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Rackspace shares tumble on lowered forecast, revenue miss

Cloudy growth not coming fast enough for testy shareholders

Shares of cloud hosting provider Rackspace were battered on Monday after the firm reported a lackluster forecast for the second quarter of its fiscal 2015.

Rackspace's total revenue for the three months ending on March 31 was $480.2m, a 14.1 per cent increase over the previous year's first quarter – not bad, but Wall Street was expecting to see a little more.

The hosting heavyweight's reported earnings of $0.20 per diluted share was on target with analysts' estimates, though, and its net income for the quarter of $28.4m showed healthy year-on-year growth of 11.8 per cent.

Yet it was not Rackspace's past performance but its projections for the coming quarter that most caught investors' attention on Monday. The firm said it expected its revenue to grow by between 1.5 per cent and 2.5 per cent in the second quarter of its fiscal 2015, as compared to the first quarter. That would place next quarter's revenue at between $487.4m and $492.2m.

The analysts were expecting to see better performance, with revenue estimates for the quarter running to $502.1m, on average. Once Wall Street wizards got over their shock, they headed straight for the trading floor, pushing Rackspace's share price down 13 per cent in extended trading.

Rackspace describes itself as a "managed cloud" company, offering services that fall somewhere in between those of traditional server hosting providers and managed infrastructure vendors like Amazon Web Services, Google, and Microsoft.

In addition to letting customers run their workloads on virtual machines, it has lately begun offering customers their own, dedicated single-tenant machines under the OnMetal brand.

Rackspace said it earned an average of $1,412 per server during first quarter, which was up 5.7 per cent from the year-ago period. The firm now operates some 114,105 servers in its data centers around the world, which itself represented a 7.4 per cent year-on-year increase.

To get there, however, it has had to spend. The company managed to reduce all of its capital expenditures in the first quarter - with the exception of data center build-outs, spending on which increased 21.8 per cent, year over year, to $13.4m.

Investors were hoping to see more return for those investments, and on Monday many voiced their displeasure by unloading their shares. ®

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