Rackspace Hosting Profit Rises 12% -- Update

By Robert McMillan And Tess Stynes 

Shares of cloud-computing company Rackspace Hosting Inc. plummeted 13% in after-hours trading Monday, after the company lowered revenue expectations for the coming quarter.

Rackspace, which had closed the day at $53.13, said it expected revenue for its second quarter, which will end in June, to be between $487 million and $492 million. The market had expected $502 million, according to a survey of analysts by Thomson Reuters. Rackspace's stock dropped to $46.23 late Monday evening.

One factor in the reduced forecast was a major customer's unwillingness to send its data outside its own country, said Bryan McGrath, the company's vice president of finance, in an email message. A large U.K. customer moved its computing workload from Rackspace to its own data center in Africa "because of data sovereignty laws," he said. Currency fluctuations also hurt the company's estimate.

The company, whose shares were trading in the $36 range one year ago, has benefited from increased interest in cloud computing services, which eliminate the need for companies to build, maintain and staff data centers by selling metered computing and storage over the Internet.

Rackspace was a pioneer in this market, but it hasn't grown as quickly as its main competitor, Amazon Web Services, a division of the online retailer. Last year, Rackspace pivoted away from an Amazon-style business and stopped selling raw compute power in favor of bundled computing and support.

That business, known as managed hosting, differentiates Rackspace from Amazon and other cloud providers including Microsoft Azure and Google Compute Cloud. However, it has led to slower growth, said Lydia Leong, an analyst with the research firm Gartner. "The overall managed hosting growth rate isn't that high," she said.

Rackspace revenue grew 14 % in its most recent quarter. Amazon, by contrast, saw Amazon Web Services grow 49 % during the same period.

Like LinkedIn and Twitter, Rackspace may also be suffering from a failure to deliver on outsized expectations, said Daniel Ives, an analyst with FBR Capital Markets & Co. "If companies don't deliver really strong results and solid guidance relative to expectations, the stocks are going to take it on the chin," he said.

The provider of cloud-computing services in September called off its so-called strategic evaluation process that could have led to a sale of the company. Though Rackspace had said it had been approached by "multiple parties" under various scenarios, the company also said none of the offers matched the value it believed it can create with its own stand-alone plan.

Investors have been paying a sharply higher multiple than they were a year ago, right before speculation about a possible deal arose.

Overall, Rackspace reported a profit of $28.4 million, or 20 cents a share, up from $25.4 million, or 18 cents a share, a year earlier. Analysts expected per-share profit of 20 cents.

Revenue increased 14% to $480.2 million, in line with the company's expectations for $477 million to $484 million. Excluding currency impacts, revenue rose nearly 17%.

At quarter's end, the number of servers deployed rose to 114,105 from 106,229 a year earlier. Average monthly revenue per server increased 5.7%.

Total costs and expenses increased 14%.

Write to Robert McMillan at [e-mail] and Tess Stynes at [e-mail]

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