Rackspace expects revenue below estimates as price cuts weigh

Reuters News
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Posted: May 08, 2013 6:26 PM

By Neha Alawadhi

(Reuters) - Rackspace Hosting Inc, which leases online storage space to companies, forecast current-quarter revenue below analysts' estimates as effects of product price cuts linger, sending its shares down 17 percent in after-hours trading.

The company, which also reported lower-than-expected first-quarter results, reduced prices of its cloud bandwidth and content delivery network (CDN) by a third in late February. (http://link.reuters.com/xup87t)

The price cuts were implemented halfway through the first quarter and will run fully in the second quarter, a company executive said during a conference call with analysts.

The company forecast current-quarter revenue of $369 million to $375 million, way below analysts' average estimate of $383.9 million, according to Thomson Reuters I/B/E/S.

This is the first time that the company has provided a forecast.

Web hosting companies such as Rackspace and competitors Equinix Inc and Internap Network Services Corp own or lease space on a server, typically housed in data centers, warehouses lined wall-to-wall with powerful storage servers.

The company said net upgrade activity and new bookings from enterprise customers slowed down during the first quarter.

"Slowdown in enterprise portion of dedicated hosting business is likely to persist as evident in dedicated hosting growth and lower installed base growth," Stifel Nicolaus analyst Todd Weller told Reuters.

Higher expenses would pull down adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins to about 30 percent from 35.1 percent in the second quarter from a year earlier, the company executive said.

FIRST-QUARTER MISS

Revenue rose 20 percent to $362 million, but was below analysts' average estimate of $367.2 million.

Net income rose to $27 million, or 19 cents per share, but fell short of analysts' average estimate of 20 cents.

"The primary miss came from underestimating the impact of the content delivery network and cloud storage price cuts the company implemented in February," Stephens Inc analyst Barry McCarver told Reuters.

Rackspace also said its first-quarter revenue was reduced by currency exchange rates.

The company's shares were down 17 percent at $43.42 in after-hours trading.

(Additional reporting by Aurindom Mukherjee in Bangalore; Editing by Sriraj Kalluvila)