Rackspace Needs to Find Its Rhythm

Where are the costs coming from? Primarily, it's due to new hires. Cost of revenue grew 64% in the second quarter, outpacing the 55% rise in revenue. Putting those capital letters on "Fanatical Support," it seems, costs money. Staff in support and data-center operations grew to 1,173 as of June 2008 from 799 a year earlier. The marketing team cheering them on grew to 419 workers from 275.

More workers may be requiring more compensation, but they aren't bringing in much more revenue. Revenue per employee was $54,000 in the June quarter, down from $50,000 in the same quarter of 2007.

Of course, profit margins were up from the fourth quarter of 2007, but that was the one with the big outage. Rackspace did the stand-up thing: Offering $3.4 million in credits to customers affected by the outage, money which would otherwise have been counted as revenue. It hurt 2007 financials, but it probably won some long-term good faith from key clients.

The problem is that the November 2007 outage wasn't a one-time occurrence. The tech Web site GigaOm noted that it suffered power issues only a week earlier. And tech blog Valleywag pointed to further problems in January. That's at least three incidents in the nine months before the company went public.

Outages strike every hosting company eventually, but investors may want to see a cleaner track record before plunging into its stock.

(Interestingly, Rackspace's discussion of the November 2007 outage is no longer on its site, but it lives on in an archived version. And a mention of it in the Wikipedia entry on Rackspace was also scrubbed on Friday.)