Rackspace guides strong, but margins come under pressure


Rackspace (NYSE:RAX) expects Q3 revenue of $454M-$461M, largely above a $454.2M consensus.

Amid intense cloud infrastructure (IaaS) price competition, adjusted EBITDA margin fell to 32.1% in Q2 from 33.2% and 32.8% a year ago, pressuring EPS. Rackspace expects a margin of 31%-33% in Q3; it recently overhauled its IaaS pricing in an attempt to stand out from rivals.

Dedicated cloud (Web hosting) revenue +12% Y/Y to $310.6M. Public cloud (OpenStack) revenue +32% to $130.5M.

Adjusted free cash flow was $26.3M, down from $39.9M in Q1 and up from $11.5M a year ago. Capex rose 11% Q/Q to $112.4M (25% of revenue).

Net upgrade rate rose to 1.5% from a depressed 0.9% in Q1, while churn improved to -0.7% from -0.6%. Average revenue/server grew 2.9% Q/Q to $1,375, and servers deployed 1.4% to 107.7K.

Following a slew of M&A rumors, Rackspace says it's still exploring its options.

RAX -1.1% AH. Q2 results, PR.

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