2015 :: ANNUAL REPORT
LE T TER TO
STOCKHOLDERS
Cloud Exper tise: The Critical Scarcit y
for Businesses is Abundant at Rackspace
“ L ACK OF RESOURCES AND
E XPERTISE HA S REPL ACED
SECURIT Y A S THE #1 CLOUD
The technologist George Gilder observes that every economic era is
defined by a “key abundance” and a “key scarcity.” The most successful
businesses are those that make use of what’s abundant and supply what
is most in demand. During the pre-industrial era, for instance, land for
farming and ranching was abundant, while horses and mules were relatively
scarce, and prized.
CHALLENG E.”
S O U R C E :: RightScale 2016 State of the Cloud Report
Today, the key abundance is computing infrastructure. Economies of scale
are driving down prices for servers, networking gear, and operating system
software — especially when users rent access to that infrastructure through
cloud computing. Also abundant are powerful new business applications
for data analysis, ecommerce, digital marketing, etc. — which can be
invented these days by any handful of software developers with a good
idea and a credit card.
The key scarcity today is the expertise to make all of that cloud infrastructure
and all of those tools and apps work together, smoothly and cost-effectively.
Early each year, RightScale, a maker of cloud-management software, surveys
more than 1,000 technology professionals, and this year it found that a typical
company is using six clouds — across public and private cloud and dedicated
servers, from multiple vendors. 1 This survey mirrors what we see among
Rackspace customers, who want a choice of leading cloud technologies.
These customers also want managed services. They seek help to architect,
migrate, scale, secure and operate their applications. They do not employ
in-house all the specialized cloud engineers they would need for this
work. And they don’t want to do so. They want to focus their expensive
engineering talent on their core business. In the recent RightScale survey,
the #1 challenge cited by cloud adopters is no longer security, which
now ranks #2. The biggest challenge is finding the expertise and other
resources required to manage multiple clouds.
That’s why, for all the cloud adoption that we’ve seen in recent years, the
biggest wave is yet to come among mainstream businesses and government
agencies. A large majority of the world’s IT is still run in-house, in corporate
and government data centers. Industry analysts believe that this work —
worth more than $300 billion a year — will move rapidly out of those data
centers in coming years and into cloud models. We believe that many of those
users will favor a managed cloud model, which combines the choice of multiple
cloud platforms with high-value expertise, tools and customer service.
www.rackspace.com
(1) ”2016 State of the Cloud Report –
Hybrid Cloud Adoption Ramps as
Cloud Users and Cloud Providers
Mature” by RightScale, Inc (licensed
under a Creative Commons Attribution
4.0 International License).
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2015 :: ANNUAL REPORT :: LET TER TO STOCKHOLDERS
To better serve those customers, Rackspace last year launched Fanatical
Support ® for Amazon Web Services (AWS) and for the Microsoft Cloud,
including its private cloud, its Azure public cloud and Office 365.
These moves open up huge and fast-growing new markets for us.
They complement our longstanding support for OpenStack ®, and our
leadership of the market for managed dedicated hosting.
Annual Revenue ($M)
$1,309
$1,535
$1,794
$2,001
$1,025
2011
2012
2013
2014
2015
These moves strongly differentiate Rackspace as the only company on
the planet with the tools and expertise to provide Fanatical Support for
the world’s leading clouds.
This expansion of our managed cloud strategy was our biggest
accomplishment in 2015. But we had others:
• Our annual revenue passed the milestone of $2 billion, quadrupling
during the seven years since our IPO. Our revenue in 2015 grew by
13.7% on a constant-currency basis compared to 2014.
• We are closing six-figure-a-month deals with enterprise customers
at nearly twice the rate that we did before we launched our managedcloud strategy in mid-2014.
• Our adjusted EBITDA margin of 34.2% rose by 50 basis points from
2014, even as we made significant investments in new products.
• We reduced capital expenditures to 23% of revenue, and increased
our adjusted free cash flow. We expect that our capital efficiency
will continue to improve as we provide more of our services on the
infrastructure of partners such as AWS and Microsoft.
• We are channeling the company’s increased adjusted free cash flow to
stockholders through a major share buyback that is still underway.
