Rackspace (NYSE:RAX)’s 3rd Quarter Earnings and Future Speculations

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By Hanson So on November 11, 2014 Technology & Software

The stocks of Rackspace Hosting Inc. (NYSE:RAX) entered the day, off about 5% year to date. What the future holds for the company depends on how well the business operates. On Monday, the cloud computing specialists are supposed to release the 3^rd quarter earnings of the company and following are the expectations that analysts have by the reports:

The low estimates by analysts for the 3^rd quarter shows the revenue to be $456 million with a 17.3% year on year growth, and the EPS estimate is shown as $0.08 with a 27.3% year on year growth.

The high estimates by analysts for the 3^rd quarter shows the revenue to be $461 million with an 18.6% year on year growth, the EPS estimate is shown as $0.18 with a 63.6% year on year growth.

The consensus by S&P Capital IQ showed the revenue to be $458.62 million with 18% year on year growth; the EPS is shown as $0.15 with 36.4% year on year growth.

The last four quarters of Rackspace show that only once did the company exceeded the target that was set by Wall Street. In Q3 2013, the consensus for the profit was $0.15, the actual profit shown by the company was $0.11. In Q4 2013, the consensus was $0.14 and the actual profit was also $0.14. In 2014’s Q1, the consensus was $0.12 and the actual was $0.18. In 2014’s Q2, the consensus was $0.16, which was the same as the actual profit generated in that quarter.

The following points come to mind when considering the history of the quarterly profits of Rackspace (NYSE:RAX):

The growth in revenue per server shows that the company’s strategy of making the customers pay more for higher levels of service is working in the favour of the company. The profit gained in the last four quarters is a clear indicator of that.
Rackspace (NYSE:RAX) had been able to gain stronger returns on capital. Previously the ROC was declining, but Rackapace (NYSE:RAX) has been able to bounce back by gaining a 10% return in Q2. However it is still not as high as the ROC in the Q1 which was 11.4%. The company will have to continue working hard to exceed the ROC generated in Q1.
Previously Rackspace (NYSE:RAX) has earned income by extracting fees from customers who signed up for dedicated hosting agreements. The agreements worked in a manner where the clients had the equipment while Rackspace (NYSE:RAX) provided the clients with space to use their equipment in, along with the power and support. However, the process is no longer effective now. On the other hand, the company provides the clients with “managed cloud” offerings and believes that it can provide them with the same high touch service through the cloud that the clients expect from them.
Rackspace (NYSE:RAX) hosts “solve” summit across the country. Customers buy stuff from Rackspace (NYSE:RAX), when the company boasts of the higher-touch brands of cloud computing. However, due to the competition between Google (NASDAQ:GOOGL) and Amazon.com (NASDAQ:AMZN), this does not happen as often as the company would like.