Will Rackspace’s Handholding Lift Cloud-Service Lead?

Cloud service provider Rackspace Hosting has suffered from growing pains the last couple of years. For a while in 2014, the company even looked for a buyer.

But Rackspace (NYSE:RAX) — no longer actively for sale — seems on surer footing now.

President Taylor Rhodes added CEO to his title in September, replacing an interim chief (Chairman Graham Weston) who stepped in after Lanham Napier left suddenly early in the year.

Rhodes vowed to improve profitability, which had sunk 19% on a per-share basis in 2013 and treaded water at best through mid-2014.

Earnings are on the mend, seen growing faster than revenue, 22% in 2015 and 27% in 2016, according to a Thomson Reuters poll of analysts.

Meanwhile, Rackspace itself seems to be growing up. A lot of mainstream enterprises are picking Rackspace’s managed hosting services in the so-called cloud, or Internet.

That way they don’t have to hire experts to manage cloud computing in-house. Rackspace will do it for them.

“The cloud computing market is moving from early adoption into the mainstream. So the market is getting bigger,” said Rhodes in a phone interview with IBD.

And the market for managed services in the cloud — where Rackspace plays — is getting larger as well, he says.

Racking Up Customers

Of three new customers Rackspace called out by name in the last quarter, two were such mainstream companies — Weight Watchers International (NYSE:WTW) and fashion design house Oscar de la Renta. The third, mobile-phone matching site Tinder, represented another type of customer — one “born on the cloud,” Rhodes said.

According to data from the 451 Group, a tech researcher, the total hosting/cloud market will grow from $ 46 billion in 2013 to $ 110 billion in 2018, or at an average annual compounded rate of 19%.

“Rackspace is well positioned in the market and that growth rate means it is going to have great growth for the next several years,” said Colby Synesael, an analyst with Cowen & Co.

Rackspace says it is the “world leader” in the managed cloud segment of the IT market, with more than 300,000 business customers.

Its hosting solutions address common business needs such as e-commerce, web content management, website hosting and data services.

“Specific workloads or apps perform better in specific environments. Because Rackspace has a broad product set, it’s in a good position to help,” said Synesael.

Rackspace provides multitenant services in the public cloud, single-tenant-server services and hybrid options, which let customers pick and choose among varied offerings.


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