Numbers in millions.

In our interview, Napier admitted theres a challenge to scale up Rackspaces own infrastructure to deliver at such a high level. But he also believes its the best way to differentiate againstAmazon.coms () cheaper Web Services offerings while producingrackspace cloud hosting the profits shareholders expect.

Making the call: buy

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Notice how sequential revenue gains arent necessarily bound to increases in server count? Thats leverage at work. Nor is it an accident that the gains coincide with cloud computing sales that comprise an ever-larger slice of the revenue pie.

Sources: press releases, TMF estimates.

Whats interesting is how customers are viewing the cloud today versus how they did a few years ago. Today, theyre more inclined to believe thata Web-based infrastructure can deliveras reliably as one built and hosted in-house. Rackspace is selling into this belief with what it calls a Managed Cloud offering that guarantees certain levels of service that, not long ago, would have required customers to create their own data center.

Cloud sales refer to general agreements in which Rackspace supplies certain levels of hosting service while determining which servers and what software to use in order to make good. Customers have zero control over how infrastructure gets deployed. These engagements produce lower revenue but higher margins,美国主机. CEO Lanham Napier said in an interview.

Great as those numbers are, they dont fully express the leverage built intoRackspaces business model. For that you need to look deeper:

Lets start with the basics. Revenue zoomed 32% year over year and 7.1% sequentially in Q4. Net income improved 85% over last years fourth quarter and 25.3% over Q3. Adjusted earnings per share came in at $0.18, two pennies ahead of estimates, according to S&P Capital IQ.

Moving up the value chain

New revenue$15,016.0$12,396.0$8,509.0$9,289.0Additional servers2,0192,1221,9983,205New revenue per server$7,437.3$5,841.7$4,258.8$2,898.3Cloud computing as a % of revenue14.6%13.4%12.4%10.8%

Sources: press releases, TMF estimates.

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Were suffering mixed feelings atMotley Fool Rule Breakerstoday. On one hand,Zipcaris off more than 10% on a weaker-than-expected outlook. But on the other,Rackspace Hosting() is rallying almost as much ona very strong fourth quarter report.

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Do you agree? Disagree? Either way, it makes sense to study how the Internet has changed computing. The Motley Fool recently dug into this trend in a video research brief titledThe Two Words Bill Gates Doesnt Want You to Hear. The report is free, but only for a limited time, sowatch it now!

Rackspace Hosting Loves You, Investors, rackspace cloud hosting,My Foolish colleague andRule Breakersteammate Rick Munarriz has the details on Zipcarsfourth quarter, which allows us to dig into all the juicy goodness found in Rackspaces delicious report.

Numbers in millions.

Add Rackspace Hosting toMy Watchlistfor up-to-the-minute Foolish coverage of the stock and your entire portfolio.

Both models work for boosting revenue, but when you compare the numbers year over year, you can see that cloud hosting is much more efficient:

Still cloudy, with a chance of billions

Cloud engagements are also easier to sell, judging by the numbers. Rackspace has added at least 9,000 new customers in each of the past four quarters. More than 172,000 were using its hosted platform as of Dec. 31, up from 130,000 the year prior. Gross margins are up 180 basis points over that period.

So r, the strategy is paying off. Rackspace is doing more to squeeze revenue and profit from its deployed assets. Gains in Q4 were overstated some because of excess server capacity built up in the second and third quarters, but normalizing for the full year shows monthly revenue per server improved 9.8% over 2010s average. Returns on capital improved 301 basis points over the same period.

As a member ofmy Big Idea Portfolio, Rackspace is a stock worth buying. I still believe that. Not only is the company strides in every metric that matters, but theres also the ct that only a small portion — perhaps less than 20% — of customers that have scaled up their commitment to the Rackspace Cloud. As that ratio increases, so will profits, returns on capital, and, ultimately, shareholder returns.

By contrast, managed hosting agreements specify both the types of services Rackspace will provideandguarantees at least some measure of customer control over the equipment and software used. Think of it as renting a snowblower, whereas cloud hosting is more like paying someone to shovel your driveway after a storm.

New revenue$18,689.0$17,343.0$17,227.0$15,276.0Additional servers1,0884,6893,5554,458New revenue per server$17,177.4$3,698.7$4,845.9$3,426.6Cloud computing as a % of revenue20.6%19.2%17.4%16.1%