Rackspace CEO: Offshoring, real estate closures and other cost cutting measures. Did NASDAQ cheer? Well? Nope

Q1 revenue up, losses widen, boss says new Elastic Engineering cloud product selling fast


There are two things that typically make Wall Street investment analysts go weak at the knees when it comes to quarterly conference calls with tech execs: expanding cloud services and gory details of cost pruning.

Rackspace delivered both in spades this week but its shares nonetheless took a beating on NASDAQ, plunging by almost 30 per cent after it delivered full-year guidance of $1 earnings per share, lower than the $1.10 consensus expected by analysts. Slowing profit growth spooked them.

Top brass used the Q1 call (transcript here) to talk up the rebranded private cloud portfolio, including a fully managed VMware Cloud service, plus Rackspace Elastic Engineering described by CEO Kevin Jones as "the next iteration of our service blocks".

"Rackspace elastic engineering is on-demand access to a pod of multidisciplinary cloud specialists who will know the customers' application, team and desired business objectives and will be laser-focused on driving their cloud outcomes.

"The pod is capable of delivering a broad spectrum of outcomes without the constraints of a fixed scope of management. This is the complete opposite of how a global system integrator structures and prices their services," said Jones.

Elastic Engineering is supported across AWS, Google Cloud Platform, Microsoft Azure and VMware Cloud. Jones claimed this "cracks the code" for businesses that are "trapped" between running traditional operations and being cloud-native.

"After just a few weeks, elastic engineering has been one of the most successful new product launches in Rackspace history. We've already closed significant deals in all three regions of the world, and the pipeline for this offering is growing very fast."

For the three months ended 31 March, Rackspace turned over $726m in sales, up 11 per cent year-on-year, this includes $579.6m in multi-cloud services, itself up 14.1 per cent, and $97.3m worth of App & Cross Platform revenue, which grew 19.4 per cent. The legacy OpenStack Public Cloud declined 22.6 per cent to $48.4m.

Rackspace reported a fall in gross margin due to the cloud mix, the early costs of on-boarding of customers and a few other aspects. This, along with operating costs and interest repayments, led to a net loss of $64m versus a net loss of $48.2m a year earlier.

Cost-cutting

The conversation on the call then naturally led to cost savings initiatives, which Jones said the business approaches "the same way as we approach sales. We build a funnel of efficiency programmes, which we regularly fill and convert, and that's how we look at it."

There are four levers that Rackspace is trying to pull with respect to trimming overheads: automaton and "streamlining processes", which is tech driven," said the CEO. Second is "leveraging the G&A (general & admin expenses) as revenue grows and also increasing the leverage of partners R&D, the product development costs that they put in, as well as the market development". The third is "driving higher offshore mix across the company. I do believe there is a huge opportunity there. We need to continue driving that as we grow."

The Reg is aware that in the past year Rackspace sent certain job functions to India, including some in support. Rackspace has never had anything to add in terms of commentary.

Jones said the fourth area of cost cutting is on the "non-labour expense side", including better supply chain management, and consolidating "our real estate footprint". Rackspace sold land for $19.1m in Q1.

"These are all the cost saving initiatives that we have in the funnel that we'll continue driving as the business model continues to transform," he said.

For 2021, Rackspace forecast full-year revenues of $2.9bn to $3.1bn, and earnings per share of between $0.95 and $1.05. Analysts were expecting more and so the share price shrank by more than 28 per cent yesterday, and was still down almost 21 per cent this morning compared to before the results were released on Monday night UK time.

Wall Street can be a cruel master but it is one that Rackspace management and its backers wanted to embrace again, so they've only got themselves to blame. ®


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