Rackspace plummets as CEO departs

The company, which is expanding from Web hosting into cloud software, also disappointed analysts with a light revenue forecast.

By Benzinga Feb 11, 2014 1:25PM

Man working in data center © Erik Isakson, Tetra images, Getty ImagesBy Louis Bedigian


Rackspace (RAX) is once again feeling the brunt of frustrated investors, plunging more than 16 percent Tuesday after news of its CEO departure overshadowed quarterly results that met expectations.


The company also disappointed with a lighter-than-expected revenue forecast for 2014, a year of continued transition as Rackspace expands from its traditional Web hosting business into cloud software development.


By all accounts, Rackspace has been showing improvement. The company's total server count increased to 103,886 -- up from 101,967 servers the previous quarter and 98,884 servers in the second quarter.


Evercore Partners analyst Jonathan Schildkraut told Benzinga Monday that he thought the company had made some "decent progress" in the quarter.


"Rackspace is a very meaningful currency tailwind this quarter coupled with what we think is some pretty steady progress along the company's initiatives to transition from sort of a rack-and-stack company for dedicated servers to being a cloud provider," said Schildkraut.


The company reported a quarterly profit of $20.8 million, or 14 cents a share, down 33 percent from a year earlier. Still, it was in line with analysts' expectations.


Revenue arrived at $408.1 million versus analysts' consensus estimate of $404.56 million. Sales were up 16 percent year over year.


The company estimated its 2014 revenue at $1.77 billion to $1.8 billion, Reuters reported, slightly below the $1.79 billion analysts were looking for.


"As we look into next year, based on that same tailwind, we feel like the numbers are not overly aggressive," said Schildkraut. "I think the challenges for the company are going to be about what they're going to point to for growth over the next year and how high [capital spending] is."


Capital expenditures rose nearly 40 percent to $465,314 in 2013 -- up from $337,682 in 2012.


Rackspace initially dropped more than 11 percent when the company's earnings were first released Monday.


Rackspace shares performed extremely well in 2012, but lost more than 49 percent of its value last year.


Nonetheless, some analysts are confident that the company is headed in the right direction.


CEO departure

Before announcing its fourth-quarter results, Rackspace said that its CEO, Lanham Napier, had stepped down.


Graham Weston, Rackspace's executive chairman (and former CEO), will serve as the new CEO until a permanent replacement is found.


"Graham is the right person to step in and lead Rackspace since he's been with the company from the beginning and served us well previously as CEO for seven years," Napier said in a company release. "I am confident that Rackspace's future is brighter than ever and that Graham and Taylor Rhodes, as president, will continue to build on our success."


Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.


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