Rackspace Hosting (NYSE:RAX)

cloud competing is a growing industry - Rax is doing well, is well managed and funded . I expect $50 in 3 years.

Well off its Great Recession lows but still plenty of room to grow.

Cloud computing seems to be the internet wave of the future and this is a company that is paying particular attention to service and employee involvement.

The leader in hosting services to businesses and ranked as one of the 43 of 100 Best companies to work for according to Fortune, you can't go wrong. Rackspace enables companies' IT departments to be more efficient. RAX will grow by leaps and bounds in the next few years.

Focus on customer service and flexible solutions

Businesses will need no-hassle could computing.

Speculative pick on the future of computing.

As businesses become more decentralized and smaller enterprises emerge, they will want to outsource their IT and software needs to a much greater extent. RAX is positioned to offer those services very efficiently and with the needed consistent excellent service and dependibility.
RAX can offer the latest cutting edge support in an environment that is rapidly changing.

Reliability backed with cash refunds is a profound statement of focus and goals. Customers who are sensitive to service levels will select a vendor who offers the package of service, reliability and refund that meets their needs.
The service sensitive customer is not buying the same offering that a commodity seller (Amazon, AT&T is selling).
The $3.99 gallon of milk bought at 3 a.m. at a convenience store to feed a hungry baby is not the same product sold during the day at your local grocery store for $2.49.
The product is made up of many elements, and a declared, written policy to focus on service and reliability is not part of the product makeup being offered by commodity priced vendors.
And the customer retention stats say the customers are noticing and selecting this differentiated product.

Of course delivery of what is promised may falter. And other vendors can replicate this product component. So the product makup may not be sustainable over the long term.

But right now, the market seems to perceive and purchase the differentiated product.

Incredible, incredible customer focus. I love what these guys stand for how and how much value they bring to their customers. With such a strong corporate culture, and such dedication, they can only continue to command the premium prices they charge.

Gaining momentum for a newly traded company. It is over the traditional spike and dive of new offerings. Cloud computing is gaining favor. I believe that this company has the wherewithall to compete successfully in this space despite larger more well funded companies. Smaller companies are much more nimble in a space that's relatively new, that's their advantage. Wouldn't be surprised at a buyout!

Company management and philosophy added to their yearly growth make this one hard to beat. Sharp minds at the helm and a firm grasp on the market will make this one a big winner.

cloud computing is getting bigger

Lone allstar underperform here... Very competitive market, amazon is doing very well with EC2. Margins in the hosting business are very low.

I live next door to RAX. Being retired I often stop in for lunch. The employees are happy and that makes for a productive, hard working employee.

Gimponthego

Clouds are building

Greetings Fools!

Came across this company recently when reading a Fool.com article. They have only been public since Aug of 2008, so theyre still relatively new.

Here's what I found after reading through the company's latest 10k dated March 2, 2009.

The Business:

Rackspace Hosting is a world leader in hosting and cloud computing. The company describes "Hosting" as IT services delivered on demand over the internet. They believe Hosting delivers a simpler, better quality and more cost-competitive solution than do it yourself IT or outsourcing. The recently IPO'd in August 7, 2008 at $10.

Their services are sold to businesses in more than 120 countries, representing 53,000 customers. They currently manage over 47,000 servers, 1mln email accounts and 83,000 cloud hosting domains.
Also note: No single customer accoutned for more than 1% of net revenues in the past 3 years.

RAX caters to mostly small and medium sized businesses. In 2008, 28% of revenues came from outside the U.S., and towards the end of the year, they opened a Hong Kong data center and sales office. (which generated minimum revenue for '08)

Rackspace's services include 3 types of Hosting, depending on the needs of the customer, as well as Cloud Hosting, Cloud applications, and Hybrid Hosting.

The Cloud Hosting seems most promising to me - Taken from the 10K:

Cloud Hosting—Our 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 quickly and easily scaled up or down on demand. Today we offer 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. Although these cloud services are emerging technologies and in the early phases of development, they offer the true promise of cloud computing – auto scaling, no hardware or software management, simple deployment.

