Rackspace Hosting Earnings Call Insights: CapEx Guidance and Critical Load Costs

Rackspace Hosting, Inc. (NYSE:RAX) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

CapEx Guidance

James Breen – William Blair: I was just wondering if you could talk a little bit about the CapEx guidance relative to this year. Your CapEx is actually down sequentially – year-over-year – sorry – in 2012 versus 2013. It shows up a little bit, but you seem to be continuing to get better efficiencies on the CapEx. Can you talk a little bit about that? Then Lanham on the big picture side, you definitely saw cloud revenue accelerate this quarter. The absolute amount of cloud revenue went up I think $1 million more in the fourth quarter than in the third. Can you talk about how much of that trends is tied into some of the new products you launched and how you expect that to move going forward?

Karl Pichler – SVP, CFO and Treasurer: I’ll take the first on the CapEx side. So, we’ve talked a little bit in the past about the nature of those capital deployments, especially with customer gear. It’s fair to say that whenever you have either geographic launches or new product launches or a combination of both that we will stand up growth capacity or launch capacity, so to speak, to basically support that launch and that means that you have a little bit of variability or lumpiness as we would say in terms of how we deploy that CapEx and capital over time. On the other hand, you also have the move or the further proportion of cloud’s revenue that comes into our company which basically means from a capital deployment standpoint that the cloud’s resources are deployed in advance of revenue whereas the dedicated resources are deployed more concurrently with the revenue generation. So, while we work on minimizing those incremental steps there is an upfront deployment of capital more so in the cloud world than in a dedicated world. So, over time, we see to smoothen that out, but there is some lumpiness especially with respect to new geographies, new datacenters and product launches. And last but not least – I just lost my breath.

Lanham Napier – President and CEO: This is Lanham. Let me talk about the second part of the question around cloud revenue growth and how much is the new platform. Let’s just take a step back and discuss where we are with respect to our cloud investments and cloud in general as a technology movement. With respect to our place in the market, obviously, OpenStack is where we’re starting to hit its stride. It’s still a young technology movement , but it’s moving at a good pace. We believe we are uniquely positioned to assume our role as the open cloud leader which we talked about in our prepared remarks. Last year was an important year for us in launching the new open cloud platform. (Indiscernible) will be proud of the platform that we’ve built. We will continue to enhance and iterate and improve on that platform, but we feel like we have got a great one in the market now. When you ask the question about the growth and the growth we are seeing, how much of that growth is on the new platform. Today, we would say, virtually all of it is on the new platform. We have our legacy cloud platform that we are still operating today. In prior calls, we’ve talked about customers on that legacy platform actually migrating to the new platform, we are seeing that. But what we’re really seeing is traction around the new platform, and I think the growth that you see here in these numbers, are really about the new platform and its traction in the marketplace, so I think that’s where we’ll continue to see the growth will be on the new platform. Now, I’d issue with a caveat around – we’ve also talked in the past that growth in cloud is not linear. That is, given its very nature, cloud is a consumption model and so it’s not a linear progression. Here, you can look at the fourth quarter and say, well, we had a linear progression at that time. I just don’t think it’s always going to go that way moving forward. The other comment I want to make on cloud traction is in prior calls we discussed that we were having conversations with CIOs and enterprises about the open cloud. And I think what I’d say this time is that those conversations have progressed in the pilots. In the prepared remarks we talked about staples as an example. We have – the vast majority of the conversations that we referenced in prior calls have turned into pilot projects with us. And these pilot projects are about these enterprise customers, testing on our cloud, putting some workloads on it, (figuring) that power to write to our APIs and really optimize the performance on those workloads. So, this is a very interesting and exciting period for us with our cloud, because now that the platform is in place, we qualify for these new opportunities. We’re talking to enterprise customers about it. The conversations have turned into pilots and now we’re truly in a test phase and performance phase with those customers. So, we like the progress that we’ve made there and we’re excited about it. So, I think when we talk about cloud growth going forward, I believe it’s going to be on a new platform and I think we’re in a pilot phase today with enterprise customers. We’re going to do everything we can to have successful pilots with them so they turn into long-term complex production workloads running on our cloud.

Karl Pichler – SVP, CFO and Treasurer: Sorry, I’m back. So, the last comment I wanted to make on the CapEx side was with respect to the two platforms that we ran concurrently in 2012, which obviously required us to build up that capacity upfront and now what you see is that the marginal productivity – the CapEx productivity has improved as we grow into that capital base.

Critical Load Costs

Jonathan Schildkraut – Evercore Partners: I have just actually one question on the CapEx side, and I was just wondering what it costs to facilitize a megawatt of critical load inside your facilities as I look at your data center CapEx for the year?

Karl Pichler – SVP, CFO and Treasurer:

Lanham Napier – President and CEO: About $5 million.