Rackspace shows revenue growth in a quarter where price cutting was rampant

Rackspace (s rax) execs said the company’s second-quarter results back up their bet that Rackspace can compete with lower-cost public cloud providers. The company offers basic, unadorned Infastructure as a Service but stresses service- and support-backed “managed” cloud as well. Or, as CTO John Engates put it recently, Rackspace offers both apples and apple pie, while Amazon(s amzn) and Google(s goog) serve up apples only.

First, the numbers: For the quarter ending June 30, the San Antonio, Texas–based company reported profit of $22.5 million, up an itty bit from $22.4 million a year ago. But revenue rose 17 percent to $441.1 million, compared to $376 million a year ago. The company had told investors to expect revenues between $434 and $440 million. It also forecast net revenue growth in the 3 percent to 4.5 percent range for the third quarter.

Rackspace announced the tiering of its base and value-add cloud just two weeks ago, so it couldn’t have had any impact yet. Directionally, though, Rackspace execs said the company is on the right track.

On Monday night’s earnings call,  the first questions from analysts centered on Rackspace’s ability to compete with much larger public cloud companies — Google, Amazon, and Microsoft(s msft) — that take turns cutting prices.  Rackspace president Taylor Rhodes (pictured above) said the market is wising up to the difference between base infrastructure providers and providers who manage and support that infrastructure as well as the stuff customers run on it.

“Companies are moving out of the notion of, geez, I should do all of that myself and moving into the notion of, geez, I want to go to somebody who does that for a living, who has expertise at scale to manage those for us,” Rhodes noted. “There is a very different market between what AWS and Google are selling, which is unmanaged cloud, and what we are selling, which is managed cloud. They are different customers who have different buying criteria and I think the proof points in our numbers are showing that the market is realizing there is a difference.”

CEO and Chairman Graham Weston also pointed out that Rackspace was able to show revenue growth in a quarter in which Google kicked off huge (30 percent) price cuts on base infrastructure, prompting AWS and Microsoft to make their own cuts.

“I think the record revenue following the… price cuts by Amazon and Google is really a proof point that we are in a different business,” he said.
We are in a different category and customers are coming to us for a managed cloud offering. And I just think it really proves that the categories have split and the industry is evolving.”

Of course the next obvious question is what happens when AWS, Google et al. get better at the sort of hand-holding Rackspace provides. Opinion differs widely about the quality of AWS support, paid or otherwise, but it is foolhardy to say Amazon’s not in the business of wooing and supporting business users, because it most definitely is. Google has more ground to make up there since it’s so new to IaaS. But Microsoft, with its focus on existing Microsoft Windows and Office shops, will also be a factor here.

Weston acknowledged that the other cloud purveyors will add more service and support. “I don’t think the question is whether they will add it. The question is whether they will become famous for it. I think that we been competing on that turf for 15 years and I think we have fared very well.”

Update: The market was apparently not wowed by this performance and also was also spooked because management didn’t address future strategic options. In May, Rackspace hired Morgan Stanley to evaluate potential options for the company but Weston said the process is ongoing and there would be no further comment. Rackspace shares were down about 7.5 percent to $29.00 from Tuesday’s opening of $31.5o.

RAX Price Chart

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Analyst Michael Bowen of Pacific Crest Securities said Rackspace will no longer break out dedicated and public cloud segments in 2015, according to Investors Business Daily.  “We believe now is not a good time to become less transparent due to uncertainties around an M&A deal and changes in the marketplace,” Bowen said in a report.

Rackspace Second Quarter metrics (unaudited)

This story was updated at 10:29 a.m. PST to reflect the market reaction to Rackspace news.