Rackspace 4Q15 Earnings Call Notes

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Rackspace Hosting (RAX) Taylor Rhodes on Q4 2015

Security is no longer the number one cloud challenge, it’s operating multiple clouds

“In the recent RightScale survey, the number one challenge cited by cloud adopters is no longer security, which now ranks number two. The biggest challenge is finding the expertise and other resources required to operate multiple clouds. We find that many of these businesses favor a managed cloud model which combines the choice of multiple cloud platforms with high-value expertise, tools and customer service.”

AWS and Azure are cultivating networks of managed service providers

“The two leading public clouds, AWS and Azure, are seeing a new wave of these mainstream customers who want to use their infrastructure along with managed services. AWS and Microsoft don’t want to disrupt their product focus, so they are cultivating networks of managed service providers. We intend to become the biggest and the best of these, and we’re seeing strong traction toward that goal.”

Selling fanatical support on AWS

“During its first four months, our AWS team signed 100 customers, including what we expect to be our first six-figure a month enterprise customer. The majority of these customers are new to Rackspace. We believe that this is an encouraging indicator of our ability to win new market share. Most of these new customers are ones we could not have won without providing AWS support. Now that we’ve got them in the door, we believe that we can cross-sell to them our other offers such as Managed Security, private clouds and data services. We are also actively selling Fanatical Support on AWS to existing Rackspace customers. Of these, the large majority are bringing us new workloads. ”

Workloads have gone to AWS slowing our growth

“In recent years, more of these incremental workloads have gone to AWS, contributing to our slowdown in growth. Now we’re seeing encouraging signs that our multi-cloud portfolio can reignite that essential part of our growth engine.”

Adding significant value through proprietary tools and platforms

“More than 70% of our AWS customers are choosing our highest service level, which we call Aviator. This trend indicates that we’re adding significant value on top of the AWS infrastructure. We add that value in two ways: through the proprietary software tools that we’ve created to make the platform easier to use; and through the specialized expertise that we’ve built among our cloud engineers.”

We’ve baked some macro uncertainty into our estimate as well

“And, finally, I think we’re all living in very uncertain times. And so, while we’re not seeing any specific macroeconomic indicators yet, we all realize that if the current uncertainty gets elongated and last for an extended period of time, we will see potentially impact on customers buying psyche and sales cycles, et cetera, budget sensitivity. So with an abundance of caution, we’ve baked in a bit of the challenging economic cycle into our estimate as well.”

There’s $200-$300B in corporate data centers that in play to come to cloud

“I can tell you unequivocally every single data point we see points to the fact that the rates out of the corporate data center is on. I think it’s a latest IDC or Forrester estimate that estimates between $200 billion and $300 billion conservatively that’s in corporate data centers that’s in play to come out in the cloud and SaaS models.”

Amazon leveraged their strengths of pouring capital under their product

“We found that as Amazon really leverage their strengths, which are pouring capital under their product, building their developer ecosystem, training people on APIs, et cetera, they really picked up a lot of momentum that took public cloud apps further and further into their model. And that was a – just – you’ve seen them, right, they’re a tornado. So we think that was an impact that was larger to our public cloud than we anticipated at the time.”

Cloud is no longer in early adoption

“whereas we were still in what I would call early adoption a couple of years ago. We’re now firmly in central IT land, where CIOs have caught up and saying we’ve got to go drive our businesses to the cloud, we’ve got to govern it, we’ve got to understand how to secure it, we’ve got to understand how to migrate applications, et cetera.”

The world has a scarcity of AWS experts

“the world has a scarcity of AWS experts. We’ve already, as I mentioned, gotten over 230 technical certifications, which are very hard to achieve and from our anecdotal evidence puts us already in the very top. “