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Rackspace Hosting Beats on Q4 Earnings, Outlook Tepid - Analyst Blog

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Shares of Rackspace Hosting, Inc. ( RAX ) declined nearly 4% in after-hours trading as the company reported lower-than-expected fourth-quarter 2014 revenues on Feb 17. Also, tepid first quarter and fiscal 2015 revenue guidance impacted share price.

Nonetheless, the cloud computing company's fourth-quarter earnings of 26 cents not only beat the Zacks Consensus Estimate of 19 cents but also improved from 14 cents reported in the year-ago quarter.

Rackspace Hosting Inc. - Earnings Surprise | FindTheBest

Quarter Details

Although Rackspace's fourth-quarter revenues increased 15.8% year over year to $472.4 million, it lagged the Zacks Consensus Estimate of $474 million. The year-over-year improvement was attributed to better-than-expected growth in cloud-based platform. The company reported year-over-year increase in server count from 103,886 to 112,628. Also, Rackspace's revenue per server increased 6.8% year over year to $1,412 per month.

Now coming to the operational metrics, Rackspace's gross profit margin expanded 21 basis points (bps) to 67.4%, primarily due to higher revenue base coupled with better-than-expected growth in cloud-based platform. In dollar terms, gross margin increased 16.1% to $318.5 million.

The company's operating expenses increased 8.7% from the year-ago quarter The increase was primarily due to higher research and development, selling and marketing and general and administrative expenses. Operating margin came in at 10.6% compared with 6.7% in the year-ago period, primarily due to lower operating expenses as a percentage of revenues (down 371 basis points year over year).

Rackspace's net income came in at $36.9 million or 26 cents per share compared with $20.8 million or 14 cents per share reported in the year-ago quarter.

Rackspace exited the fourth quarter with cash and cash equivalents of $213.5 million compared with $349 million in the previous quarter. Long-term debt (including current portion) stood at $1.98 million.

The company reported cash flow from operations of $150.9 million for the three months ended Dec 31, 2014. Free cash flow during the quarter came in at $54.8 million. Management repurchased shares worth $200 million during the said quarter.

Outlook

For the first quarter of 2015, Rackspace expects revenues in the range of $477 million to $484 million (mid-point $480.5 million). The Zacks Consensus Estimate is pegged at $493 million. EBITDA margin is expected to be in the range of 32% to 34%.

Rackspace also guided revenues in the range of $2.0 billion to $2.1 billion (mid-point $2.05 billion) for 2015.. The Zacks Consensus Estimate is pegged at $2.08 billion. EBITDA margin is expected to be in the range of 33% to 36%.

Conclusion

Rackspace reported mixed fourth-quarter results, with the bottom line beating the Zacks Consensus Estimate but the top line missing the same. The year-over-year revenue comparison was favorable. The company saw an increase in server count and revenue per server during the quarter. However, the company provided tepid revenue outlook for the forthcoming quarter and for the full year.

The company has a large number of clients. It recently reached 300k customers globally. The partnership with Google ( GOOGL ) is expected to strengthen its position in the hybrid cloud computing market. Hybrid clouds comprise features of both public and private clouds and are much more secure than public ones.

However, competition in the Infrastructure-as-a-Service (IaaS) market is intense, particularly with players like Amazon ( AMZN ) and behemoths like Microsoft ( MSFT ) that are willing to price aggressively. This could remain a headwind.

Currently, Rackspace has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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