Rackspace: Solid Q4, weak outlook and hopes to ride cloud computing support wave

Rackspace's quarter and outlook were a mixed bag, but company execs are convinced a plan to offer managed services for AWS and Azure is a winner.
Written by Larry Dignan, Contributor

Rackspace reported a strong fourth quarter that was better than expectations as the company signed up early customers to be a managed service provider for Amazon Web Services.

The company reported fourth quarter earnings of $32 million, or 24 cents a share, on revenue of $523 million, up nearly 11 percent from a year ago. Non-GAAP earnings were 31 cents a share. Wall Street was looking for earnings of 22 cents a share on revenue of $521.4 million.

As for the outlook, Rackspace forecasted tough sledding. The company said first quarter revenue will be between $517 million and $521 million compared to Wall Street estimates of $530.7 million. For 2016, Rackspace projected revenue between $2.08 billion and $2.16 billion. Currency fluctuations and a small divestiture were the primary reasons for Rackspace's outlook.

Shares fell nearly 10 percent in afterhours trading.

For 2015, Rackspace reported earnings of $126.2 million, or 90 cents a share, on revenue of $2 billion.

Going forward, Rackspace's most interesting effort is to offer managed services for AWS as well as Microsoft's Azure. Rackspace has competed with those cloud providers to some degree and tried to make its name via strong support and customer service. The company is now using that strength to play the cloud support game on multiple platforms. What's unclear is whether Rackspace's move is a case of too little, too late.


Taylor Rhodes, CEO of Rackspace, said the company added its first 100 customers for AWS support. Rhodes said:

We intend to be the number one managed services provider for AWS, and we are well on our way toward that goal. Second, we showed that our business is becoming less capital intensive, resulting in higher free cash flow.

On a conference call, Rhodes said the managed services effort can boost growth. :

These moves open up huge and fast-growing new markets for us and strongly differentiate us as the only company with the tools and expertise to provide Fanatical Support for the world's leading clouds.

From there, Rackspace is hoping to sell its managed services customers more products.

Through most of our history our install base growth was driven by winning the first workload from a new customer delighting it with Fanatical Support in the winning additional workloads. In recent years more of these incremental workloads have gone to AWS contributing to our slowdown in growth. Now we're seeing encouraging signs that our multi-cloud portfolio can reignite that essential part of our growth engine. More than one third of our AWS customers are international.

More than 70% of our AWS customers are choosing our highest service level which we call Aviator. This trend indicates we are adding significant value on top of the AWS infrastructure. We have now achieved more than 230 AWS technical certifications and more than 1100 business and technical accreditations on AWS.

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