Rackspace announces solid Q1 figures, aims to confound critics with business model

Open cloud provider Rackspace has announced healthy first quarter results, with CEO Graham Weston telling investors that his company will continue to differentiate from the price slashing of AWS, Google and Microsoft.

For the quarter ending March 31, Rackspace posted a net revenue figure of $421m, up from $408m at the end of Q413 and representing a 16% year on year increase.

Income fell year on year from $27.2m to $25.4m, but Q114 figures represented a boost from the fourth quarter trough of $20.8m income – a percentage increase of 22% per quarter. Adjusted EBIDTA also went up from Q413, $140m representing a 5.8% spike.

Looking at the nuts and bolts, Rackspace added 2343 servers in the first quarter of 2014, and gained 92 new employees.

It was a pretty good showing, with Reuters reporting that Rackspace shares rose by up to 12% after the bell trading yesterday. And, in prepared comments on an analyst call, Rackspace chief exec Weston reassured investors that the price drops initiated by Mountain View, Redmond and Seattle are just a mere sideshow.

“This attracted a ton of publicity within our industry, but it’s important to remember that this is just the latest iteration of a long-standing trend for those players who sell raw computing capacity, a service that only covers a fraction of the real cost of transitioning, running and scaling on the cloud,” Weston said.

“Our business has always been more than just renting out access to infrastructure,” he continued. “We add value by managing that infrastructure, as well as specialising in the complex tools and applications that run on top.

“While the other providers add value through economies of scale that yield low unit prices, we add value through economies of expertise, allowing customers to leverage the specialised expertise of our cloud engineers and architects,” he added.

It comes as little surprise that Rackspace has come out fighting, because the analysts were holding little back before the results were released with stock plunging 29% since early February. Dan Caplinger, writing for The Motley Fool last week, argued that Rackspace had to come up with a viable strategy to ensure it didn’t cede the lucrative enterprise market to Google.

Clearly, the San Antonio firm believes in its bet of managed cloud services. John Engates, Rackspace CTO, pulled no punches in a blog post published last night.

“The vendors leading the race to the bottom on the price of raw infrastructure would love for you to believe all cloud services are identical,” Engates wrote. “These providers believe the lowest infrastructure price will win the most market share and that customers will choose a provider based on that price.

“Their actions implicitly acknowledge that they’re selling an undifferentiated commodity and that its price is their best lever to win business.

“This is a dangerous and expensive way for developers and businesses to make critical cloud buying decisions,” he added. “Success with the cloud requires much more than just renting access to cheap infrastructure.”

Rackspace has left it pretty late to announce its first quarter results, and the timing is a not-so-coincidental fillip against the naysayers. Given a recent IDC study predicted the infrastructure as a service space will eventually comprise pure cloud players, there’s a huge amount of jockeying still to be done – and Rackspace wants to do things its own way.

What do you make of the results, and Rackspace’s strategy?

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