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Image source: Rackspace.

Cloud computing specialist Rackspace Hosting (NYSE:RAX) reported fourth-quarter results after the closing bell on Tuesday. Sales rose but profits declined, leaving investors cold. Rackspace shares fell as much as 10.5% in after-hours trading before recovering to a 4% loss as of 6 p.m. ET.

Rackspace Hosting's results: The raw numbers

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Revenue

$522.8 million

$472.5 million

10.6%

Net Income

$32.1 million

$37.0 million

(13.2%)

Operating Cash Flows

$204.0 million

$150.9 million

35.2%

GAAP Earnings Per Share (Diluted)

$0.24

$0.26

(7.7%)

Data source: Rackspace.

What happened with Rackspace Hosting this quarter?
This was a mixed quarter, by any definition of that concept. Sales and cash flows raced higher but bottom-line earnings stayed low. And that's just scratching the surface of this complex reporting period.

  • Adjusted EBITDA margins were 35.1% in the fourth quarter, up from an even 35% in the year-ago period. In full-year terms, this margin rose from 33.7% to 34.2%.
  • Rackspace spent $117 million on share buybacks during the quarter, retiring more than 4% of the shares outstanding. In the first two quarters since authorizing $1 billion of fresh share repurchases, the company has spent $367 million on buybacks.
  • To help pay for the buybacks and generally bolster the balance sheet while interest rates are low, Rackspace also issued $500 million worth of corporate bonds during the fourth quarter.

Looking ahead, Rackspace offered some sales guidance both for the coming quarter and for the full 2016.

  • In the first quarter, revenue should land near $519 million, roughly 8% above the year-ago period. Backing out currency exchange effects, the constant-currency sales growth should reach above 9%.
  • Full-year sales are seen rising 6% to roughly $2.12 billion. Without currency headwinds, which become more difficult to estimate over the longer span of a full year ahead, revenues should grow between 6% and 10% in 2016.
  • Adjusted EBITDA margins are expected to stay between 33% and 35% both in the first quarter and across the whole fiscal year. Capital expenses will account for something like 21% of Rackspace's full-year sales. For the record, that ratio stood at 23.2% in 2015.

What management had to say
CEO Taylor Rhodes wanted to remind investors that Rackspace is shifting gears. The old focus on selling Rackspace-branded cloud hosting services is now giving way to selling best-of-breed support services for competing cloud platforms. That means knowing the Amazon.com (NASDAQ:AMZN) AWS platform better than Amazon's own support staff does, and also beating Microsoft (NASDAQ:MSFT) at providing quality support for its Windows Azure platform.

"We saw encouraging demand for our Fanatical Support for AWS offer, signing up our first 100 customers through the end of January," Rhodes said. "We intend to be the number one managed services provider for AWS, and we are well on our way toward that goal."

That would be an ambitious goal on its own, but each additional platform that Rackspace supports adds a whole new world of staffing and expertise requirements. This will not be an easy path to travel, no matter how long Rackspace has been known for its trademarked Fanatical Support.

Looking ahead
So the next couple of years could be tricky or downright difficult. Rackspace decommissioned more server systems than it installed during the fourth quarter, breaking a long-lived expansion trend. But those are the breaks when you're leaning less on in-house computing assets and more on supporting systems that are owned and operated by other companies.

Anders Bylund owns shares of Rackspace Hosting. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool also recommends Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days.

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