A global appetite for connectivity is raging.
The cloud-computing companyRackspace Hosting (
) stands ready to quell that hunger. "We live in a hyperconnected
world," says CEO Lanham Napier. "All of us have more information
and data demands than ever before."
This macro trend has played right into the company's strong
suit. "It needs a brain at the center and the cloud is that
brain," Napier says of the movement. "Rackspace is standing at
the epicenter of the cloud."
Napier has been with the company since 2000 and is presently
guiding it along a spectacular run. Revenue and profits are way
up at Rackspace as is the company's stock price. Shares have
climbed 37% this year and are up 70% from a year ago.
With cloud offerings from heavy hitters such asAmazon (
) andHewlett-Packard (
), there is certainly no shortage of competition in the industry.
Rackspace has made its mark by using an open-source platform
known as OpenStack to power its cloud portfolio.
The company partnered with NASA to launch the software in 2010
and has since built a burgeoning support business around
OpenStack. The OpenStack project now has the backing of more than
180 companies. It also appeals to customers seeking to avoid
"We've discovered that the marketplace really wants an open
set of technologies for cloud," Napier says. "Over time, open
systems tend to innovate faster and reach a greater scale."
Rackspace derives the lion's share of its revenue from its
dedicated cloud hosting business. These services are provided on
servers reserved for specific corporate customers. In Q2, 77.2%
of the company's $319 million in net revenue came from dedicated
Stifel Nicolaus analyst Todd Weller thinks this business
segment still has room to run. "They're well-positioned to grow
from their roots as a dedicated managed hosting company," he
The remainder of the company's revenue is generated from its
public cloud business, which manages pooled IT resources for
customers, including small businesses and individuals.
The complementary offerings are driving towering levels of
growth. In Q2, Rackspace saw its top line spike 29% when compared
to the year-ago quarter. The previous three quarters all
witnessed revenue gains north of 30%.
These stellar sales figures have translated into a rich bottom
line. In its most recent quarter, EPS for the company surged 38%.
The prior three quarters experienced comparative improvements of
70%, 80% and 56%. "They've been a beneficiary of secular trends,"
Weller said. "We remain positive for the growth story for
Jim Breen, an analyst for William Blair, holds similar
sentiments. "Our outlook is generally favorable for Rackspace,"
Breen points to a widespread shift that he sees benefiting the
company. "Managed services and cloud computing will continue to
experience growth as IT services currently handled within
organizations move outside," he said. "There is a pretty steady
tail wind pushing the company along over the course of the next
five or six years."
A major driving force behind the growth story at Rackspace
thus far has been its customer service. "We believe technology is
delivered as a service," CEO Napier says. "When you buy the
service, you want to know that you will have a world-class
Rackspace has a motto of providing "fanatical" support to its
client base. Customer growth trends indicate that the formula is
working. At the end of Q2, the company had 25% more customers
than it did at the end of its Q2 in 2011. Compared to two years
ago, its client base is up 77%.
The competition may want to tear a page out of the fanatical
support playbook. "Technology companies have historically been
terrible at service," Napier says. "As a customer, you want to be
working with people you can trust."
In addition to maintaining its existing customers, Rackspace
has set its sights on building its reach with new offerings. "As
OpenStack thrives and prospers, other opportunities will present
themselves," Napier says. "Recently, we were able to launch
Rackspace Private Cloud, powered by OpenStack."
Rackspace expects the launch to have a lasting presence. It is
a component of Rackspace's hybrid model, which the company
designed to give customers the capabilities of public cloud with
the customization and control of a dedicated environment.
In addition to beefing up service offerings, Rackspace has
plans to expand its global footprint.
In 2008, it pushed into the Asia Pacific market with the
opening of a data center in Hong Kong. Earlier this month, that
focus intensified with another data center in Sydney joining the
"We're seeing a growing demand in interest for our services in
the region," Napier says. "We expect to continue to make
incremental investments there."
Napier thinks emerging markets will be quick to adopt the
cloud. "Developing nations skipped land lines and went straight
to mobile," he said. "In some ways, I think Asia Pac will skip
some of the legacy ways IT has been run and go straight to
In its most recent quarter, Rackspace pulled in 25% of its net
revenue from overseas.
Regardless of whether Napier considers the company's growth
prospects from a service offering standpoint or a geographic
vantage point, he sees plenty of upside. "We have an incredible
opportunity in front of us," he says. "Our No. 1 challenge will
be to execute on that opportunity."