Rackspace Earnings Disappoint, Growth Slows

Rackspace ($RAX) reported Q1 2012 financial results on May 7.

Rackspace could not match the prior record-breaking Q4 2011, despite an adequate increase in revenues and surprising increase in gross margin. Both are all-time highs. Even though Q1 2012 is arguably the second-best quarter ever, the small decrease in net income (-$1.87M) and earnings per share (-$0.01) QoQ is the first since before Q3 2009. The streak has been broken. The year over year increase in earnings per share was strong (+70%).

CEO A. Lanham Napier delivered the revenues and gross margin, but performance weakened at the operating margin level. Operating expenses hit a 4-quarter high of 59.25% of total revenues. The income statement performance slowed at that point and earnings per share took the small hit of -5.56% QoQ. Napier said, "While we’ve made a lot of progress so far in 2012, we have much more to do. We are executing through a very important platform shift to our next generation cloud, and we need to make this experience incredible for our customers. Massive technology disruptions like this create once in a lifetime opportunities for companies to seize the moment, take the initiative, and lead the revolution. Our goal is to lead the revolution".

Historically this operating expense ratio does peak annually in Q1 and 2012 was lower than the prior 2 years. So there is a positive aspect. Performance then improves through the remainder of the year. Therefore, expectations are for better, and record-setting, quarters ahead.

Rackspace Income Statement Q1 2012 Rackspace reported record total revenues of $301.36M, net income of $23.18M, and earnings per share of $0.17. From the prior quarter Q4 2011, these were +6%, -7%, and -6%, respectively. From the prior year quarter Q1 2011, these were +31%, +68%, and +70%, respectively. Gross margin increased QoQ and YoY to 71.05%, a multi-year high. Both the operating margin and net margin dipped QoQ but increased YoY to 12.31% and 7.695, respectively. Cash flow from operations dropped to a 7-quarter low of $0.499. The operating expense ratio of 58.75% is a 4-quarter high.

Rackspace Balance Sheet Q1 2012 Rackspace's total assets reached a record $1.09 billion. The capital to assets ratio rose to 61%, which is a multi-year, if not all-time, high. The current ratio is a low 27% but improving. Working capital has been an issue in the past. Current working capital rebounded to a 6-quarter high of $55M. The debt ratio of 13% is reasonable and trending downwards. The return on assets is low for a technology company, but has consistently grown to the current multi-year peak of +8.92%.

Rackspace Outlook 2012 None provided, may be provided in annual letter to stockholders this spring.