Shares of Rackspace Hosting (NYSE:RAX) stock fell 9.28% on Monday as of 4:13 p.m. ET, as investors took a dim view of the company's first-quarter revenue miss. Here's a closer look at the final Q1 totals versus Wall Street's projections:
|RAX||Revenue||YOY Growth||EPS||YOY Growth|
|Consensus estimate||$480.96 million||14.2%||$0.19||5.6%|
|Q1 actuals||$480.2 million||14%||$0.20||11.1%|
Commenting on the results, CEO Taylor Rhodes said in a press release: "We delivered on our promises in the first quarter and are better positioning ourselves to benefit from the rapid growth of the managed cloud market. The execution of our strategy is driving profitable growth for Rackspace, including through a rising number of new, larger enterprise customers."
What went right: Monthly revenue per server held steady with Q4 at $1,412, which was up 5.7% over last year's Q1. Rackspace has also managed sequential revenue growth in each of the last four quarters. How much longer that continues depends on how well Rackspace converts big accounts to managed cloud environments that command higher fees. The company is sponsoring new "Solve" summits in London, Dallas, Sydney, and Hong Kong to win these sorts of deals.
What went wrong: Revenue growth slowed from 16.2% in last year's first quarter and 15.8% in the fourth quarter to just 14.1% in Q1. Returns on capital were up year over year (from 11.5% annualized to 12.6% annualized) but down sequentially (from 15.7% in Q4). Cash from operations inched up just 2.5% over last year's Q1, held back by meager net income gains. Rackspace appears to be building ahead of anticipated demand, perhaps to address the "new, larger enterprise customers" of which Rhodes speaks in his quote.
What's next: Looking ahead, Rackspace expects second-quarter revenue to grow between 1.5% and 2.5% on a "constant currency basis," code-speak for correcting for exchange rates. Less clear is whether that growth rate refers to quarter-over-quarter or year-over-year. Analysts tracked by S&P Capital IQ have the company generating $501.22 million in revenue and $0.22 a share in adjusted profit versus $441.11 million and $0.16 a share in last year's Q2.
Second-quarter ambiguity may be contributing to tonight's sell-off. More likely is that investors didn't like seeing Rackspace miss revenue projections for the second consecutive quarter. Longer term, analysts have Rackspace Hosting growing earnings by an average of 23.55% annually during the next three-to-five years.
In the meantime, investors should keep a close eye on revenue per server. Flat growth from Q4 to Q1 isn't necessarily a problem, but, as investors, we're expecting Rackspace to fully leverage its infrastructure for managed services deals that yield higher margins and more per unit.
Tim Beyers has a love-hate relationship with earnings season. (Doesn't every investor?) He's also a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission and owned shares of Apple and Rackspace Hosting at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+, Tumblr, or Twitter, where he goes by @milehighfool.
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