Rackspace re-invention brings slow public cloud revenues

The re-invention of Rackspace continued this week as the firm turned in a quarterly profit of $29.2 million, up from $22.5 million, a year earlier, on revenue up 11% to $489.4 million.

But the company is concerned about slowing growth rates, particularly around public cloud revenues. As CEO Taylor Rhodes puts it:

That expectation has not been fulfilled while our overall sales momentum did pick up in the latter part of Q2; our public cloud growth remained slow throughout the quarter.

Rhodes has a checklist of issues that have held the firm back so far in 2015. This includes:

• Marketing issues
• Sales issues
• A talent gap
• Public cloud product take up.

But he remains adamant that the firm has set the correct strategic direction:

The cloud market continues to segment into two distinct categories: unmanaged cloud and managed cloud. Both are growing rapidly. We couldn't be more pleased that our leadership of the managed cloud category was reaffirmed two weeks ago in Gartner's annual Magic Quadrant reports for both North America and Europe where we are placed high into the right. We see the market opening up for us as large traditional players struggled to adopt cloud business models, and as mainstream businesses demand multiple options for cloud infrastructure along with high value managed services.

And he maintains that Backspace has some clear differentiators to the competition:

We create additional value by providing customers with a choice of the world's leading technology, including soon multiple public and private clouds, e-commerce platforms, data services and productivity suite. We serve customers on the technologies that are best for their needs. This approach differentiates us because we are the only at-scale specialist in cloud support and expertise. Product companies focus on developing their technology stacks. Technology conglomerates and telcos offer some service, but it's not their specialty. Other peer support companies are relatively small and narrowly focused. None can match what Rackspace has to offer.

Intel and third parties

Rackspace intends to focus on a longer term strategy of third-party management cloud services of the likes of Azure, with Amazon Web Services likely to follow later this year. This won’t deliver short-term revenue benefits, but is seen as a long game winner.

But Rhodes wants to make a distinction between this third party service offering and the work of the likes of Accenture. He argues:

Accenture and the other global SIs have a very different business model obviously. What they want to do is come in and focuses on business transformation and application level transformation where they are managing re-platforming or building of new applications and the migration of those applications.

[It’s a] very, very different business for us, right? We have never really focused on getting into the professional services business because we value sticky recurring revenue models. Our experience so far in the market, and understanding where customers need help and express value, we're not going to pull up in the bus and unload it with 40 people and comes back after nine months to do a job. We don't want to get into that business; it's not what we do well, and we don't think the margins are great there.

What we want to do is we want to bring expertise to the table to companies who are wanting to leverage the right cloud stack of what they're trying to do, we can add value first by helping them understand what to do there. Second, by helping them understand what types of applications they should move and providing some guidance and assistance along the way.

Third, we are very much developing customer use cases that are about ongoing value-add in operating those application, optimizing them as the product stacks change and really helping them solve very sticky thorny problems like making NoSQL databases work in cloud models, which is hard. These are all scarce skill set areas where we can really monetize our economies of expertise and where we can be sticky to these customers over time.

The firm will also be placing great emphasis on its partnership with Intel, which has resulted in an OpenStack Innovation Center at Rackspace headquarters in San Antonio. It will include the world's largest OpenStack developer cloud with two server clusters containing a 1,000-node each. Rhodes says:

The real strategy behind the Intel partnership is to propel OpenStack forward at a much greater pace and a focused monetization strategy for us targeted towards enterprise, private and hybrid clouds.
There is a very large class of applications and workloads out there that don't want to be in a pure public cloud, and there are new and exciting things coming down the road in terms of containerized applications that will run differently in OpenStack than they will run anywhere else. So the ability to work with Intel to differentiate and focus OpenStack is actually a brilliant monetization strategy for us.

My take

A continued re-invention perhaps, but it's all taking time of course. It's still too difficult to make a call on this one. We can only watch and wait.