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Does Rackspace CEO's sudden retirement signal trouble?

The retirement of Rackspace CEO Lanham Napier has IT pros keeping a close eye on the company as industry and Wall Street analysts debate the impact.

Customers of Rackspace Hosting will carefully watch the company as it deals with the sudden retirement of its CEO and fends off Wall Street analysts who smell blood in the water.

Wall Street demonstrated its concern at the departure of Lanham Napier, age 43, who disclosed his retirement plans on Rackspace's earnings call this week, driving the company's shares down.

The news capped a year-long slow-down in revenue growth; Rackspace's 16% year-to-year growth in the fourth quarter of 2013 was down from 25% in the same period last year, according to analyst firm Technology Business Research Inc. (TBR), based in Hampton, N.H.

"Rackspace's decelerating revenue growth proves the company is unable to keep up with the competition," a note from TBR analyst Jillian Mirandi said. "While TBR believes that Rackspace is continuing down the right path, the company is walking down the path, whereas competitors with deeper pockets funded by well-established non-cloud businesses are in full-on sprints."

Competitors cited in the TBR note include Amazon Web Services (AWS), Google, Inc. and IBM SoftLayer.

However, Rackspace customers and IT analysts aren't as pessimistic.

Rackspace CEO hubbub jangles IT pros' nerves

The IT community isn't pressing the panic button just yet, but some say the news has them looking on with concern.

"My overarching response is one of a little extra nervousness," said Rackspace customer Gary Rush, CEO of Boston-based online retailer Karmaloop.

Karmaloop plans to do a fresh evaluation of its cloud service provider contracts next quarter in preparation for a fourth-quarter contract renewal, and this news may factor in to that process, Rush said.

"Ultimately, it comes down to what happens with the prices that we're paying and the support that we're getting," he said.

While Amazon has been more aggressive than Rackspace on pricing, Rackspace has been more "high-touch" than Amazon in terms of customer service, Rush said. The customer support from Rackspace also has financial implications for him, as it means he doesn't have to pay for infrastructure expertise in his on-site IT team.

"I've seen financials wreck a perfectly good company because the market doesn't understand it," said Jon Wyrick, CEO of Beyond Secure, Inc., a cloud consultancy based in Austin, Texas that works with Rackspace. Wyrick is also a Rackspace shareholder.

He worries about the kind of reaction the news has already gotten, and that it could become a self-fulfilling prophecy.

"When people start writing negative stuff, before you know it, it just starts going downhill because everyone else is following the other sheep," he said.

Technology analysts dispute departure's impact

Technology analysts couldn't be further apart from their Wall Street brethren about how well Rackspace is doing and whether Napier's departure is a sign of struggles to come.

"Lanham is the second of the early founding crew to take early retirement," said James Staten, analyst with Forrester Research, based in Cambridge, Mass. "I think this is more a sign of Lanham being ready to do something new than any sign of concern for Rackspace."

Staten pointed to the selection of board chairman and former Rackspace CEO Graham Weston as another sign that the executive shakeup shouldn't be a problem for the company long-term.

"I think if there were any signs of concern by the board about the leadership of the company, they would have looked outside it [for a replacement]," Staten said.

Wall Street has it wrong, added Carl Brooks, analyst with 451 Research based in Boston.

"OpenStack has by far the largest mindshare of any cloud technology within the enterprise going forward," he said. "That's a huge natural advantage for Rackspace."

The declining stock price is undeniably bad news, "but I'll eat my hat if [Rackspace] doesn't grow revenues again this year," he continued. "They are advantageously positioned for the next phase of cloud adoption over the next few years, and they'll make a killing."

Rackspace officials said on the earnings call that the company has more than 200,000 customers overall, with more than 100 customers building private clouds using OpenStack, an area of the business the company plans to expand.

Beth Pariseau is senior news writer for Write to her at bpariseau@techtarget.comor follow @PariseauTTon Twitter.

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