Rackspace Hosting, Inc. Earnings: Why the Revenue Miss Doesn't Matter

By Markets Fool.com

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Rackspace exhibiting at a 2013 partner conference. Credit: Rackspace Hosting via Facebook.

This afternoon Rackspace Hosting reported worse-than-expected revenue growth in the fourth quarter, pushing the stock down 3.75% as of 4:40 pm eastern. Here's a closer look at the final Q4 tally versus Wall Street's projections:

Rackspace Hosting Revenue YOY Growth EPS YOY Growth
Consensus estimate $473.52 million 16% $0.19 35.7%
Q4 actuals $472.42 million 15.8% $0.26 85.7%
DIFFERENCE ($1.1 million) (0.2%) $0.07 50%

Sources: S&P Capital IQandRackspace Hosting press release.

For the full year, Rackspace reported $1,794.36 million in revenue and $0.77 a share in non-GAAP profit. Analysts tracked by S&P Capital IQ were calling for $1,795.56 million and $0.70 a share, respectively.

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CEO Taylor Rhodes said in a press release announcing the results:

"We will build on this momentum in 2015 by expanding the specialized expertise that we offer in areas such as e-commerce, big data and security. We're helping more and more businesses leverage the power of the cloud without the pain of managing complex new technologies by themselves."

What went right:Expense management. Operating margin soared from 6.7% to 10.6% as Rackspace got more from investments in sales, marketing, R&D, and administrative line items. These same bets also showed up in higher returns on capital. According to Rackspace, ROIC rose from 9.6% annualized in last year's fourth quarter to 15.5% as of the current 12 months. Greater capital efficiency is a good sign in that it suggests Rackspace is getting a premium for space on its servers.

What went wrong:Revenue growth missed estimates for reasons not specified in the press release, though the natural concern is that Rackspace didn't win as many large deals as it did in Q3. And yet it might not matter. Gross margin inched up 20 basis points year-over-year -- to 67.4% -- as earnings per share for both the quarter and the full year blew past estimates.

What's next:Looking ahead, Rackspace is aiming for $477 million to $484 million in first-quarter revenue.Analysts tracked by S&P Capital IQ have the company generating $489.66 million in revenue and $0.22 per share of profit. In each case, the cloud computing specialist is poised to significantly outpace last year's totals. ($421.05 million and a $0.18 per share, respectively).

Longer term, analysts have Rackspace Hosting generating 21.93%average annual earnings growth during the next three to five years.

The article Rackspace Hosting, Inc. Earnings: Why the Revenue Miss Doesn't Matter originally appeared on Fool.com.

Tim Beyersloves boardgames that allow him to rack up the points. He's also a member of theMotley 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'sweb homeandportfolio holdingsor connect with him onGoogle+,Tumblr, or Twitter, where he goes by@milehighfool.The Motley Fool recommends Apple, Facebook, and Rackspace Hosting. The Motley Fool owns shares of Apple and Facebook. 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.