Rackspace's stock tumbles on 1st quarter report
Updated 9:29 pm, Wednesday, May 8, 2013
Rackspace Hosting Inc.'s shares tumbled in after-hours trading Wednesday after it announced financial results that missed Wall Street's expectations for the second consecutive quarter.
In after-hours trading, shares were off 16 percent as of 6 p.m.
The managed hosting and cloud computer services firm reported $362.2 million in revenue in the quarter ended March 31, an increase of 20 percent from the same period a year ago but up just 2.6 percent sequentially. Analysts expected revenue of $367 million in the latest quarter.
“While we are not satisfied with our growth rates in the first quarter, we are more optimistic than ever” about our position in the market, Rackspace CEO Lanham Napier said during a conference call with analysts.
Napier attributed the lower than expected revenue to a slowdown in net upgrades and in new sales in the first quarter.
The cloud computing and hosting sector — one of Rackspace's main businesses — has become increasingly competitive over the last year as Google Inc. and Microsoft Corp. have launched their own cloud-computing products to compete with Rackspace and Amazon.com Inc.
And the sector will become even more crowded as Dell Inc. and technology behemoths IBM Corp. and Hewlett-Packard Co. launch new cloud products, industry experts said.
“If you have to compete on price — and everyone does to some degree — it's almost impossible to compete with Amazon,” said Larry Dignan, editor-in-chief of technology news website ZDNet. “(Amazon CEO Jeff Bezos) is a mad man. He's a guy who just doesn't care about profit.”
Amazon has been built its success on an Internet retail business that operates with “profit margins that are as thin as a business card,” Dignan said.
Dignan said Rackspace might be able to compete by continuing to offer superior customer service and products at a higher price, much the same way that Macy's has been able to survive the onslaught of Wal-Mart.
However, these larger competitors have the engineering resources to simply out-muscle Rackspace as they develop their own cloud solutions, said Lydia Leong, a research vice president at Gartner Inc., a technology research firm.
Leong added that as time goes on, “Rackspace will find itself more and more challenged to compete against the behemoths who enter this (business).”
Rackspace generated $27.3 million in net profit in the first quarter, an almost 18 percent increase over earnings of $23.2 million in the same period last year.
Sequentially, earnings fell almost 9 percent from $29.9 million in the fourth quarter of last year.
On a per-share basis, Rackspace earned 19 cents in the latest quarter compared with 17 cents a share in the first quarter of 2012 and 21 cents in the fourth quarter of last year.
Analysts had forecasted Rackspace to earn almost 20 cents a share in the latest quarter.
Rackspace's shares closed at $52.24 on Wednesday.
In early evening after-hours trading, shares were down $8.49 to $43.75 — not far from the company's 52-week low of $41.22. Less than four months ago, the stock was trading at an all-time high.