Evercore ISI cuts Rackspace shares, cites challenges despite Q1 beat

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On Wednesday, Evercore ISI reduced its share price target on Rackspace Technology Inc . (NASDAQ:) to $2.00 from the previous $3.00, while retaining an In Line rating on the stock. The decision followed Rackspace’s report of quarterly results that exceeded expectations, with revenue and EPS figures surpassing Wall Street’s forecasts.

The company reported a revenue of $719 million and an EPS of ($0.03), compared to the street’s projection of $715 million in revenue and an EPS of ($0.04).

The performance of Rackspace’s business segments aligned with expectations, despite witnessing year-over-year declines. The Private Cloud sector saw a nearly 13.8% quarter-over-quarter decrease due to customer runoff from older generation solutions, and the Public Cloud segment experienced a 4.7% quarter-over-quarter drop.

On a positive note, Rackspace announced plans to initiate a debt exchange offer for its remaining outstanding lenders, which is expected to close in the following month. This move could potentially reduce the company’s total debt by $800 million, complementing the $375 million of net debt already eliminated and the $275 million of new money raised, enhancing liquidity for strategic initiatives.

Despite a notable increase in private cloud bookings, which surged 86% quarter-over-quarter and 96% year-over-year, Rackspace’s management highlighted ongoing uncertainties in the demand environment. The company pointed out extended decision-making and sales cycles in its public cloud services business. Rackspace’s guidance for operating margins fell short of expectations, suggesting an operating profit of $13 million for the first quarter, significantly lower than the anticipated $43 million.

The guidance for the December quarter also disappointed, with projected revenue and EPS well below analysts’ expectations at $685 million and ($0.12-$0.14), respectively. This compares unfavorably to the street’s forecast of $709 million in revenue and an EPS of ($0.04), with an implied EBIT margin of 2.0% for the first quarter, below the consensus of 6.1%.

The firm noted that while the growth in bookings and the public debt exchange offer are positive developments, the persistent macroeconomic uncertainty and longer sales cycles warrant a cautious stance on the stock. Evercore ISI reaffirmed its In Line rating but adjusted the price target downward, reflecting these concerns.

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