Rackspace's Q4 Profit Up 80% As Cloud-Based Revenue Soars

Investor's Business Daily

Cloud-computing service provider Rackspace, (NYSE:RAX - News) riding continued growth in its hot sector, late Monday reported fourth-quarter results that beat analysts' views, sending its shares rising.

Rackspace Hosting said fourth-quarter profit rose 80% to 18 cents per share, as revenue jumped 32% to $283.3 million. Analysts polled by Thomson Reuters were expecting 15 cents and $281 million.

Shares, up more than 60% since early October and up 13% in February, were up nearly 6% after hours, after the release.

"The numbers look good," said William Blair analyst James Breen. "They executed well on the plan they set out in the beginning of 2011.

Cloud-computing services accounted for 20.6% of Q4 revenue, up from 14.6% in the year-earlier period, the company said. Cloud services revenue soared 86% to $58.4 million from $31.4 million a year earlier. Rackspace's customers rent computer servers via the Internet to process business applications and perform number-crunching tasks. Its top rivals include Amazon.com (NASDAQ:AMZN - News), the e-tail leader that has built a booming cloud services operation.

Rackspace's main business is providing website hosting services. That business saw revenue rise 22% to $224.8 million.

While Amazon is No. 1 by far, Rackspace CEO Lanham Napier says he aims to take the top spot with superior customer service.

"We know Rackspace is strong where our competitors are weak," he told analysts on a conference call without naming Amazon specifically. "Fanatical (customer support) continues to differentiate our offer in the marketplace.

An Amazon cloud services outage last April knocked sites such as Reddit offline for hours.

Napier also said that "2012 should result in a revenue growth and margin profile that is similar to our performance in 2011.

San Antonio-based Rackspace doesn't provide specific guidance. But the view of executives was upbeat in the conference call, says Jonathan Schildkraut, an analyst at Evercore Partners.

Saying they believe 2012 growth will match 2011 "is a very positive indicator for 2012 relative to expectations," Schildkraut said.

Capex Both Good, BadDemand for its cloud-computing services has pushed capital spending higher at Rackspace. In November, the company announced initiatives aimed at lowering investment costs. Rackspace said 2011 capital spending soared to $345 million, up 60%. It said it expects 2012 capital spending of $335 million to $405 million.

To lower costs, Rackspace aims to lease data center space from firms such as DuPont Fabros (NYSE:DFT - News) instead of building its own facilities.

"There's no doubt the message from Rackspace has been that capital intensity of the business will be declining, that they're becoming more capital efficient," said Stifel Nicolaus analyst Todd Weller.

Capital spending rose to more than one-third of sales in 2011. Analysts expect a dip in 2012.

Rackspace said it operated more than 79,805 servers at the end of the fourth quarter, up from 66,000 a year earlier.

Capital expenditure on servers is a "bullish sign for investors" because it indicates strong demand for cloud services, said Cowen analyst Colby Synesael. "Much of their capex is success-based; there's a correlation with revenue growth," he said.

Besides Amazon Web Services, Rackspace rivals include Verizon Communications' (NYSE:VZ - News) Terremark unit, CenturyLink's (NYSE:CTL - News) Savvis subsidiary, AT&T (NYSE:T) and IBM (NYSE:IBM - News).

Rackspace garners about 10% of revenue from large companies, the rest from small and midsize businesses. Its Web-hosting revenue is recurring, with customers paying annual subscription fees for dedicated servers. With cloud services, its customers pay an hourly or monthly rate per server and can scale up computing resources on demand.

Its infrastructure-as-a-service business is a "public" cloud service because customers share servers and data storage resources. So-called "hybrid" clouds, where companies use internal as well as off-site data centers, are a fast-growing part of the market.

Piper Jaffray analyst Christopher Larsen says a key for Rackspace is building 2012 momentum for its open-source "OpenStack" project, which targets private/hybrid cloud computing. Larsen calls OpenStack "Linux for the cloud," referring to the PC operating system. OpenStack could "transform Rackspace's business over the next two to four years," said Larsen.

Rackspace wants to make OpenStack a cloud software standard, though it's not supported by Amazon and server "virtualization" specialist VMware (NYSE:VMW - News).

AT&T recently joined Hewlett-Packard (NYSE:HPQ - News) and Dell (NASDAQ:DELL - News) as OpenStack supporters.

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