Tuesday, February 7, 2012

Rackspace Earnings Preview: Record Quarter Expected

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Update 1 on 2-5-12

Rackspace (RAX) Quarterly Earnings Announcement

Rackspace will report Q4 2011 financial results on Monday, February 13, after market close. The conference call will be at 1:30 p.m. PT.

Rackspace Future and Past Financial Performance
Estimated Q4 2011 Earnings per Share (GAAP) Yahoo Finance Analysts Estimates: $0.15 avg, $0.13 low, $0.17 high, 17 analysts
Prior Quarter: $0.14
Prior Year: $0.10
Rackspace Outlook: none

Prior Q3 2011 Financial Results (GAAP) When Rackspace reports Q4 2011, the 3 months ended December, financial results on February 13, Rackspace is expected to meet, beat, or miss various prior quarterly results. These prior quarterly GAAP financial results were:
Total Revenues $264.57M
Operating Income $31.07M
Net Income $19.98M
Earnings per Share $0.14
Rackspace Outlook: Total Revenues minimum $258.20M
Gross Margin 68.84%
Operating Margin 11.74%
Net Margin 7.55%

Summary (GAAP) Overall, Rackspace is expected to beat QoQ and YoY for Earnings per Share. Therefore, Rackspace is also expected to beat QoQ and YoY for Total Revenues, Operating Income, and Net Income. Cash Flow per share should increase QoQ but may decrease YoY. Rackspace should at least meet QoQ and beat YoY for gross, operating, and net margins. In short, this is expected to be a record quarter. The prior quarterly review is below.

Rackspace Reports Record Q3 Earnings!: Revenues, Net Income, EPS Up

Rackspace Summary Q3 2011 Total revenues, operating income, net income, and earnings per share all reached another record high. Financial performance continues outstanding. Cash flow per share from operations dropped, but is not an immediate concern. Overall financial position is good, but working capital is negative again, mostly due to leasing of data centers and servers. This is a liquidity issue not a profitability issue.

Rackspace Income Statement Q3 2011 Rackspace reported record total revenues of $264.57M, record net income of $19.98M, and record earnings per share of $0.14. From the prior quarter Q2 2011, total revenues were up +7.01%, net income up +13.79%, and earnings per share up +7.69%. From the prior year quarter Q3 2010, these were up +32.48%, up +69.21%, and up +55.56%, respectively. Gross margin dipped QoQ to 68.84%, operating margin was a multi-year high of 11.74%, and net margin was a multi-year high of 7.55%. Cash flow from operations dipped to $0.51 per share mostly due to a large increase in prepaid expenses and other current assets. The Operating Expense Ratio of 57.09% is a 4-quarter low.

Rackspace Balance Sheet Q3 2011 Rackspace's total assets increased +9.36% QoQ to a record $970.68M from the prior quarter of $887.58M. The capital to assets ratio is a respectable 56.77% and about the same for the past 3 quarters. The current ratio is an illiquid 23.41% and lack of working capital has been a problem for Rackspace 3 of the past 4 quarters. Current working capital (current assets less current liabilities) is a negative -$2.73 and was negative in the prior quarter Q2 2011 (-$3.53M). Rackspace continues with low working capital, due to ongoing leasing of data centers and servers plus an increase in prepaid expenses and other current assets. This is a liquidity issue, not a profitability issue. The return on assets is low for a technology company, but has consistently grown to the current peak of +7.71%.

Rackspace Outlook 2011 Total revenues $1 billion, maintain margin profile

Rackspace Financial Performance by the Quarters

Rackspace Earnings Per Share Current Earnings per Share of $0.14 is a very strong +7.69% QoQ and +55.56% YoY. EPS has been flat 2 times, but never decreased, since Q3 2009 on the chart below.


Rackspace Cash Flow per Share Current Cash Flow per Share of $0.51 is a 4-quarter low. CFS dropped -$0.09 and -15.25% QoQ, and was up +$0.01 YoY. The largest contributors to this drop were an increase in Prepaid Expenses and Other Current Assets plus Excess Tax Benefits from Share-Based Compensation Arrangements.


Rackspace Total Revenues, Operating Income, and Net Income Current Total Revenues of $264.57M are a new all-time high, up +7.01% QoQ and +32.48% YoY, and have consistently grown. This is the 4th consecutive quarter above $200M. Current Operating Income of $31.07M are a new all-time high, up +8.44% QoQ. Current Net Income of $19.98M is also an all-time high, up +13.79% QoQ and +69.21% YoY.


Rackspace Gross Margin, Operating Margin, and Net Margin Current Gross Margin of 68.84% is a 4-quarter low and just above the historical average. Current Operating Margin of 11.74% is historically very strong and is a multi-year, if not all-time, high. This is the 5th consecutive quarter above 10%. Current Net Margin of 7.55% is historically very strong and is a multi-year, if not all-time, high.


Rackspace Return on Assets Rackspace has a historically low ROA for a technology company, but the ROA is consistently increasing QoQ. Current Return on Assets of +7.71% continues the uptrend QoQ and is a multi-year, if not all-time high. This indicates assets are being more effectively deployed. The ROA chart average is 6.60%.


Rackspace Growth Rates YoY Total Revenues Growth YoY of +32.48% continues the high rate of increase. Current Earnings per Share Growth YoY of +55.56% also continues a strong growth rate. The TRG and EPSG chart averages are a very strong +28.55% and incredible +50.75%, respectively.


Rackspace Revenue Sources The trend is a decrease in Managed Hosting (now 80.85%) offset by an increase in Cloud (now 19.15%). The Managed Hosting and Cloud chart averages are 86.29% and 13.71%, respectively.


Rackspace Working Capital Current Negative Working Capital  of -$2.73 million is the 2nd consecutive quarter and the 3rd quarter in the past 4 quarters such a condition has existed. This appears to be mostly the result of 1) an increase in accounts payable and other accrued expenses and 2) the ongoing leasing of data centers and servers (see next chart below). The leasing of data centers and servers, that is the current portion (due within 1 year) of obligations under capital leases, has created a large, ongoing current liability (now $65.78M). This is a liquidity issue not a profitability issue. The Current Assets, Current Liabilities, and Working Capital chart averages are $207.71M, $185.20M, and $22.51M, respectively.


Rackspace Customers, Servers, Employees Current Customers of 161,422 have been steadily increasing and current Servers of 78,717 have also, but at a slower rate. Current Employees of 3.799 have increased at an even slower rate, which has consistently increased the Customers to Employees Ratio. This indicates increased efficiency.


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