Rackspace Hosting Earnings Call Nuggets: Quarterly Net Server Add and Cloud Revenue Growth

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

Quarterly Net Server Add

James Breen – William Blair: So my one question is, looking at the net server add this quarter was a level that we haven’t seen, I’m not sure we’ve ever seen. So just wondering, if you could provide some color around sort of what drove that, whether the change in the sales force structure again, are there other fundamental factors that are pushing that number up?

Lanham Napier – CEO: This is Lanham. A couple of things are driving that number. So if you look at the key metrics, when you look at the number of servers deployed at period end, you can see the increase in Q2 versus Q1. There are a couple of things here. Number one, in our prepared remarks we referenced the fact that we just completed a new cloud build out in Australia. When we build a new cloud, obviously, we create capacity upfront. We have an investment in that. That cloud launched during the quarter and so we had a number of servers going on in light of that. In our prepared remarks we also referenced the fact that we are building a new cloud in Virginia as well as to follow in Hong Kong. So part of what’s driving this number is that we just flat-out had capacity expansion and increases here as we add these new clouds on a global basis. The other element that drives this number is that it’s basically success-based with our growth. So we did a little bit better growth-wise this quarter, so we’re going to add a few more servers as a result. I think the primary factor here is the new cloud infrastructure we are building as with all of these clouds between Sydney, Australia, Virginia and Hong Kong. The second factor is that this is success-based growth and as we grow a little bit faster we add more servers.

Cloud Revenue Growth

Gray Powell – Wells Fargo: So you guys had a good reacceleration on the cloud revenue growth this quarter. Can you talk about the main driver there and just how we should think about that trend going forward?

Lanham Napier – CEO: This is Lanham. I’ll take that one. We did our cloud revenue – when you look at the sequential growth rate, it certainly did improve here in Q2. What’s driving that is really just a handful of things. When we look at growth, number one, we think we are in the middle of a big market opportunity for cloud in general. In our prepared remarks we talked about the opportunity for hybrid cloud. We really do believe that (Humanity) is building out its next computing platform and so we are pretty excited being in the middle of that. When we look at the work that we are doing to make our cloud more attractive to customers, in the previous question I gave you some data around the new clouds that we are building, and so I think that is something that supports new customer adoption and usage. And so what happens is we look at all of those factors and then we bake them into the revenue guidance that Karl just provided you. So, I think that what we want to do in this when we are providing the revenue guidance is basically look at all these different variables whether it’s cloud growth, or dedicated hosting growth, upcoming churn, we look at our pipelines, we consider FX; I mean, that’s a multi-variable equation there. We bake all that into it and we come into our revenue guidance range. So, the feedback we have given you here on guidance for Q3 which Karl just went over bakes all that in, and within that guidance we are taking into account things we are seeing in the cloud business. We continue to believe that cloud is in a hotspot for market growth, and we need to do our part to build out our offerings. Some of it’s the geographical expansion we talked about in the prepared remarks. Other things we are doing here is advancing our roadmap and continue to offer more features and capabilities for customers in our cloud along with higher service levels.

A Closer Look: Rackspace Hosting Inc Earnings Cheat Sheet>>