Rackspace Q4 2013 Earnings Preview

Rackspace Q4 2013 earnings preview

Rackspace (NYSE:RAX), provider of hybrid cloud services and the creator of open cloud platforms, is set to report its Q4 2013 numbers after-market hours today (Feb 10). RAX stock has lost close to 20% since it announced Q4 2013 results which saw the company miss the analyst consensus earnings estimate by over 30%. However, there were encouraging facts in Q3 which suggested of a brighter future to come, and juxtaposing the price drop on the canvas of the future potential, this might be the point every long term investor waits for. We look into Rackspace’s performance over the last few quarters and provide a preview of what we expect in the conference call post market hours.

Rackspace historical performance

Rackspace has seen healthy rate of growth over the last 5 years. Let’s take a look at the company’s revenue and earnings growth over the last few quarters.

Rackspace revenue and earnings growth

While revenue growth has always been healthy, the company’s margins have often turned into the sore spots for investors. A once healthy earnings growth rate has seen a Y/Y decline over the last four quarters, a consistency which has resulted in negative investor sentiment towards the company’s stock. However, the falling earnings growth rate has been more in line with the management’s strategy to focus and drive growth through reinvestment into the business, leading to margin compressions over the last few quarters. A look at the operating margins and Y/Y operating margin change makes the current operational strategy at Rackspace a bit more clear.

Rackspace operating margins and YoY change in operating margins

The management strategy, as stated in the Q3 2013 conference call, has been to invest into the business in order to drive future revenue growth with the effects of these investments beginning to show in increased revenue growth.

While the management may be clear about their strategy to fuel future growth, the fact that Rackspace operates in a highly commoditized industry with no significant competitive advantage can jeopardise the expected future potential.

Outlook for 2014

The company expects to drive revenue growth through new products like hybrid cloud, open stack, performance servers and improved management hosting services targeting fast growing customers, the key question to ask is ‘Why will a customer pay a premium to Rackspace for a commoditized service?’

While fanatical support could be the answer in the head of many investors, we at Amigobulls don’t view that alone as a substantial competitive advantage in the cloud space. The fact that the company will continue to see depressed profit margins on account of investment into the business through 2014, makes the stock extremely expensive at its current valuation levels.

Q4 2014 guidance and analyst consensus estimates

The management has guided to Q4 2013 revenues of $400 - $408 million. At its midpoint of $404 million, the guidance represents a sequential growth of 3.8% and a Y/Y growth of 14.45%.  Analyst consensus estimate for RackSpace, according to by streetinsider.com, is revenue of $404.56 million with earnings per share estimated to be 14 cents.


We expect the company to report revenues of $404.56 million, which is in line with analyst consensus estimates with revenue driven by increase in number of customers and higher traction in new products including hybrid cloud. However, we see Non-GAAP EPS of 12 cents per share falling, which is marginally short of the current Streetinsider consensus estimates.

To see Rackspace’s latest stock price movement, click here (NYSE:RAX)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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