IPOs on Parade

Let's haze the freshman class.

Two of the market's most recent IPOs -- webhosting star Rackspace (NYSE: RAX  ) and language software specialist Rosetta Stone (NYSE: RST  ) -- stepped up to the earnings stage yesterday.

These are the quarterly reports that matter. I can't emphasize that point enough. The first few reporting periods after a company goes public are crucial. It proves to investors if the company was going public to bankroll its promising growth or if it was simply an exit strategy before the bottom falls out.

Disastrous IPOs like Vonage Holdings (NYSE: VG  ) or Xinhua Finance Media -- the latter so disappointing that it quietly changed its name, focus, and ticker symbol to Xinhua Sports & Entertainment (Nasdaq: XSEL  ) two months ago -- remind investors to be careful with their enthusiasm over market debutantes. Let them prove their worth.

So, how did yesterday's newbies perform? Well, it was a bit of a mixed bag.

Rackspace delivered reasonable results. Revenue rose 21% to $145.1 million. Earnings also matched the 21% spurt to $6.6 million. Its profit growth was flat at $0.05 a share, as a result of having more shares outstanding today after last summer's IPO.

Rackspace's growth has stemmed mostly from its cloud computing platform, which now makes up more than two-thirds of its 62,078 accounts. However, it is the managed hosting accounts that make up the lion's share of revenue at the company, since cloud computing deals are substantially smaller in scope and hosting fees. The promising note there in the company's report is that the first quarter was the first time in a year that Rackspace's managed hosting accounts delivered a sequential increase. The stock opened lower this morning after the report, though I'm encouraged to see that Rackspace has now topped Wall Street's profit projections in each of its first three quarters as a public company.

Rosetta Stone is also growing nicely. The company's first quarterly report as a public company revealed a 41% spike in revenue to $50.3 million. The company's foreign language software is a hit with individuals as consumer-based revenue accounts for 80% of the company's business. Rosetta Stone posted a profit of $0.19 a share, reversing a small loss from a year ago.  

Shares of Rackspace and Rosetta Stone fell after posting their quarterly financials, but I still like what I'm seeing out of both companies. Sure, it wasn't the kind of blow-out quarter that fellow freshman Changyou.com (Nasdaq: CYOU  ) delivered last week, but both companies proved themselves worthy of their ticker tape parades.

Rackspace and Rosetta Stone managed to grow during a very difficult quarter for more seasoned public companies. Keep it up for a few more quarters, and they can begin hazing the next freshman class.

Other ways to go public:

Longtime Fool contributor Rick Munarriz feels that the guide to Web hosting -- To Server Man -- is not a cookbook. It's not a cookbook! He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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