Though Rackspace's (RAX) Q4 revenue growth (15.6% Y/Y) was nearly on par with a Q3 level of of 15.7%, its gross margin fell 190 bps Y/Y to 67.2%, adjusted EBITDA margin dropped 440 bps to 32.4%, and op. margin fell 740 bps to 6.7%.
Tough price competition from the likes of Amazon, Google, and Microsoft is has been pressuring margins, and so has Rackspace's aggressive spending: Sales/marketing spend +28% to $55.5M, R&D +47% to $16.9M, capex +32% to $115.8M (over 28% of revenue). Adjusted free cash flow was $15.3M, below net income of $20.8M.
Public cloud revenue (inc. OpenStack) +34% Y/Y vs. +37% in Q3, and now 29% of total revenue. Dedicated cloud (Web hosting) revenue +10% vs. +9% in Q3.
Rackspace's net upgrade rate was 1.1%, down from 1.5% in Q3 and 1.2% a year ago. Churn was -0.7% vs. -0.8% in Q3 and -0.7% a year ago.
Servers deployed rose 2% Q/Q and 15% Y/Y to 103.9K, and average revenue/server rose 2% Q/Q and 1% Y/Y to $1,322.