With GoDaddy boasting soaring profits after the initial public offering (IPO), it seems they aren’t setting the standard for everyone in the industry. Another major web host, Rackspace Hosting, has forecast dismal profits for the second quarter (Q2) of 2015. Analysts are blaming the strong US dollar for hindering revenue growth, but there may be more to the story. It’s no surprise, since Rackspace is going up against an army of Goliaths, from Google to Microsoft and Amazon, and the web host may be getting pushed out of the cream of the crop. Revenues were down 13 percent, but Rackspace is hopeful that a new (anonymous) “large” financial-centric company will bolster their profits soon—but that won’t be seen until Q3.
The Chief Executive of Rackspace, Taylor Rhodes, sounded hopeful in a post-earnings call, but depending on a single client to stay above water is never a wise strategy. Plus, Rackspace is hurting due to getting hit with a “one-time charge” this quarter after one of their other big customers took away some “production elements” at one of the company’s UK-based operations. Analysts are predicting that revenue will inch up 1.5-2.5 percent before this quarter comes to a close, but that still puts Rackspace at the end of the pack. If analysts are correct, that will put revenue somewhere around $489 million. Unfortunately, earlier this year Rackspace was expected to bring in over $502 million says Thomson Reuters I/B/E/S.
The Right Niche?
Rackspace specializes in leasing virtual storage space to companies of all sizes, complementing this offering with support services and management focused on cloud-based operations. Around 33 percent of all profits come from outside the US—and there’s the problem, according to the company. Foreign currency exchange rates aren’t favorable at the moment. The actual revenue went up 14.1 percent at the end of Q1, totaling $480.2 million, but solely on a “constantly currency basis,” revenue was actually up 16.6 percent.
Overall, the dollar has gone up around 23 percent when compared to major currencies in the last 12 months. Earlier in 2015, the net income for Rackspace went up $28.4 million, totaling around 20 cents per share, compared to this time last year. In 2014, Rackspace had 18 cents per share, totaling $25.4 million.
The Risks of Foregoing Local
In some instances, it can literally pay off to focus on foreign income, but when the exchange rates don’t turn out in a company’s favor it can be dangerous. Additionally, more and more web hosting companies are looking for local companies for peace of mind and better service. Connectivity, customer service and convenience are all must-have items that can be tough to come by if you’re depending on a foreign company. There are times that customers benefit from foreign web hosting services, but only in very specific instances.
Going with a local web hosting company is becoming a priority as more and more customers understand the nuances and the critical factor of having a great web host on their side. From a web hosting perspective, the growth of boutique-sized companies focused on serving certain time zones, states and even towns is on the rise. “Supporting local” is no longer something reserved for retail shops and restaurants—and it may be something Rackspace should consider paying more attention to before profits sink even lower.