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, and they remove the IT burden and expense of managing and maintaining software and hardware. We currently offer email, collaboration, and file back-up cloud applications. These cloud applications are priced on a pay-per-use basis, can be purchased and used quickly. Our cloud applications have experienced strong growth over the last year. We believe the future market opportunity for cloud applications will be substantial.
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The company generates nearly all its revenues on a recurring basis, based off its subscription based business model. The customers pay a recurring fee based on the size and complexity of the IT systems they manage. Their cloud business offers pay-as-you go service as well.
This helps RAX grow revenue exponentially - both from new customers, and incremental services added by existing customers.

* The number of cloud customers has grown from 661 in Dec 2006 to a whopping 34,820 in 2008. Very impressive. Revenues from Cloud services has also ballooned too - just 310,000 in 2006, to $25 million in 2008.

Company vision:

RAX wishes to be recognized as one of the worlds great service copmanies. Theyve even christened their customer service group as the "Fanatical Support", believing (and rightly so) that excellent customer service creates loyalty, which in turn leads to higher profits and growth. RAX is focused on going "above and beyond" expectations in order to delight the customer. (I once worked for Callaway golf, and the founder Ely Callaway firmly stood by those same words when it came to customer service).

They actually call all their employees "Rackers"! And actually have some kind of award they call the "Straightjacket Award" given to the best customer service rep. .. interesting..

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Events:

The company has made continual investments in cloud during the past year, including $2.5mln in Cloud R&D, and $11.5mln in acquisitions of Jungle Disk (cloud storage solutions), Slicehost (Cloud hosting company)

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Financials:

Revenue - growth has been very impressive the past 5 years - YOY growth since 2004 has been: 60%, 61%, 61%, and most recently 47% revenue growth in 2008 at $532 million.
Analysts expect revenue to slow somewhat and are calling for about $625mln in revenues for 2009.

The company reported .19 in eps (thats 21.7mln) for 2008. This barely exceeds the .17 they did in 2007. (or the .19 they did in 06). Im not sure why estimates for 2009 are only for .17, granted thats not very impressive, but what has been impressive in the wads of free cash flow the company has been producing.

CFFO in 2006: 60.6mln
2007: 105mln
2008: 137mln

Now, I'll need someone more savy than me process the quality of these cash flows. I do note they write a ton off on D&A, I dont know whether this is a good thing or a yellow flag. But I figure when you have a young, growing technology company, theyre gonna invest alot of money in the early stages building themselves out before the net income growth shows up.. (Like an Amazon, or Omniture so to speak).

In addition to the $140mln or so raised by the IPO, the company also has drawn down $142.7 mln on their revolving credit facility. The facility is due in 2013, and I believe they are well within the leverage ratios to service the debt agreement. So, theyre sitting on $238.4mln in cash or abour $2 a share cash.

- Lastly, I assume the company will need to improve on its net margins, as they seem pretty low from what I see, but this might be normal as they expand their service suites, and I would expect COGS would start to drop as time goes by.

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Conclusion:

I like this company, and its sure been sold off relative to its growth prospects in this environment. Granted, they are newly public, so we do not yet know how they will treat shareholders.
I think revenues will continue to grow even in this nasty economy as cloud computing has shown to lower IT expenses for companies. Reminds me how Salesforce.com is still growing nicely. I'll most likely be adding some shares to my portfolio.

If you made it this far, thanks for reading. (I typed this out during work, so apologies if I rambled on too long) :)

Love to hear any comments/questions on RAX

Foolishly,
Matt

cloud computing is hot

A young company that insiders are taking ownership in to the tune of around 31%. Concerned about the recent 200M debt take on in addition to the money from the IPO. The company has been around for a while but now has to deal with the market and shareholders...I think they can do it, I'm going to watch for a while before buying in.