Monday, November 8, 2010

Rackspace Hits Expectations, Down 2% After Hours

By David Gross

Rackspace met sell-side expectations with an EPS of 9 cents, and revenue beat by 1% at $199.7 million.   Normally, I don't like getting into this EPS-by-a-penny chase, but Wall Street can't help but have emotional responses to news in this industry.   Even though Rackspace hit public estimates, it fell slightly short of a Morgan Stanley estimate of 10 cents that was published this afternoon in Investor's Business Daily.   The stock fell 5% after hours after the earnings report hit the wire, but has come back a bit and is now down 2%.  

Cloud continues to be less than 20% of revenue, but over 80% of the hype, but was up sequentially from 12.4% of revenue to 13.4%.   More important to profitability, the company's SG&A/Revenue ratio continued its decline, dropping 44 points sequentially to 36.94%, and down 2.15 percentage points year-over-year.   This boring, but financially significant detail, is the main reason why earnings growth has been 55% over the last 12 months while revenue growth has been 23%.   But with the company saying "cloud" as if they get a multiple off of how many times they can they the word, don't expect a lot of news about techniques to control SG&A costs.

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