Revenue ($M) FY 2015: $2,001
$509
$480
$489
Q1 15
Q2 15
Q3 15
$523
Q4 15
Capital Expenditures
(% of Revenue)
33.6%
30.8%
25.8%
2011
2012
24.3% 23.3%
2013
2014
2015
• We hired key leadership talent. Our new sales and marketing leader,
Alex Pinchev, brings deep experience and proven success in our industry,
including as a senior executive at Red Hat. Carla Sublett, whom we
recently promoted to CMO, is a seasoned marketing leader who will help
us tell the world about the unique value that Rackspace provides to
businesses. Brian Stein, our new head of global engineering, commands
great respect for his innovative work at Red Hat and Puppet Labs.
Our financial results for 2015 demonstrate that our established products
serve a stable customer base and generate consistent revenue growth,
profit and adjusted free cash flow. Our customers are sticky. Their
spending with us recurs and grows. In our managed hosting business,
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2015 :: ANNUAL REPORT :: LET TER TO STOCKHOLDERS
where we’re #1 in the world, we are proud to report that customer churn
hit a three-year low during Q4.
What binds our established products and our new offers on AWS and
Microsoft is our strategy to provide Fanatical Support for the world’s
leading clouds. The two leading public clouds, AWS and Microsoft Azure,
are seeing a new wave of mainstream customers who want to use their
infrastructure, along with managed services. AWS and Microsoft don’t
want to disrupt their product focus by offering such services, so they are
cultivating networks of managed service providers.
In other words, AWS and Microsoft want to focus on their economies
of scale, constantly adding features to their cloud infrastructure while
lowering prices. Rackspace is focused on expanding our economies of
expertise, adding ever-greater value to businesses that want a trusted
partner to manage the multiple clouds they use.
We intend to become the biggest and the best of the managed service
providers for AWS and Microsoft — just as we are today for Openstack and
for managed dedicated hosting. And we’re seeing strong traction toward
that goal.
During the first four months since we launched Fanatical Support for
AWS, our team signed 100 customers, including what we expect to be our
first six-figure-a-month enterprise customer. Most of these customers
are new to Rackspace. We are also actively selling Fanatical Support on
AWS to existing Rackspace customers, most of whom are bringing us new
workloads. More than a third of our AWS customers are international. More
than 70% of our AWS customers are choosing our highest service level,
which we call Aviator. We have now achieved more than 230 AWS technical
certifications, and more than 1,100 business and technical accreditations,
which place us among the top few AWS service providers in terms of
expertise. The customers of our AWS service include one of the world’s
largest management consulting companies, and other market-leading
companies such as Razorfish, one of
the world’s top digital agencies.
Our support offer for the Microsoft Cloud is showing similar progress. Since
mid-2015, our team has landed more than 100 customers, including several
large enterprise and global customers.
www.rackspace.com
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2015 :: ANNUAL REPORT :: LET TER TO STOCKHOLDERS
We expect our new offers of Fanatical Support for AWS and Microsoft to
drive our growth in 2017 and beyond. We believe that our economies of
expertise, and the cost efficiencies that we can deliver, position us well to
compete against the many small companies that focus on managed cloud
services, as well as against the traditional IT giants such as IBM, HP, and
the telecom companies — some of which are cutting back or shuttering
their cloud businesses.
Even as we nurture our fast-growing new offers, we are working to
optimize our established ones. By doing so, we intend to achieve significant
savings, which we are investing in our new, hyper-growth products. As we
demonstrated in the second half of 2015, we can launch and fund new
products while also keeping margins in line with historical levels.
We have done a lot of challenging work in 2015, revitalizing our product
portfolio and our talent. In 2016, we intend to build on that foundation
to aggressively expand our leadership of the market for managed cloud
services.
In closing, I want to thank our Rackers around the world for their
indomitable spirit, and for their hard work to develop the expertise and
tools to deliver Fanatical Support for the world’s leading clouds. They have
once again mastered and created new technologies, and learned to serve
customers in new ways. They’re special people who make us the world
leader in creating at scale, the technical expertise that is the key scarcity in
today’s economy.
Sincerely,
Taylor Rhodes
President and CEO
Rackspace
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www.rackspace.com