Rackspace reported Q2 results on Monday with news the company was offloading its Cloud Sites business, though did not mention anything regarding a full sale.
Today, Cowen and Company restates an Outperform rating on the company and a $38 price target (current price $30.04). Analyst Colby Synesael projects FY 2016 revenue of $2.06B, EBITDA of $717M and EPS of $1.04.
He cites improved cost management, slowing core growth, capital-light nature of support business, focus on profitability and strong demand for newer growth offerings in the memo.
Rackspace (NYSE:RAX) registers 8.9% Y/Y normalized revenue growth, net income of $36M (6.8% margin), adjusted EBITDA of $187M (35.8% margin), cash flow from operating activities of $165M, free cash flow of $98M, capital expenditures of $82M, cash and cash equivalents of $544M and interest-bearing debt of $501M.
Regarding the Cloud Sites divestment, Liquid Web is a cloud-hosting provider with $90M in annual sales. The deal is expected to close in the upcoming quarter.
Rackspace projects Q3 revenue of $510M-$515M and FY 2016 revenue of $2.06-$2.08B.
Taylor Rhodes, Rackspace president and CEO: "Demand is scaling rapidly for the expertise and managed services that we provide to businesses that use AWS, the Microsoft Cloud, and our OpenStack private cloud. We now serve almost 600 customers on these platforms, including some of the world's largest companies. During the second quarter, we demonstrated continued revenue growth, along with higher profitability, higher capital efficiency, strong operating cash flow and record free cash flow."
Last week, Wells Fargo commented on recent Rackspace (RAX -0.1%) takeover rumors with notes supporting a $32 per share price tag. Today, Oppenheimer & Co. forecasts a similar outcome.
Oppenheimer & Co. analyst Timothy Horan maintains a Buy rating on the company and raises his price target to $32 ($29.21 current price). He notes: "...a deal in the $32 area is more likely given our assumptions that the company could cut OPEX by 20%, decrease capital intensity of the business to 10-15% of revenue and increase leverage to ~4x EBITDA. At $32, or $4.3B, 30% equates to ~$1.3B in equity.”
He does not discount the possibility of a strategic bidder coming in with a high-30s offer, though mentions Rackspace insiders may bite on a lower private-equity bid if equity retention is part of a deal.
Rackspace reports on its second quarter today after market close. Horan expects weak results and reduced guidance.
Rackspace Hosting (NYSE:RAX) is off 7.8% in choppy trade after hours, following a Q1 report where it easily cleared profit expectations and revenues fell short, despite growing nearly 10% on an adjusted basis.
Net income was up 77.5% Y/Y, and margin at 9.4% (up from a year-ago 5.7%). And EBITDA rose 11.7% to $179M, beating an expected $176.1M.
GAAP revenues were affected by currency as well as the sale of the company's Jungle Disk business.
Free cash flow hit a record $94M.
For Q2, it's forecasting revenues of $519M-$524M (vs. consensus of $523.7M) and for the full year, revenues of $2.08B-$2.16B, in line.
Though Barclays, Pac Crest, Stifel, and Credit Suisse have downgraded Rackspace (RAX +2.1%) to neutral ratings after the company provided light Q1/2016 sales guidance to go with a Q4 beat, shares have turned green, erasing double-digit early-morning losses along the way.
Low expectations are helping: Rackspace went into earnings down 68% from a 52-week high of $56.20. Shares currently go for just 1.2x Rackspace's 2016 sales guidance midpoint of $2.12B.
Pac Crest's Michael Bowen is worried about the revenue uncertainty surrounding Rackspace's deals with Amazon and Microsoft to provide support, management, and consulting services for AWS/Azure deployments. "While Rackspace continues to attempt to win value-added contracts associated with other cloud platforms, the contracts are not material enough to offset softness in Rackspace's public cloud revenue."
Credit Suisse's Sitikantha Panigrahi notes Rackspace's guidance implies just 4%-8% 2016 revenue growth, and thinks the company will face challenges in both retaining cloud clients and competing with Amazon's existing partners.
Oppenheimer's Tim Horan (Outperform, target cut by $13 to $30) is cautiously optimistic. "2016 will largely be another transition year, as AWS is the focus for RAX, but it needs to improve its capabilities. RAX is positioning itself and its resources to capture incremental workloads that will likely flow to AWS/AZURE. RAX's execution has been poor; at least it is going in the right direction, and we expect growth to bottom midyear. Positively RAX's services are in strong demand."
On the earnings call (transcript), CEO Taylor Rhodes stated Rackspace's 2016 guidance accounts for "expected Q1 softness, our lower expectations for growth in our OpenStack public cloud and the uncertain economic environment." Q1, meanwhile, is expected to be slower than normal due to "shifts that we are making in our marketing and sales efforts toward our multi-cloud offers."
Rhodes doesn't mince words about AWS/Azure's strong competitive positioning relative to Rackspace's OpenStack public cloud offerings. "I think it's fair to say that more and more incremental or new workloads are heading to AWS and Azure. Winning those new workloads used to be a key part of our growth driver; and without them we expect our OpenStack public cloud growth to slow in 2016, and that's a factor baked into the guidance as well."