INTERVIEW - Rackspace says to continue investing in cloud

BANGALORE (Reuters) - Web hosting company Rackspace Hosting Inc plans to continue investing in cloud computing and is closing the gap with, its top executive said.

“Cloud computing” -- one of the hottest buzz words in Silicon Valley -- refers to a variety of ways in which technology companies offer computing services over the Web from remote data centers, seemingly from the cloud of the Internet.

Rackspace manages customer hardware and software with its managed hosting service, its biggest segment, and lets customers host websites and rent “virtual” servers through its cloud business.

“We believe that the cloud is a game-changing paradigm shift,” Chief Executive Lanham Napier said in an interview with Reuters.

The cloud business, which contributed 10 percent to revenue in the third quarter, has been growing in excess of 100 percent per year.

“Anytime we are having that kind of a growth rate I suspect we will be making outsize investments, trying to get ahead of that growth, which will put pressure on margins,” he said.

“This year we have made significant investments in the cloud business while increasing our aggregate margin by 500 basis points,” Napier said.

“As cloud grows at a high rate there is naturally some pressure on margin, but we’ve been able to offset that with higher levels of profitability from our traditional hosting business,” he said.

In the third quarter, Rackspace recorded adjusted earnings before interest, taxes, depreciation, and amortization margins of 31.7 percent, flat quarter over quarter. Its cloud business grew 17 percent from the second quarter.

Another area of growth for the company, which has historically focussed on small and medium-sized business, has been the large enterprise managed hosting segment, where its rivals include IBM and Hewlett-Packard.

Napier said the impact of more business from large enterprises on its margins was likely positive.

The company, which competes with, Joyent and GoGrid in the cloud market, has been faring well against rivals, Napier said.

“We have increased our competitiveness in 2009. Relative to certain competitors, we’re absolutely gaining market share,” Napier said.

“A year ago, Amazon was incredibly far ahead of us,” Napier said. “This year we’ve closed the gap.”

Shares of the San Antonio, Texas-based company closed down 4 percent on the New York Stock Exchange on Thursday. The shares have risen 233 percent since the start of the year.

Reporting by S. John Tilak in Bangalore; Editing by Aradhana Aravindan