Rackspace Hosting, Inc. (RAX) reported second-quarter 2014 earnings of 16 cents per share, which not only missed the Zacks Consensus Estimate by a penny but also remained flat on a year-over-year basis.
Quarter Details
Rackspace’s second-quarter revenues increased 17.4% year over year to $441.1 million and also came ahead of the Zacks Consensus Estimate of $437.0 million. The year-over-year improvement was attributed to better-than-expected growth in cloud-based platform. Moreover, new customer wins and upgrades opted for by existing customers also drove quarterly revenues.
Moreover, during the quarter, Rackspace unveiled OnMetal Cloud Servers. These cloud-based solutions will help to solve enterprise complexities and make the cloud-computing environment more secure, simple, flexible and efficient.
Rackspace’s gross margin was down 158 basis points from the year-ago quarter to 67.1%, primarily due higher costs, professional fees and software license expenses.
The company’s operating expenses increased 17.7% from the year-ago quarter. The increase was primarily due to higher research and development, selling and marketing and general and administrative expenses. Operating margin came in at 7.7% compared with 9.4% in the year-ago period, primarily due to higher operating expenses.
Rackspace’s net income came in at $22.5 million or 16 cents per share compared with $22.4 million or 16 cents per share reported in the year-ago quarter.
Rackspace exited the second quarter with cash and cash equivalents of $340.3 million compared with $313.8 million in the previous quarter. Receivables were $130.9 million versus $118.5 million in the prior quarter. Long-term debt (including current portion) stood at $1.1 million compared with $1.9 million in the previous quarter.
The company reported cash flow from operations of $124.5 million for the three months ended Jun 30, 2014. Free cash flow during the quarter came in at $26.3 million.
Outlook
For the third quarter of 2014, Rackspace expects revenues in the range of $454.0 million to $461.0 million (mid-point $457.5 million). The Zacks Consensus Estimate is pegged at $455.0 million. EBITDA margin is expected to be in the range of 31% to 33%.
Conclusion
Rackspace reported mixed second-quarter results, with the bottom line missing the Zacks Consensus Estimate but the top line surpassing the same. The year-over-year revenue comparison was favorable. The company witnessed new customer wins and continued business from its existing customer base. Moreover, the company provided encouraging third quarter revenue outlook.
Rackspace leases server space and helps enterprises store and access data in the cloud. We believe that Rackspace’s focus on offering a hybrid cloud computing product will present a significant growth opportunity for the company, going forward.
However, competition in the Infrastructure-as-a-Service (IaaS) market is intense, particularly with players like Amazon (AMZN) that are willing to price very aggressively and behemoths like Microsoft (MSFT) and Google, which are determined to build a position in the fast-growing segment. Moreover, margin contraction due to higher costs also remains a concern for the company.
Currently, Rackspace has a Zacks Rank #4 (Sell).
Investors can also consider F5 Networks, Inc. (FFIV) which has a Zacks Rank #1 (Strong Buy) and is worth buying.
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