Rackspace CEO bets the (server) farm on 'open cloud'

Lanham Napier says the new technology presents a frontier in the industry.

By TheStreet Staff Aug 10, 2012 10:41AM

Only three years ago, companies were nervous about the potential security and management risks of sending critical data and services into the "cloud." Today, the cloud-computing industry has developed so rapidly that Rackspace (RAX) has put its faith in open-source cloud technology.


Rackspace developed OpenStack, an open-source cloud operating system in 2010, and is now cranking up its efforts around the technology. Earlier this month the San Antonio, Texas-based firm announced OpenStack-powered versions of its flagship Cloud Server offering. Rackspace also unveiled a Cloud Databases offering and a Control Panel product for managing the services, both built on OpenStack.


"We're working hard to build an open-cloud company," Rackspace CEO Lanham Napier said during an interview. Rackspace, he added, will launch additional open-cloud services during its third and fourth fiscal quarters.


Rackspace, which is one of TheStreet's top cloud stocks for 2012, reported robust second-quarter results earlier this week, although Napier's focus is firmly on the open cloud.

"We still have hard work ahead of us to meet our roadmap, but we're confident that we will get it done," he said, noting that high-performance storage, monitoring and backup products are scheduled for the third quarter. A cloud network product will make its debut the following quarter.


Open-source technology lets Rackspace quickly scale its own cloud infrastructure, according to the CEO, significantly boosting efficiency. "In the long run, I believe that there's the opportunity to improve our economics because the platform is more capable," he explained. "We will absolutely share a lot of that savings with our customers."


Rackspace, however, does not offer guidance, so investors are unable to measure the strategy's impact on the company's financials.


Nonetheless, Canaccord Genuity analyst Greg Miller sees open-source cloud computing as a positive for Rackspace. The strategy opens the door to much larger applications and customers that could generate higher margins for Rackspace, he said in a note, but added that no meaningful revenue is expected until the first quarter of 2013.


OpenStack, which supports both public and private clouds, also has the backing of over 180 companies, including heavy hitters HP (HPQ), Dell (DELL) and Citrix (CTXS).


In a public cloud such as Amazon's (AMZN) S3 and EC2 offerings, customers access shared services like storage and server power from third-party companies, whereas private clouds can be run at customers' own sites or on dedicated resources at a third-party location.


Tech research firm IDC estimates that revenue from public IT cloud services alone exceeded $21.5 billion in 2010 and will reach $72.9 billion in 2015, growing four times faster than the IT market as a whole.


Another cloud specialist, Proofpoint (PFPT), says customers are clearly becoming more comfortable with the cloud model. Whereas Rackspace focuses on cloud hosting, Proofpoint touts specialized security services, according to CEO Gary Steele.


"There are things that we can do as a cloud-based service that are impossible to run on-premise such as big data processing," he said in an interview. "Think about non-tech organizations -- the financial services and health-care organizations -- do they want to build these systems and hire all the staff to run them? Probably not."


Shares of Proofpoint, which also released strong second-quarter results this week, dipped 0.6% to $14.20 on Thursday. Rackspace shares, which have risen more than 24% this year, crept up 0.2% to $53.57.


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