Why Rally Software Development Corp Shares Sank Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Rally Software Development Corp (NYSE: RALY  ) fell 10% Friday after the company turned in solid fourth-quarter results, but followed with weaker-than-expected forward guidance.

So what: Quarterly revenue rose 27% year over year, to $19.6 million, which translated to an adjusted net loss of $0.19 per share. By comparison, Rally Software posted a loss of $1.68 per share in the same year-ago period. Analysts, on average, were looking for a wider fourth-quarter loss of $0.26 per share on lower sales of $19.25 million.

However, Rally expects first-quarter revenue in the range of $19.4 million to $19.6 million, or a deceleration to 21% to 22% growth over the same period last year. That should result in an adjusted net loss of $0.53 to $0.50 per share. Both figures arrived significantly below analysts' expectations for an adjusted loss of $0.20 per share on sales of $20.85 million.

What's more, Rally see full-year sales in the range of $91.5 million to $93.5 million, with an adjusted loss per share of $1.61 to $1.56. Analysts were modeling a full-year loss of $0.74 per share on sales of $92.11 million.

Now what: When asked about the discrepancy between their earnings guidance and Wall Street's models, Rally Software CEO Tim Miller pointed to "measured investments in R&D," and growing head counts for sales and marketing by 39%. That's all well and good, but the fact remains that the market was significantly underestimating Rally's near-term losses.

As a result, I'm sticking by my previous stance of patiently watching from the sidelines until Rally shows more signs of slowing cash burn and maintaining top-line growth.

Good things come to those who wait
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