Rackspace is ratcheting down its revenue expectations for the rest of the year, stung by the ramifications of being in acquisition limbo last summer.
On a more positive note, the company announced it’s getting ready to tap some potential services business with customers of Amazon Web Services.
First, the bad news. Announcing second-quarter revenues today, Rackspace said its 2015 revenue growth will be 12 to 14 percent, down from its previous forecast of 14 to 18 percent. (All those figures are in constant currency, meaning they don’t take into account the fluctuations in international currency valuations.)
Sales problems from the first quarter continued to dog Rackspace in the second quarter, “exacerbated by a talent gap that lingered into the first half of this year,” said Taylor Rhodes, Rackspace president and CEO on the company’s earnings call today.
That gap resulted from Rackspace mulling acquisition offers last year. In September, the company chose to remain independent, but the months of uncertainty created a wide enough window for some key employees to leave, Rhodes said on today’s call.
Rhodes noted that the sales issue didn’t affect Rackspace’s existing customers. “Where we suffered in Q2 was in incremental demand generation,” he said.
The second quarter was additionally burdened by the loss of one of Rackspace’s “largest and longest tenured” customers, as Rhodes worded it three months ago. That customer, citing sovereignty requirements, left Rackspace’s UK data center in favor of a facility in Africa. Rackspace didn’t disclose the size of that business, but since the pullout happened on April 1, it counted against second-quarter revenue.
On a more positive note, Rhodes announced that Rackspace expects to start supporting workloads on Amazon Web Services (AWS) sometime later this year.
This model — managing a cloud that a customer has set up on non-Rackspace infrastructure — is a services business that Rackspace feels is very promising. It comes from customers that don’t have the wherewithal to manage their own clouds — or who could do it and just don’t want to, Rhodes said.
Demand for these services is out there, based on what Rackspace’s existing customers say, he added. “We normally go where we feel strong pull first from our installed base, and secondly where we can map that onto the broad market.”
This would be a way for Rackspace to cash in on AWS’ market power. Now that Amazon has started revealing AWS revenues, it’s clear AWS is not just huge but growing — at 81 percent year-over-year for the second quarter, compared with 50 percent in the first quarter.
But Rackspace has been cautioning investors that these service deals represent a brand new business that won’t generate substantial revenues in 2015.
Running the Numbers
For its second quarter, which ended June 30, Rackspace reported revenues of $489 million and net income of $29.2 million, or 20 cents per share. Those earnings per share matched the consensus estimate calculated by Thomson Financial.
For the same quarter a year ago, Rackspace reported revenues of $441 million and net income of $22.5 million, or 16 cents per share.
Rackspace also announced a $1 billion share buyback, which is due to start in volume immediately, with at least half of the buying to be completed in the next six to nine months. Officials said they’re doing this to shore up the company’s capital structure and strengthen its debt rating.
Rackspace shares were up $1.40 (4%) at $33.13 in after-hours trading.