There probably wasn't much heat behind last night's quarterly report from Web hosting giant Rackspace (NYSE: RAX).
This summer's IPO was a dud. Though shares were initially priced as high as $16 apiece, anemic demand found underwriters settling for $12.50 a share in August. The stock has spent the last two months underwater in the pre-teens, never approaching its IPO price.
Last night's quarter wasn't a blowout performance, but it contained some good signs, if you know where to look. Top-line growth was stellar, up 56% to $130.8 million for the quarter. Earnings dipped by 13% to $4.2 million, but don't be so quick to turn your back on Rackspace. The net margin contraction is the result of infrastructure project investments and accounting-related items. Adjusted EBITDA kept up with the top-line spurt, rising 57% to $33.8 million.
Rackspace closed out the quarter with 33,600 customers utilizing a fleet of 42,400 servers. Recent data center openings in Hong Kong and the United Kingdom will help the San Antonio-based company in its global push.
Most investors will gloss over the company's 59% server utilization rate, down from the 69% usage a year ago. That's actually a good thing. It shows that Rackspace's investments in beefing up its server farms are real, giving it room to grow in the future.
Mr. Market either doesn't understand the hosting market, or doesn't care. Other publicly traded hosting specialists like SAVVIS (Nasdaq: SVVS) and NaviSite (Nasdaq: NAVI) aren't exactly household words. The one server farm niche that investors have warmed up to in the past -- content delivery networks -- has since cooled off, as Akamai (Nasdaq: AKAM) battles smaller rivals like Limelight Networks (Nasdaq: LLNW).
What's the market afraid of, another dot-com bubble bursting? This isn't 1999, folks. Do you smell the mania anywhere? Rackspace's customers are typically real-world companies that need a reliable online presence. They're not going away. The company was growing revenue at a 59% annualized clip over the past five years heading into this summer's debut, and its first public quarter validates that growth rate.
We can keep this our little secret for now, but if Rackspace keeps growing its revenue and adjusted EBITDA anywhere near current levels, it won't be a preteen forever.
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