Earnings: Rackspace Cloud Loses Momentum, OpenStack Doesn't Help

By samdizzy

Rackspace (NYSE:RAX), the cloud services provider (CSP) and OpenStack proponent, delivered weaker than expected quarterly earnings results today. The big question: Is the growth of cloud computing slowing down — or is Rackspace being squeezed by Amazon Web Services, Microsoft Windows Azure and other big-name public clouds?

For its quarter ended March 31, Rackspace said revenue grew 20 percent to $362 million and net income grew 18 percent to $27 million. Most businesses craze that type of growth. But Wall Street wanted even more, and Rackspace shares fell more than 15 percent in after-hours trading.

Analysts blamed the earnings miss on February 2013 price cuts involving Rackspace’s cloud and content delivery network (CDN) services. Rackspace has been trying to keep pace with price cuts at Amazon Web Services and Microsoft Windows Azure. Amazon is still widely considered the market leader, and Azure revenues are now above $1 billion annually, Microsoft recently indicated.

Slow Start to 2013

In the earnings release, Rackspace CFO Karl Pichler conceded that the company “got off to a slow start for the year.” He stressed the need to build a lasting, successful business but said there’s an immediate need to restore growth. Pichler also pointed to momentum around OpenStack, the open source cloud standard that Rackspace promotes. But generally speaking, I don’t think OpenStack is lifting Rackspace’s earnings power to date.

Further complicating matters: Rackspace apparently does not have a channel chief at the current time. Former Channel Chief Chris Rajiah exited Rackspace in December and recently surfaced as ViaWest’s partner program leader. Another former Racker, Robert Fuller, also is consulting at ViaWest now. 

Rackspace put a big spotlight on its channel partner program in 2012, launching a Partner Leadership Council in June of that year. But I haven’t heard much from the company on the partner front since that time.

Still, CEO Lanham Napier issued a statement expressing an upbeat long-term view. “We are optimistic about our long-term position in the market and our future opportunity as the world moves to a new model of computing.”

Short-term investors don’t share that optimism. And there’s growing concern that Rackspace can’t match Amazon’s seemingly endless price cuts. Indeed, Amazon has cut its cloud prices 31 times since launching Amazon Web Services in 2006.

Disclosure: I’ve been a long-term Rackspace investor since around 2011 or so, but I own fewer than 100 shares.