Rackspace Hosting, Inc. Stock Rocked by Revenue Miss

By Markets Fool.com

Continue Reading Below

Rackspace's Crawley data center in the UK is embracing more green technology.

Shares of Rackspace Hostingstock 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%
DIFFERENCE ($0.76 million) (0.2%) $0.01 5.5%

Sources: S&P Capital IQand Rackspace Hosting press release.

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."

Continue Reading Below

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" summitsin 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%annuallyduring 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.

The article Rackspace Hosting, Inc. Stock Rocked by Revenue Miss originally appeared on Fool.com.

Tim Beyershas a love-hate relationship with earnings season. (Doesn't every investor?) 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 Hostingat 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 and Rackspace Hosting. The Motley Fool owns shares of Apple. 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.