Summary: Rackspace reported steady 4Q15 results that were in line with its current growth trajectory.
Details: Revenue came in at $522.8m, up 10.6% y/y and 2.7% q/q. On a constant currency basis, revenue was up 12% y/y. On an annual basis, Rackspace crossed the $2b revenue mark and grew 11.5% y/y. Revenue growth on a y/y basis declined slightly compared to the last few quarters.
Revenue patterns: Very notable was Rackspace’s projection of public cloud growth deceleration. Management pointed directly to the impact of massive-scale public clouds and is diverting resources away from public cloud to private cloud in response to the change. While growth on public cloud is expected to slow, Rackspace pointed out that churn is not changing materially. It describes the public cloud customer base as sticky. It is not expecting rapid departures.
Revenue segments: Rackspace does not separate out cloud and dedicated hosting any longer. However, it did make some general comments. Public cloud is said to be growing in the ‘double-digit percentage range’ while managed hosting is growing in the ‘high’ single-digit range. Public cloud comprised about 25% of revenue recently, though this includes SaaS.
Server count: The server count at Rackspace grows quite steadily q/q but was down slightly in 4Q15. Management pointed to the de-commissioning of 2,400 servers in order to retire less efficient servers as one contributing factor. It also consolidated legacy data centres in the UK and this had some impact. While management did not make mention, the 100 managed AWS customers that were signed in the quarter may also have contributed. None of those customers, of course, will add to Rackspace’s server count. This will be a pattern to follow going forward. Server growth is going to start slowing as Rackspace shifts to managing more infrastructure in other data centres with the corresponding impact this will have on overall CapEx. Also notable: while server count was down, revenue per MW continued to climb. Actual server growth is slowing but server density, and in turn power consumption, will continue to climb. These metrics will be increasingly critical.
Rackspace 4Q15 (revenue in $m USD, except for ARPU per server; servers, employees are actual figures)
| 4Q15 | 4Q14 | 3Q15 | Y/Y% Change | Q/Q% Change | |
|---|---|---|---|---|---|
| Total Revenue | 522.8 | 472.5 | 508.9 | 10.6  |
2.7 |
| Servers | 118,177 | 112,628 | 118,654 | 4.9 |
0.4  |
| ARPU Per Server | 1,472 | 1,412 | 1,444 | 4.2 |
1.9 |
| Employees | 6,189 | 5,936 | 6,177 | 4.3 |
0.1 |
| Net Annualized Revenue per MW | 64.5 | 62.6 | 63.3 | 3.0 |
1.9 |
Source: Rackspace filings
Rackspace 2015 (all figures in $m USD)
| 2015 | 2014 | Y/Y% Change | |
|---|---|---|---|
| Total Revenue | 2,001.3 | 1,794.4 | 11.5 |
| Adjusted EBITDA | 684.1 | 605.4 | 13.0 |
Takeaways:
- on a constant currency basis, revenue was up 12% y/y
- net income was $32.1m for a margin of 6.1%, down y/y from 7.8%
- total CapEx was reduced to 23% of revenue
- cash flow from operations was $204m for the quarter
Rackspace 4Q15 (all figures in $m USD)
| 4Q15 | 4Q14 | 3Q15 | Y/Y% Change | Q/Q% Change | EBITDA Margin | |
|---|---|---|---|---|---|---|
| Adjusted EBITDA | 183.6 | 165.4 | 177.4 | 11.0 |
3.5 |
35.1% |
Jungle Disk divestiture: Rackspace confirmed the sale of Jungle Disk, which is not core to its current business. Details will be disclosed next quarter.
Managed third party cloud: This was the big one. Rackspace hasn’t been in the market long with this product but confirmed it had signed on 100 customers. These were essentially all AWS customers though there was mention of emerging traction with Azure. A majority of these customers were net new to Rackspace and there was mention of interest in adding on other services like dedicated servers. About 70% of these customers chose the highest service level and 33% were from outside the US.
Guidance: Rackspace is projecting more growth and it should be in line with the current trajectory. 1Q16 is expected to come between $517-521m and takes into consideration negative impact from the Jungle Disk divestiture. Sequential growth is expected to fall between 0.5-1.4%. 2016 revenue is projected to come in at $2.08-2.16b or roughly 6-10% y/y growth.
Migrations and consolidations: Rackspace is consolidating smaller facilities in London and migrating customers off public cloud to private cloud. This caused the slowing in server count and utilized MWs.
Angle: Rackspace is in transition but continues to show consistent and steady growth and incremental improvements to key bottom line indicators. It is both executing and driving scale through the business. The profile of the business is already showing signs of change as Rackspace uses a less capital-intensive strategy and relies more on support and managed services to drive revenue. The capital this frees up will go to hires and innovation – areas it will need to win as it shifts the business even further into value-building areas.
