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Summary:

Rackspace revenue continued to rise during the third quarter, but growth was slow and profits were down year over year. The company chalks up the latter to increased forward-looking investments, but the elephant in the room is Amazon.

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Rackspace announced its third-quarter earnings on Monday, and they sent the same message as they did last quarter: Growing a legitimate cloud business in the shadow of Amazon Web Services is hard work.

Here’s a chart I made comparing Amazon and Rackspace cloud earnings for the second quarter, updated to include the third quarter and to include total “other” revenue for Amazon. Rackspace’s cloud revenue rose nearly 37 percent year-over-year to $108.4 million.

Rackspace revenues for both its cloud and dedicated hosting businesses were up during the third quarter, but as a whole they dropped in terms of year-over-year growth and failed to meet analyst expectations. Net income was down nearly 40 percent, although Rackspace CEO Lanham Napier said during the company’s earnings call that’s a product of increased technological investment that should pay off down the road, according to a ZDNet post.

Napier noted the company’s uptick in investment — mostly around improving its OpenStack-based infrastructure and offerings — during an interview with me last July. And, indeed, the company is still spending around $25 million a quarter on what it labels “capitalized software and other projects.” Rackspace also spent about $12.4 million building out data centers during the third quarter and $6.7 million building new offices.

Rackspace might never compete with AWS in terms of sheer user count or revenues — in fact, it looks nearly impossible that will happen — but AWS isn’t the only cloud provider around. Companies like HP and IBM might be more closely targeting the same type of customers as Rackspace is, and I assume they expect their public clouds to be billion-dollar businesses sooner rather than later. Heck, IBM just spent $2 billion on SoftLayer to ensure that happens.

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  1. http://trends.netcraft.com/www.digitalocean.com

    I wonder if anyone is agonising over the nett move numbers from Rackspace to Digital Ocean in that report – most months in four figures. That company were growing 30% per month last time I saw solid numbers, and they are the destination for startup software developers en masse. That may not bode well for Rackspace in the long term future if left unaddressed…

  2. Rackspace only have a tiny fraction of the product range that AWS have. AWS essentially “finished” their core infrastructure products – compute and storage – years ago and have since been innovating with features across the entire “infrastructure stack” – DNS, monitoring, mail, queuing, provisioning, scaling, etc. This, alongside incremental improvements to the core such as pricing, packaging, smaller features, etc.

    Rackspace really have only just reached a similar level with their core products what with the switch from their old generation (Slicehost) to the next gen (OpenStack). We’re now starting to see the results of that with their recent high performance architecture announcement (which seems directly attacking Digital Ocean, particularly with all-SSD backed instances). Recent product acquisitions are also starting to build out the portfolio.

    So we’ll see if this pays off. Simplisticly, AWS seem to innovate and build in house. Rackspace have a lot of ownership over the core tech with Open Stack but their route to the extra product features seems to be through acquisition.

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