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Rackspace Hosting (RAX) Beats on Q3 Earnings & Revenues

Riding on new products launches and recent partnerships, with Amazon.com's AMZN Amazon Web Services (AWS), Intel INTC and Microsoft MSFT , Rackspace Hosting, Inc.RAX recently reported better-than-expected third-quarter 2015 results.

The cloud computing company's third-quarter earnings of 26 cents not only beat the Zacks Consensus Estimate of 21 cents but also improved from 18 cents reported in the year-ago quarter.

Rackspace Hosting Inc. - Earnings Surprise | FindTheBest

Quarter Details

Rackspace's third-quarter revenues not only increased 10.7% year over year to $508.9 million but also surpassed the Zacks Consensus Estimate of $504 million. The year-over-year improvement was attributed to better-than-expected growth in cloud-based platform. Also, foreign exchange rate changes had a positive impact on the quarter's revenues.

The company reported a year-over-year increase in server count from 110,453 to 118,654. Also, Rackspace's revenue per server increased 2.8% year over year to $1,444 per month.

Now coming to the operational metrics, Rackspace's gross profit margin contracted 255 basis points (bps) to 66.4%, primarily due to higher cost of sales. In dollar terms, gross margin increased 6.6% to $337.7 million.

The company's operating expenses increased 1.8% from the year-ago quarter. The increase was primarily due to higher selling and marketing and general and administrative expenses. Operating margin came in at 11.1% compared with 8.8% in the year-ago period, primarily due to lower operating expenses as a percentage of revenues (down 484 basis points year over year).

Rackspace's net income came in at $36.5 million or 26 cents per share compared with $25.7 million or 18 cents per share reported in the year-ago quarter.

Rackspace exited the third quarter with cash and cash equivalents of $189 million compared with $317.1 million in the previous quarter. Total debt stood at $25.1 million.

The company reported cash flow from operations of $111.4 million for the three months ended Sep 30, 2015. Free cash flow during the quarter came in at $45.2 million. Management repurchased shares worth $250.1 million during the said quarter.

Outlook

For the fourth quarter of 2015, Rackspace expects revenues to grow in the range of 2% to 3%, sequentially (mid-point $521 million). The Zacks Consensus Estimate is pegged at $521 million. EBITDA margin is expected to be in the range of 33% to 34%.

Conclusion

Rackspace reported better-than-expected third-quarter results. The year-over-year comparisons on both counts were also favorable. The company saw an increase in server count and revenue per server during the quarter. Moreover, the company provided a modest revenue outlook for the forthcoming quarter.

The company has a large number of clients. These partnerships will add value to Rackspace's existing portfolio and the resultant synergies will benefit the company in the long run.

Although the company is growing reasonably in the cloud market, growth prospects have been rationalized to a considerable extent due to intensifying competition from International Business Machines Corporation.

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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