Rackspace Conference Call Highlights

Rackspace

reported its third quarter earnings on Monday. Shares of the company are up 14 percent. Below are some key highlights from its conference call: • We believe that our progress and momentum in the third quarter and really throughout 2014 demonstrate the success of our strategy and validate our position as the number one managed cloud company. • Our company has been working in a pretty noisy environment for much of this year, and we've been glad to put that behind us. • Through it all, a clear storyline has been developing, and that's what we want to talk about today. • We see three trends that are shaping the future of our industry and of our company. • First, the cloud market is clearly separating into segments: a managed cloud segment and an unmanaged cloud segment. • Over the past several years, the cloud market has gone through massive disruption. • Different business models have emerged, along with new technologies that have changed the customers' experiences and their expectations. • There is an emerging market category for cloud providers that offer value-added services in conjunction with computing infrastructure. • The winners of the unmanaged cloud segment will appeal to companies that want to manage all of their IT themselves, either because it's strategic to their business or because they are led by developers who simply enjoy learning new technologies. • Second, Rackspace has emerged as the company best positioned to dominate the managed cloud segment. • Fanatical Support and specialized expertise are what differentiate us from the unmanaged cloud providers. • We are playing a different game than they are and this strategy is working. • Third, we see improvement in our operating performance and trajectory that validates our strategy. This trend demonstrates that we're executing well and that our positioning as the number one managed cloud company has taken root. • Performance and Financials: • We added $19 million of new revenue in the third quarter. • GAAP revenue grew 4.2% sequentially, close to the high-end of our guidance range. • More importantly, our sequential growth rate on a constant currency basis rose to 4.4%; ex-currency that's our fastest sequential growth rate since the fourth quarter of 2012. • Our year-over-year growth rate of 18.3% in the third quarter marks the third consecutive quarter of improvement, following the previous nine quarters where our year-over-year growth decelerated. • Our sequential growth rate for cloud revenue remained essentially unchanged at 7.4%, and accelerated slightly on a constant currency basis. • We were able to demonstrate leverage in our model by improving margins and returns in the quarter. • In further pursuit of that goal, we announced earlier today that we're expanding our Managed Private Cloud product portfolio to include Fanatical Support for the Microsoft Cloud OS, which includes System Center and Hyper-V Server. • We recently reached a major milestone of 300,000 customers worldwide, in part because of the great progress we made in adding new accounts in Q3. • We're proud to be working with such respected names as Aldo fashion shoes and handbags; Kendra Scott jewelry; Luxottica, the world's largest premium eyewear company; PetMed Express, America's largest pet pharmacy; and Feeding America, a national food bank that just jumped to number five among privately funded U.S. charities. • Finally, last week we sent many of our top engineers and other Rackers to Paris for the Semi-Annual OpenStack Summit Meeting. • After a review of our growth strategy, CapEx requirements, capital structure, and cash flow profile, our board has authorized the repurchase of up to $500 million of the company's stock. • We intend to immediately execute a $200 million accelerated share repurchase agreement. • The remaining $300 million will be available for purchases at the company's discretion over the course of the next two years, subject to all applicable conditions including the macroeconomic environment, general market conditions, our growth capital needs, and access to capital. Three Key Points: • First, strong growth results. • We saw good growth across our products, attraction with new customers as well as our installed base. • Our managed cloud strategy is clearly resonating with customers and industry analysts, and we are well positioned to build on our success. • Second, we're driving improvements in our business model and we already see results. • During the third quarter, we started a more deliberate effort to improve our cost structure and margins have already improved as a result. • Third, our board authorized the share repurchase program for up to $500 million through November 6, 2016. • We remain focused on organic growth and we will continue to aggressively invest towards this goal. • At the same time, our financial position and cash flow profile affords us the opportunity to make investments in the business, while also repurchasing our shares. • We intend to start the program immediately with a $200 million accelerated share repurchase agreement that will be funded with available cash and the small and temporary draw on our revolving line of credit. • Revenue for the third quarter grew 4.2% sequentially to $460 million. Guidance: • For the fourth quarter, we are forecasting total revenue to range between $469 million and $476 million, which includes a negative foreign currency impact of approximately $5 million in the quarter or 110 basis points of sequential growth. • Our expected range of revenue assumed constant currency growth of 3.0% to 4.5%. We expect adjusted EBITDA margin to range between 33% and 35%.