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Rackspace chugs along amid takeover speculation

Taylor Rhodes
Source: Rackspace
Taylor Rhodes

In the cloud-computing market, Google and Amazon.com have been embroiled in a brutal pricing war. So when news broke in May that smaller rival Rackspace had hired Morgan Stanley to explore strategic options amid such stiff competition, Rackspace’s president, Taylor Rhodes, expected a six-month parade of discussions with customers concerned about his company's future.

Instead, Rackspace has been signing up clients at an accelerated pace even as its status remains unresolved, Rhodes said. The company’s pitch has long been that the raw computing power and storage in the cloud is becoming commoditized and that there's money to be made selling services and support on top of it to the many businesses that need the help.

Rhodes says that the infrastructure piece is only 20 percent to 30 percent of the market Rackspace is going after.

“We’ll let Amazon and Google fight for that,” Rhodes, who was promoted to president in January, said in an interview on Monday at a Rackspace customer conference in San Francisco. “Every cloud has to be managed.”

Whether Rackspace can win the managed services market and capture enough revenue in the process to build a big, independent business are questions investors are pondering. On May 16, the day after Rackspace announced that its board had enlisted Morgan Stanley, the stock jumped 18 percent, a sign that any potential acquisition would bring a premium.

But the company never indicated that a sale was likely and said in the filing that there could be "no assurance that the board's review process will result in any partnership or transaction being entered into or consummated."

Rhodes declined to comment on Rackspace's plans or the current state of talks. He did say that he's been surprised at how few customers have needed reassurance about what the future holds.

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With no public developments since the filing, the shares have fallen 14 percent from the mid-May rally, closing Monday at $30.91 and giving the San Antonio-based company a stock market value of $4.4 billion.

Rackspace is scheduled to report second-quarter earnings on Aug. 11, and analysts are projecting revenue growth of 16 percent to $437 million, according to a survey by Thomson Reuters. That would mark its fastest rate of expansion in a year.

Rhodes said that two areas where Rackspace is gaining customers are cloud databases and digital marketing. As companies move from traditional databases, where software and hardware are tightly aligned, to big data technologies like Hadoop that reach across many servers and allow for more sophisticated data analysis, Rackspace can help clients manage the transition.

And when customers hire digital ad agencies to develop marketing campaigns, Rackspace provides Web hosting services.

"Rackspace is doing a better job of differentiating itself from the commodity cloud infrastructure offerings of Amazon, Google and Microsoft," Patrick Walravens, an analyst at JMP Securities, wrote in a July 23 report.

Those companies are all many times bigger than Rackspace and have proven willing to throw cash at certain businesses even at the expense of profitability. Rhodes knows that and wants investors and analysts to recognize that during this period of dramatic cost cuts by competitors, his company has closed "some of the largest deals in the history of Rackspace."

By CNBC's Ari Levy

Squawk Alley