What's Happening: Shares of cloud-computing company Rackspace Hosting (NYSE:RAX) slumped on Tuesday after the company reported mixed second-quarter earnings. Revenue came in at $489.4 million, up 11% year-over-year but just shy of the average analyst estimate. Earnings were in-line with analyst expectations, with net income of $29.2 million, up 30% year-over-year, leading to EPS of $0.20. At 2 p.m. Tuesday, the stock was down about 12%.
Why It's Happening: Rackspace managed to grow earnings far faster than revenue by keeping its costs in check. Operating expenses rose by just 8.4% year-over-year, slower than revenue growth of 11%, allowing the company to meet earnings expectations even as it fell short on revenue.
Guidance for the third quarter also came in below expectations. Rackspace expects revenue to grow sequentially by 2% to 3.5% on a constant currency basis, while analysts expected 4% growth in U.S. dollars. During the second quarter, currency effects reduced the year-over-year growth rate by 2.7 percentage points.
Rackspace also announced that it had increased its buyback authorization to $1 billion. The company expects to fund its buybacks with cash on hand, free cash flow, and proceeds from new debt issuances. Rackspace is targeting a debt level of 1.5 times EBITDA, suggesting that the company will take on a significant amount of debt in order to fund future buybacks.
This announcement of new buybacks wasn't enough to balance a revenue miss and disappointing guidance, and investors sent the stock tumbling as a result.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.