Rackspace Cloud Building Momentum

Rackspace Hosting (RAX) saw gains in its cloud computing business in the first quarter of 2009, adding more than 8,000 customers on its suite of cloud services, the company said Monday. The San Antonio company reported revenue of $10.9 million from its cloud unit, which now has 43,030 customers using its Cloud Sites, Cloud Files and Cloud Servers offerings.

The Rackspace cloud unit continues to account for a fraction of the company’s total revenue, which is dominated by its core managed hosting operation. Rackspace reported revenue of $134.2 million from its 19,048 managed hosting customers in the first quarter. That works out to $7,045 per managed hosting customer, compared to $252 per customer for the cloud computing unit.

Lew Moorman, the president of the Rackspace cloud computing operation, says the push into the cloud will enable Rackspace to expand its customer base. The economics of the cloud may differ from the company’s traditional managed hosting business, but Moorman says the numbers add up.  

“The model creates lower price points, but still allows us a profit margin,” Moorman said. “It obviously exposes you to a different customer base, but we can lower our operating costs using automation. Part of the magic of the cloud is increased server utilization and increased asset life. We can get a lot more customers per server and do it without touching as many boxes.”

Building 43: What’s In It for Rackspace?

When word emerged that Rackspace Hosting (RAX) had hired blogger Robert Scoble to form a new community called Building 43, much of the early coverage focused on the new undertaking as the next career move for Scoble, always one of the most-watched figures in the blogosphere. Scoble earned a reputation for independence during his time blogging for Microsoft, and made it clear that he’ll expect similar freedom in his new role as an employee of Rackspace.

“In Building 43 you won’t just find information about Rackspace,” he told TechCrunch. “We’re going to help the entire cloud computing industry get more adoption, users, customers. We’ll cover technologies from Rackspace’s competitors like Amazon, Microsoft, Google, GoGrid, IBM, and others. Our philosophy on Building 43 is a rising tide lifts all boats.”

So what’s in it for Rackspace? “It’s an unusual move for us,” acknowledged Lew Moorman, who runs the Mosso cloud computing division for Rackspace. “We think the marketing world is changing as well. We need to be more directly in dialogue about the future of technology.”

Analyst Upgrade Boosts Rackspace

Managed hosting provider Rackspace Hosting (RAX) gained ground on Wall Street Tuesday after Goldman Sachs raised its investment rating on the stock. Shares of Rackspace closed at $8.38, up 96 cents for a gain of 13 percent on the session.

Goldman changed its rating on Rackspace from neutral to “buy,” citing the company’s execution in a difficult environment and efforts to raise raising investor awareness of its accomplishments. “We believe that over the year, investors will give Rackspace more credibility as it executes against its longer-term strategy and contains costs,” the analysts wrote.

Yesterday’s gains came on top of Rackspace’s performance in the first quarter of 2009, when it gained 39.4 percent. Shares of RAX remain below their $12 price from the company’s IPO last August.

Rackspace the Sole IPO for Last 12 Months

The Wall Street Journal’s Venture Capital Dispatch blog writes about the IPO drought, noting that the U.S. stock market has seen just one venture-backed initial public offering in the past 12 months: Rackspace Hosting (RAX). “Even during the worst of times when the dot-com bubble burst and tumbleweeds rolled in, we never saw less than 10 venture-backed IPOs in any 12-month period,” Scott Austin writes.

So how did Rackspace, the San Antonio-based managed hosting provider, manage to buck the fierce market headwinds? “The answer is simple: Rackspace makes money,” Austin writes. :It posted 2007 revenue of $362 million, up 62% from the year before and better than nearly all companies in registration for IPOs. It has also been profitable for at least five years, a rarity among start-ups.”

There were occasions when hosting industry analysts felt Rackspace was taking a deliberate path to its long-expected public offering, but its focus on profitability turned out to be a differentiator in the 2008 IPO environment. Shares of RAX have been beaten up since the IPO, but no moreso than other companies in the sector. And in recent months insider buying has stepped up, suggesting confidence that shares are heading higher over the long term.

