Rackspace returned to the public market in August.
Dreamstime
Rackspace Technology shares are trading sharply lower even though the company reported fourth-quarter financial results that were ahead of Wall Street estimates. Concern about margins is the key.
For the quarter, the provider of managed cloud services posted revenue of $716 million, up 14% from a year earlier, and ahead of the Wall Street analyst consensus estimate at $702 million. Non-GAAP profits were 26 cents a share, three cents ahead of the Street consensus forecast of 23 cents. Under generally accepted accounting principles, the company lost 23 cents a share. Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, were $199 million.
For the full year, Rackspace Technology (ticker: RXT) posted revenue of $2.7 billion, up 11%, with a non-GAAP profit of 83 cents a share.
Rackspace is projecting full-year 2021 revenue of $2.9 billion to $3.1 billion, for an 11% increase at the midpoint of the range. The previous Street consensus call was $2.94 billion. The company sees non-GAAP profits of 95 cents to $1.05 a share, falling shy of the Street consensus at $1.11 a share.
Rackspace returned to the public market in August, four years after a $4.3 billion leveraged buyout led by Apollo Global Management. In the IPO, the company sold 33.5 million shares at $21, and the stock is only slightly higher now. Shares were off 12.8% to $21.77 on Friday afternoon.
J.P. Morgan analyst Tien-tsin Huang on Friday repeated his Overweight rating on Rackspace shares, while lifting his price target to $28, from $24. He noted that there is some concern about margins among investors.
The company is projecting non-GAAP operating profit of $$500 million to $530 million, which would be 9% growth at the midpoint, falling short of the anticipated revenue growth of 11%. In other words, margins seem to be shrinking.
“The company expects its near term gross margins in mid-30s, a tad below our views and recent trends, given high booking implementation costs and opportunities to invest and take share,” he wrote. “Longer-term, we see operating profit growth at least matching revenue growth from cost transformation programs and less drag from higher-margin legacy business.”
Credit Suisse analyst Matthew Cabral, who has an Outperform rating on the stock, agreed that margins will once again be a key point among those bearish on the stock. He said the company’s target of gross margins at percentages in the mid-30s was shy of his previous 39% target for 2021.
“We continue to believe Rackspace is well positioned in a hybrid cloud world,”Cabral wrote. “For the stock, however, the debate remains squarely on the margin profile, as bears question Rackspace’s steady-state economics in a cloud-centric world.”
Write to Eric J. Savitz at [email protected]
