Rackspace pares losses; price cuts, spending pressure bottom line

|About: Rackspace Hosting, Inc. (RAX)|By:, SA News Editor

After launching price cuts this year to better compete against the likes of Amazon, Google, and Microsoft (each of whom is pricing its cloud infrastructure offerings very aggressively), Rackspace's (RAX) gross margin fell 150 bps Q/Q in Q3 to 67.2%.

Meanwhile, R&D spend jumped 53% Y/Y to $23.8M, and sales/marketing spend 24% to $50.9M; each figure eclipsed revenue growth of 16%. Together with the GM decline and a 600 bps Q/Q increase in the company's tax rate to 40.7%, that led Rackspace's op. margin to fall to 7.1% from Q2's 9.4% and the year-ago period's 13.5%.

Rackspace's capex, meanwhile, rose 10% Q/Q to $118M, and equaled 30% of revenue. Adjusted free cash flow was $8M, below net income of $16M.

Though clearly coming at a price, Rackspace's top-line growth was fairly healthy. Public cloud revenue (inc. OpenStack) rose 37% Y/Y to $108.4M after growing at a 36% pace in Q2, and now accounts for 28% of total revenue. Dedicated cloud (Web hosting) revenue rose 9% to $280.2M after growing 12% in Q2.

Rackspace ended Q3 with 102K servers deployed, +3% Q/Q and +15%. Average revenue/server was $1,290 vs. $1,298 in Q2 and $1,287 a year ago. Net upgrade and churn rates were steady Q/Q at 1.5% and -0.8%, respectively.

RAX pares its losses, shares now -3.7% AH. CC underway.

Q3 results, PR