Rackspace Hosting, Inc (RAX)

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Rackspace Hosting, Inc. (RAX)

Morgan Stanley Technology, Media & Telecom Conference

February 27, 2013 5:30 pm ET

Executives

Jason Luce

Bryan McGrath

Analysts

Simon Flannery - Morgan Stanley, Research Division

Francois Meunier - Morgan Stanley, Research Division

Presentation

Simon Flannery - Morgan Stanley, Research Division

Okay. Good afternoon, everybody. It's my great pleasure to welcome Rackspace's Jason Luce, VP of Finance; and Bryan McGrath of Investor Relations. Before we get started, please note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures appear in the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk.

Question-and-Answer Session

Simon Flannery - Morgan Stanley, Research Division

So, Jason, perhaps you can kick it off by talking about priorities for 2013? You put out some guidance there. There's been some concerns about deceleration in growth rates and so forth, but perhaps put it in context for us [indiscernible].

Jason Luce

Yes. I think, first thing we can do is sort of review what we did in 2012. Our number one mission in 2012 was really to ensure that OpenStack prevailed as the open cloud standard. And we spent -- I was trying to say we spent a year in the lab working on that. And we also shifted from a public cloud platform from the old code to the new code which included 7 new products. And that -- and I think all that was a success. I think some of those products rolled a little later than we had liked, but we're definitely conservative around making sure that the kinks were worked out before we put those products to sort of general availability mode. And we've seen good traction on the platform since then. So those are the priorities for 2012. In November, on our Q3 call, we said that now that the product platform has shifted, we're on to the new code base, we have 2 new priorities. And then we re-stated those priorities on our February call. And the priorities are around getting referenced customers, the big customers, marquee names, running big production apps. The kinds of things that we couldn't take on when we were on the old software platform. And coming to market with those customers, getting those deals in a revenue-generating mode, and then that leading to reacceleration of our cloud growth. Those are the 2 priorities. Yes, those are the stated goals for the year. And I think that there's been a little bit of confusion around -- people thought well the platform rose and now, you're going to get a bunch of big deals immediately. The reality is, is that the way we think about them is what started out as a long list of really meaningful conversations then turns into proof of concepts and then moves into the commitment phase, i.e, the legal department, and then it becomes revenue-generating. We think that will be the catalyst to help us reaccelerate the growth rate on the cloud side.

Simon Flannery - Morgan Stanley, Research Division

Great. And so, I know you don't give formal 2013 guidance apart from CapEx. But your sort of server-based CapEx is going up, I think 17% at the midpoint, but you're obviously moving more of your revenues to cloud. So how should we think about top line trends in context of that guidance? And then on the margin side as well, I think you said -- it's -- if I had read it right, to expect consistent margins give or take with 2012?

Jason Luce

Yes. So I start out by saying we don't give revenue guidance. I think you can infer sort of top line growth rates by looking at the relationship between the customer geared CapEx that we give, and historically, incremental revenue dollars that we've added. And obviously, the sales side does that every year when we give our CapEx range. Look -- and if you run that relationship then the growth rate implies lower than last year. And I think that a lot of -- and so people are asking, okay, why you got this new product platform -- why does the growth rate imply lower? The reality is, and some of you understand this well, in a recurring revenue business is a layered cake. If those deals don't hit in January, you don't get to count them 12 times. If they hit in July, you only count them 6. And so you don't get the benefits, just the timing of the platform and the customers that are running the proof of concepts, if those become revenue-generating the mid -- in the middle of the year, then obviously, it means lower for '13, but hopefully sets you up for a nice '14. The other thing that sort of impacts the growth rate this year is our installed base growth, so our same-store sales, which in 2011 kind of ran around 1% a month, and if you look at the fourth quarter, it was 0.5% a month. And on the $350-ish million of revenue, that's a few million dollars that you also don't get to count 12 times as you go into the year. And so I think that around the installed base growth -- on the call, Lanham said that there might have been some execution issues there, or we took our eye off the ball. And I think what he really meant was that we had a lot on our plate last year. Last year, was -- we were focused really on kind of this one thing in terms of rolling the new product software platform. And I just think that the priority of upselling enterprise customers was probably number one in 2011, and it just sort of slid down the priority list. What I will say is we've gone back to work on that, okay? So I know that we're pulling out all the stops and trying to make that number go higher because the same-store sales we were talking about, a couple of hundred thousand customers, is a really important part of our growth engine. And we also believe helps us to build -- sort of, lob large numbers. It's just like -- it was just no guarantee it's going to happen overnight. But I would point out also, when you think about what Lanham said on the call when he talked about reaccelerating growth, he said back half of the year. So, we all know how growth -- in the beginning of the year, if there's the annual growth rate compared to the back half of the year, given the layered cake nature of the revenue recurring model.

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