Rackspace Hosting, Inc. Stock Rises on Q3 Revenue, Earnings Beat Estimates

Shares of Rackspace Hosting, Inc. (RAX) stock inched up a bit over 1% in late trading after reporting better than expected third-quarter results this evening. Here's a closer look at the final totals versus Wall Street's projections:

Sources: S&P Capital IQ, Rackspace Hosting press release.

"We are poised to capitalize on the massive opportunity ahead in the managed cloud market, where we see increasing demand for our managed services and expertise. And while we made strong progress this year, we're determined to continually improve our execution and seize our future," CEO Taylor Rhodes said in a news release announcing the results.

What went right
Rackspace didn't just exceed earnings expectations. The cloud hosting provider also reported a new monthly record for revenue per server -- $1,405, up 8.9% year over year -- and higher returns on capital. ROC zoomed to 11.7% as gross margin jumped  to 68.9% from 67.2% in last year's third quarter. In each case, the data suggests that initiatives aimed at improving efficiency and boosting pricing power are finally starting to take hold.

What went wrong
Not much, though free cash flow could have been better. Rackspace paid $124.1 million in capital expenditures, leaving just $1.3 million of cash from operations as free cash flow. That's down substantially from $10 million in last year's Q3. Also, top-line guidance came in weaker than expected, which may explain why the stock isn't moving much after hours.

What's next
Specifically, Rackspace's forecast of $469 million to $476 million in fourth-quarter revenue, including $5 million in negative impact from foreign currency exchange. Wall Street had been calling for $477.02 million. For the full year, analysts polled by S&P Capital IQ expect $1,797.07 million in revenue and $0.67 a share of earnings after accounting for stock-based compensation and other non-cash charges.