Rackspace Falls Most Ever as Sales Miss Estimates

Rackspace Hosting Inc. (RAX), a provider of Web-based computing services, plunged the most ever after its revenue result and forecast trailed analysts’ estimates.

Rackspace, which first sold shares to the public in August 2008, fell 25 percent to $39.36 at the close in New York, extending the decline for this year to 47 percent.

Facing stepped up competition in the cloud-computing market from Amazon.com Inc. (AMZN), which has lowered prices in its web-services division seven times this year, Rackspace said sales in the second quarter will be $369 million to $375 million. That trailed the average analyst estimate of $384.4 million, according to data compiled by Bloomberg. Chief Executive Officer Lanham Napier said sales to business customers in the first quarter were slower than forecast.

“It remains uncertain if RAX can stimulate enterprise demand or if larger competitors are successful in integrating such products in a broader offering, placing RAX at a long-term disadvantage,” Gregory Miller, an analyst at Canaccord Genuity Corp., wrote in a research note. “Competition remains intense at all levels.”

Miller, who recommends holding the shares, cut his share-price target to $40 from $55. At least four analysts cut their ratings on the stock, with at least three others reducing their stock-price estimates.

Amazon Competition

Rackspace, based in San Antonio, reported sales in the first quarter of $362.2 million, lagging the $366.6 million average analyst projection. Rackspace has been shifting its focus from managing traditional data centers for other companies to providing a full suite of software and services in the cloud.

Last year, Rackspace completed the introduction of OpenStack, a newer product going head-to-head with Amazon. Rackspace is also competing with Microsoft Corp. (MSFT)’s Azure software, which along with other products surpassed $1 billion in annual sales for the first time.

“Our first quarter results demonstrate that we are still working through a product cycle transition,” Napier said in the conference call. “This product-cycle transition will likely continue for some time, given the large number of customers still using the legacy public cloud platform.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.