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Rackspace Hosting (RAX) |
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WIKI ANALYSIS
Rackspace Hosting (NYSE:RAX) is a hosting company that runs its clients' web servers at its own facilities, allowing clients to reduce the number of in-house servers and in-house IT professionals needed to run them. Rackspace is the first managed hosting company to go public. Rackspace management says the company's services go beyond just keeping servers up and running - the company sells its clients "computing on demand" and related services - anything from email systems, load balancing strategies, system stress testing, better monitoring, and higher security.
Rackspace' revenue has grown around 60% each year for the last three years, and the company's customer base has grown 227% since 2005.[1] The company attributes its rapid growth to its customer service. Rackspace does not use call centers, but instead has experts from Rackspace, Microsoft, and Red Hat available 24 hours a day. Another factor driving demand is the rise of new technology that is making hosting a more attractive and cost efficient option. Virtualization helps reduce hardware costs by allowing multiple “virtual operating systems” on one server rather than having one physical operating system on the server. This can therefore decrease the number of necessary servers by sharing a single computer among multiple rackspace clients. The expertise and manpower to manage and operate a large virtualization system makes hosting a more desired option for companies. Cloud computing offers a cheaper alternative to leasing a dedicated server, because it allows a customer to use space and bandwidth from a central server rather than leasing its own personal (dedicated) server.
Company Overview
Rackspace serves 29,193 customers and 36,692 servers with its 2,600+ employees.[2] Rackspace's customers are businesses, web designers and web developers. During the year ended December 31, 2009, the Company served more than 90,000 business customers and managed more than 56,000 servers, 1,600,000 e-mail accounts, and 259,000 cloud hosting domains.[3]
Business and Financial Metrics
First Quarter 2010 Results[4]
Rackspace reported net revenue for the first quarter of 2010 of $178.8 million, an increase of 23.2% year-over-year and 5.5% from Q4 2009. Adjusted EBITDA was $59.4 million, an increase of 31.8% year-over-year and 6.1% from Q4 2009. The company achieved adjusted EBITDA margin of 33.2%, up from 31.1% in Q1 2009 and 33.0% in Q4 2009. Net income of $9.8 million grew 48.9% year-over-year and 8.6% from Q4 2009
Business Segments[3]
Dedicated Hosting
Dedicated hosting delivers a customer-specific, dedicated server, located in the Company’s business-class data centers. The Company’s customers have full administrator privileges and are responsible for most administrative functions. It provides a customer management portal and other management tools, including managed hosting, Private Cloud and managed colocation. The Company’s core service offering is managed hosting. This service removes the burden of managing the data center, network, hardware devices, and operating system software from the customer. Rackspace offers a Private Cloud service that allows large enterprises to virtualize their dedicated information technology (IT) environments. Platform hosting serves the demands of highly technical customers who require ordering and provisioning support. Managed colocation customers manage most or all of their software and applications. The Company manages the data centers, networks and some standard hardware devices. Its platform hosting service is often combined with traditional managed hosting, allowing customers the flexibility to customize service levels for each hosting service component.
Cloud Hosting
The Company’s cloud hosting services allow businesses to run their custom applications, similar to managed hosting, but using the new technologies of cloud computing. There are multiple varieties of cloud hosting services that are priced on a pay-per-use basis and that can be scaled up or down on demand. The Company offers cloud servers, cloud files, and cloud sites. Cloud servers allow customers to purchase slices of servers, load their applications onto those virtual servers, and pay only for the capacity they use. Cloud Files allow customers to purchase storage services by the gigabyte. Cloud Sites allow customers to deploy their applications to a cluster of servers that will scale processing on demand and as required by the application.
Cloud Applications
This cloud category, often called software-as-a-service, delivers applications provisioned and ready for end-customers to use. These services require limited support from the customer’s IT department. The Company offers e-mail, collaboration and file back-up cloud applications. These cloud applications are priced on a pay-per-use basis.
Hybrid Hosting
The Company offers Hybrid Hosting. Hybrid Hosting is a suite of dedicated hosting and cloud computing services.
The Company competes with AT&T, British Telecom, SAVVIS, Terremark, The Planet, Verio, Amazon, Microsoft, Google, IBM and Salesforce.com.
Trends and Forces
An Alternative to Outsourcing
Hosting has gained popularity as an alternative to in-house IT operations and IT outsourcing services. In-house operations require a large amount of manpower and hardware to effectively run IT services. Outsourcing IT services usually means that the entire IT and computing operation is outsourced. Rackspace’s hosting service allows companies to pick and choose the services they want to have hosted and the services they want to keep in house, while at the same time reducing the cost of hardware and IT professionals. For example, a customer can choose to have its database run in-house, but have the website’s storage and backup operations hosted.
Maintaining a High Level of Service
Rackspace attributes much of its growth and business to its high standard of customer service. Rackspace does not use call centers, but instead has experts from Rackspace, Microsoft, and Red Hat available 24 hours a day. Rackspace was also named one of the most reliable hosting companies by Netcraft.[5] However, Rackspace has had revenue growth of 161%, customer growth of 227%, and employee growth of 177% all in the span of three years.[6] Rackspace must be able to maintain its high level of customer service despite this rapid growth by being able to add enough employees but still delivering the necessary attention and expertise to its customers.
More Efficient Computing
Hosting is growing ever more efficient and reliable with technologies like virtualization and cloud computing. Virtualization helps reduce hardware costs by allowing multiple “virtual operating systems” on one server rather than having one physical operating system on the server. This can therefore decrease the number of necessary servers by allowing consolidation of different operating systems and capacity on to less servers. Virtualization also most efficiently handles server load by allowing the option of turning certain capacity on or off depending on the customer’s needs. The expertise and manpower to manage and operate a large virtualization system makes hosting an attractive option for companies. Rackspace works with VMware to offer and manage its virtualization services. Cloud computing services offered by Rackspace gives customers storage space and bandwidth from a central server at a lower cost than if the customer got its own dedicated server from Rackspace.
Competition
Rackspace competes with other hosting companies, as well as IT outsourcing firms like Infosys Technologies (INFY) and Wipro (WIT). However, most of Rackspace's closest competitors are not public companies.
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