Almost 300 customers signed for the AWS service through July -- an even balance between existing and new Rackspace customers. But roughly 80 percent of the existing customers were bringing new, incremental workloads to the AWS environments.

That suggests the partnerships aren't cannibalizing the core Rackspace cloud business -- at least not yet, Rhodes said.

But the company's dedication to finding the best cloud fit for customers could lead to a degree of cannibalization down the road, he warned. If OpenStack users want to move to AWS or Azure, "we certainly can accommodate them," Rhodes said.

Another product counteracting the slumping Infrastructure-as-a-Service business is Rackspace's private OpenStack cloud.

"Demand for OpenStack public cloud is slowing," Rhodes said, but there's "strong demand for OpenStack private cloud" in the market.

Rhodes declined to address questions in any way related to the most recent acquisition reports, including one asking if there was any change in perspective since Rackspace took itself off the market in 2014.

Last week, The Wall Street Journal reported a deal with a private equity firm was imminent. Reuters later identified the potential buyer as Apollo Global Management.

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