This Space Racks Up Customers

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There's a fine line between genius and madness. The genius of IT hosting provider Rackspace Hosting (NYSE: RAX) might sound like lunacy to others.

Rackspace works in a very crowded corner of the IT service market, where businesses hand over the responsibility to run computing and network services to someone else.

Amidst this crowded marketplace, Rackspace managed to turn in a doozy of a quarter. In the second quarter, Rackspace grew sales 16% year-over-year to $152 million and net earnings ballooned 67% to $7 million. That's $.06 per diluted share.

Rackspace added more than 8,700 customers in the quarter for a total of 70,800. No single customer contributes more than 1% of Rackspace's revenue, and that kind of customer diversification ensures smoother revenue and reduces the risk of a high-profile customer loss.

How is Rackspace so successful when other companies are flailing around, begging for a lifejacket to save them from the economic rapids? Simply put, Rackspace competes differently. Big boys like IBM (NYSE: IBM) tend to land the large, lucrative full-on outsourcing deals, complete with staff dedicated to your servers and hefty service bills.

Likewise, Amazon.com (Nasdaq: AMZN) has taken an early lead in the fast-growing cloud computing sector, followed by Microsoft (Nasdaq: MSFT) Azure and other big-name hopefuls.

But Rackspace has a secret weapon that helps it win over customers in the small and medium business segment against alternatives like server co-location experts AT&T (NYSE: T) and SAVVIS (Nasdaq: SVVS). It's called "Fanatical Support."

Everybody knows that great customer service creates happy customers and plentiful return business. Rackspace has made this a way of life. Employees are known as Rackers and encouraged to go the extra mile for every customer. Rackspace's recruitment processes focus on finding the right personalities first, because technical skills can be taught.

Rackers are expected to solve problems like a more realistic and rational MacGyver, and compete for the annual Straightjacket customer service award. Rackspace even celebrates Oktoberfest. A touch of whimsy points to open-minded management.

This company is dominating its small-business service niche with a very Foolish swagger. It's one of Fortune magazine's 100 best places to work -- and perhaps one of the best places for you to invest. Growth isn't dead. MacGyver will keep it going for years. It’d be wrong of me to heap praise upon its employment practices if they weren’t delivering results, but we’re seeing Rackspace turn into a major player in the “on-demand” computing field that allows companies to outsource IT functions and pay for what they use. It’s a growing field, and Rackspace’s philosophies and investment in its people have paid off with numerous accolades and a growing advantage over competitors.

The stock may look expensive, trading at more than 80 times trailing earnings. But our Rule Breakers team will tell you that you have to pay a premium for prime growth, and Rackspace is showing muscle in the burgeoning cloud hosting market that makes me believe in a big future for the company.

And that fanatical dedication to high-quality customer support is winning over plenty of business.

Further Foolishness:

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• 5 Stocks That Just Won't Quit