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 Robert.Mcmillan@wsj.com and Tess
Stynes at tess.stynes@wsj.com
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