Rackspace Hosting, Inc. reported mixed 1Q results, with softer revenues, and better-than-expected profitability and free cash generation. Jefferies’ Mike McCormack maintained a Hold rating for the company, with a price target of $21, citing limited visibility into a possible reacceleration of growth.
FY Guidance Achievable
Rackspace’s 1Q revenue of $518.1 million fell marginally short of expectations and was towards the lower end of the $517-$521 million guidance range. The company’s adjusted EBITDA of $178.5 million was ahead of expectations, with margins of 34.5 percent, up 90bps from a year-ago and near the high end of the 33-35 percent guidance.
Rackspace has guided to 2Q revenues of $519-$524 million, implying normalized y/y revenue growth of 8-9 percent, given the expected late quarter pickup in activity and the pipeline for larger deals signed or expected to close. Analyst Mike McCormack said, however, that the benefits from the larger deal closures are more likely to be visible in 3Q.
Rackspace’s FY revenue outlook of 6-10 percent growth appears achievable, McCormack commented. The company also maintained its FY guidance on margins and capex, implying notable ramp in capital intensity through the year.
The analyst pointed out that while the support for third party cloud workloads continues to gain traction, their overall contribution remains relatively small to have any impact on growth.
| Date | Firm | Action | From | To |
|---|---|---|---|---|
| May 2016 | Raymond James | Downgrades | Strong Buy | Outperform |
| Mar 2016 | CLSA | Downgrades | Underperform | Sell |
| Feb 2016 | Barclays | Downgrades | Overweight | Equal-weight |
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