Rackspace Shares Dive On Slowing Cloud Growth
May 8, 2012
Rackspace (RAX) Hosting dived in late trading after the cloud-computing service firm reported Q1 profit below views and cloud services growth slowed sequentially.
Rackspace earnings rose 70% to 17 cents a share. Revenue grew 31% to $301 million. Analysts expected 18 cents and $300 million.
Shares, up 69% since early October, slid 13% late. They fell 1% to 57.80 in the regular session.
Cloud services revenue rose 74.5% to $64.75 million. That’s down from Q4 2011’s 86% gain. Rackspace rents out computer resources in remote data centers via the Internet. Revenue for its main business, website hosting, rose 22.7% to $236.6 million…
Small and midsize businesses have been Rackspace’s main customers, but it now gets an estimated 15% of revenue from enterprise customers — large companies and government agencies.
Competition in cloud services is rife. Hewlett-Packard (HPQ) is soon expected to enter the market.
Amazon Web Services (AMZN) is far larger than Rackspace’s cloud business, analysts say. Amazon hasn’t disclosed cloud revenue, but some estimate AWS’ 2012 revenue will top $1.5 billion.
Amazon has pressured cloud rivals by cutting prices 16 times in two years, Forrester Research analyst James Staten says.
Rackspace said Q1 average revenue per server, a key metric, was $1,238, up 3.9% from Q4’s $1,191.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) fell to $100.7 million vs. $102.2 million in Q4, but up from $75.9 million in Q1 ’11.
EBITDA margin fell to 33.4% from 36.1% in Q4 and the first sequential drop in nearly five years. But analysts say that was expected as Rackspace added sales staff to target corporate customers.
The hiring spree was an "opportunistic investment," CEO Lanham Napier said on Rackspace’s earnings call. "We will get benefits throughout the year."
Rackspace operates in the "public" cloud where customers share servers and pay by the month or hour. Amazon’s fees are as low as 8 cents per hour, Staten says.
Rackspace is targeting high-margin, "value-added" offerings. It hopes large firms will use its OpenStack software in their data centers to link to the public cloud. Over 150 companies have joined the OpenStack group,which freely licenses open-source code for data center server software.
But Amazon has ties to startup Eucalyptus, which offers rival software. Citrix Systems (CTXS) is pushing its own offering. OpenStack also vies with server software specialist VMware (VMW).
Rackspace’s OpenStack products are still in testing.
"We wanted this to go faster, but we’re acting prudently," Napier said. He doesn’t expect OpenStack revenue until Q4.
Goldman Sachs analyst Scott Goldman says 2013 revenue visibility will be a key stock driver.