Rackspace Hosting (NYSE: RAX ) is quietly turning into a leader in the red-hot cloud computing space. And I mean quietly, because I'm sure you aren't drowning in Rackspace TV commercials and pop-up banner ads. That's just not how this company rolls.
The just-reported second quarter shone a spotlight on how the longtime server-farm specialist is going through a serious transformation right now. Revenue grew 23% year-over-year and 4.8% sequentially to $187 million. The managed server hosting segment is still Rackspace's bread and butter, pulling in $164 million in sales from 19,400 customers. The rising star, however, is the cloud-computing division. More than 88,000 customers sent in $23 million of service payments, representing 78% revenue growth from the year-ago period. Meanwhile, earnings took a 33% leap to $0.06 per share.
On a private call with yours truly this morning, CFO Bruce Knooihuizen explained that this dual-segment strategy will soon be a thing of the past. Rackspace is helping its customers find the right balance between full-on server hosting and bite-sized virtual servers on a case-per-case basis, and it won't be too long before the typical customer runs a hybrid of real and virtual servers.
This sets Rackspace apart from the competition: IBM (NYSE: IBM ) and Hewlett-Packard (NYSE: HPQ ) love to do wholesale IT management services, but their cloud-computing options are not very ambitious yet. On the other hand, Amazon.com (Nasdaq: AMZN ) and the Microsoft (Nasdaq: MSFT ) Azure team can sell a lot of virtual servers but no hands-on hardware hosting. SAVVIS (Nasdaq: SVVS ) does both but on a smaller scale than Rackspace.
The company is planning to build out more floor space to expand its service offerings, the net sales per server and per square foot are increasing quarter by quarter, and there's a fresh wind behind the free cash flows. Don't be alarmed when you see that 20% of Rackspace's floor space is sitting unused -- lease agreements are structured to let the company pay only for the space it actually uses while holding the rest in reserve. The unused space is Rackspace planning for the future in a cost-effective manner.
I think Rackspace will be ready for a serious sales drive soon. Channel partners are currently driving its sales alongside word-of-mouth marketing -- the sales team is "only about six people knocking on doors" these days, according to Mr. Knooihuizen. I can't wait to see what would happen to sales growth here if Rackspace decided to put the pedal to the metal.
Should Rackspace play it lean and safe until the economy comes out of its doldrums, or would the company be better off with a serious marketing effort today? Discuss in the comments below.