Roundup: Rackspace, Digital Realty, Quality

Here’s a roundup of news announcements Wednesday from major data center operators:

• Rackspace Hosting (RAX), the world’s leading hosting services provider, today announced that it has repaid $100 million on its revolving line of credit backed by Comerica Bank, JPMorgan Chase, Wachovia Bank, Bank of America and The Frost National Bank. The move decreases the amount owed from $200 million to $100 million. The company said its average borrowing costs on the remaining $100 million outstanding debt balance is approximately 3.9%. With the repayment, $144 million is available on the credit facility.
• Digital Realty Trust (DLR) said it has achieved “five 9s” of uptime with another year of 99.999% availability across its portfolio of facilities in North America and Europe in 2008. The company said the metrics are based on a comprehensive evaluation of the company’s Turn-Key Datacenter facilities in the US and Europe using standard industry methodology. “This is a great validation of how well designed our datacenters are and how skilled our operations team is,” said Ted Martin, Vice President, Technical Operations at Digital Realty Trust. “We have exceeded the five-9s benchmark for four straight years going back to our first year in business as a public company, and we have been able to do that while dramatically increasing the number of facilities we own and operate.”

Rackspace and the Economics of the Cloud

Cloud computing is hot. But is it profitable? And if so, does the business model extend beyond Internet titans running giant data centers? Cloud market leader Amazon (AMZN) has yet to break out any customer or revenue data for its Amazon Web Services unit. But another public cloud builder, Rackspace Hosting (RAX) provided details of its cloud computing operations in last week’s earnings report, and the numbers provide some interesting contrasts with the company’s traditional power base in managed hosting.

Rackspace beefed up its cloud operations with its recent acquisitions of JungleDisk and SliceHost, which is reflected in a huge jump in its cloud customer count. But the revenue from these customers pales in comparison to the managed hosting operation:

• As of Dec. 31, Rackspace’s cloud computing services had 34,820 customers, or 65 percent of the company’s total customer base. Those operations generated net revenue of $8.9 million in the fourth quarter, which works out to 6.2 percent of the company’s net revenue for that period.
• Rackspace’s managed hosting operation has just 35 percent of the customers, with a total of 18,480. But it generated $134 million in revenue for the quarter - 94 percent of total revenue. 

Let’s look at these numbers using average revenue per user (ARPU), a common metric for hosting performance: each cloud computing customer produced an average of $254 in net revenue in the fourth quarter, while the managed hosting business averaged $7,265 per customer.

Rackspace Expands with Ashburn Data Center

Rackspace has leased space in this DuPont Fabros data center facility in Virginia.

Rackspace Hosting (RAX) will expand its data center network with an additional facility in northern Virginia, the company announced today. Rackspace will lease 11,000 square feet of raised floor space in a huge data center in Ashburn operated by DuPont Fabros Technology (DFT). Rackspace expects the new space to come online in July 2009. This will be Rackspace’s second facility in northern Virginia, where it already operates a data center in Herndon.

The expansion is needed because Rackspace is running out of space in its primary hosting facility, a 144,000 square foot data center near Dallas. The company considered building additional data center space in its new headquarters facility in a former shopping center in San Antonio, but later indicated that it believed it could save money by buying or leasing instead. In announcing the new location, Rackspace affirmed that the lease “will enable it to serve customer demand more quickly and cost effectively than if Rackspace built its own facility.”

Promotion Crashes Dr. Pepper Web Site

What happens when you offer everyone in America a free 20 ounce Dr. Pepper, and point them to your web site? That crashing noise is the sound of the web servers at DrPepper.com. The company’s promotion was originally intended to be a one-day event, but was extended after Internet users reported problems accessing the Dr. Pepper web site to claim their coupon.

“The response has been greater than anticipated and we want to do everything we can to ensure Dr Pepper fans get their free coupon,” said Tony Jacobs, vice president of marketing for Dr Pepper. “As a result, we’ve extended the offer, increased our server capacity and added a toll-free number, 1-888-DRPEPPER, for consumers to call to request their Dr Pepper.”

Earlier this year Dr. Pepper pledged to give a free soda to everyone in America if the long-delayed Guns N’Roses album “Chinese Democracy” came out in 2008. When the album appeared last week, the company made good on its promise and directed thirsty Americans to claim their coupon on DrPepper.com on Sunday, Nov. 23.