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Why Rackspace Hosting, Inc. Stock Popped Today

By Steve Symington - Feb 18, 2016 at 4:05PM

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The managed cloud-computing company ended 2015 on a high note.

What: Shares of Rackspace Holding ( RAX ) jumped more than 12% Thursday after the managed cloud-computing specialist announced strong fourth-quarter 2015 results.

So what: Quarterly revenue grew 2.7% sequentially from last quarter, and 10.7% year over year -- 12% on a constant-currency basis -- to $522.8 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBTIDA) climbed 11%, to $183.6 million, or 35.1% of total sales. Cash flow from operations came in at $204 million, while adjusted free cash flow was $85 million. On the bottom line, Rackspace's adjusted net income fell 19.5% year over year, to $52.2 million, and -- thanks to share repurchases -- adjusted net income per diluted share declined a more modest 13.9%, to $0.31.

For perspective, Rackspace's revenue was well within its guidance range, which called for sequential growth of 2% to 3%, while adjusted EBITDA margin came in above expectations for a range of 33% to 34%. Analysts' consensus estimates predicted slightly lower revenue of $521.4 million, and adjusted net income of $0.23 per share.

Now what: Rackspace CEO Taylor Rhodes lauded "significant progress" made by Rackspace toward its strategic and financial goals during the quarter, including its launch of "Fanatical Support for the world's leading clouds."

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

For the current quarter, Rackspace expects revenue to be between $517 million and $521 million, which amounts to currency-neutral year-over-year growth between 9.2% and 10.2%. Analysts, on average, were anticipating higher first-quarter revenue of $530.7 million. Similarly, for the full-year 2016, Rackspace expects revenue between $2.08 billion and $2.16 billion, or currency-neutral growth between 6% and 10% -- again below Wall Street's estimates for 2016 revenue to grow 10.6% on a reported basis, to $2.21 billion.

However, Rhodes also pointed out that Rackspace is becoming less capital intensive, which allows the company to generate higher free cash flow, and in turn, return more capital to shareholders through its ambitious repurchase efforts. During the last year alone, Rackspace spent $367 million on its buyback program, up from $200 million in 2014, and an enormous chunk of cash, considering its entire market capitalization currently sits below $3 billion. 

Given Rackspace's relative strength, and with shares still down nearly 60% during the past year, it's no surprise investors were willing to aggressively bid up Rackspace stock today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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