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Blue Harbour Raises Its Stakes in Rackspace Hosting

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Apr. 20 2015, Published 3:18 p.m. ET

Blue Harbour and Rackspace Hosting

Blue Harbour increased its position in Rackspace Hosting (RAX) in 4Q14. The company accounts for 13.72% of the fund’s portfolio in 4Q14.

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Rackspace reported mixed 4Q14 results

Rackspace posted revenue growth of 16% YoY (year-over-year) to a total of $472 million in 4Q14. The adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) for 4Q14 was up 25.3% YoY. The company reported net income of $36.9 million in 4Q14 for a margin of 7.8%.

Even though Rackspace’s revenue growth rate was 16%, it missed the consensus estimate of $474 million. In fact, its 4Q14 earnings of $0.26 beat consensus estimates by $0.07.

Other companies in the cloud hosting space include Amazon Web Services (AMZN), AT&T (T) and Verizon’s Terremark (VZ). Amazon Web Services aims to leverage the fast-growing cloud services market. To learn more, read Why Amazon web services is an attractive business. AT&T also posted revenue growth of 4% in 4Q14.

Investors can get exposure to Amazon by investing in the Consumer Discretionary Select Sector SPDR (XLY). XLY has 6.3% exposure to Amazon.

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Impact of currency headwinds on 1Q15 outlook

In terms of outlook for 1Q15, Rackspace said in an earnings release in 4Q14 that “For the first quarter of 2015, Rackspace expects revenue to grow between 2 percent and 3.5 percent on a constant currency basis. Based on foreign currency movements to date, Rackspace anticipates a 100 basis point headwind to revenue growth in the first quarter, resulting in GAAP revenue in the range of $477 million to $484 million. The company expects adjusted EBITDA margins to be between 32 percent and 34 percent for the first quarter.”

Rackspace’s chairman bought $2.5 million of company stock

In November 2014, the company’s chairman and founder, Graham Weston, bought $25. million of Rackspace stock. Weston believes that the company has a lot of growth potential. He’s very optimistic about its revenue growth under the leadership of its new CEO.

A leader in managed cloud

Rackspace (RAX) is a leader in managed cloud. It’s the founder of OpenStack—the open-source operating system for the cloud. It offers a diverse portfolio of cloud computing services—including public cloud, dedicated cloud, private cloud, and hybrid cloud. All of its services are committed to open technologies. The equipment—including servers, routers, switches, firewalls, load balancers, cabinets, software, and wiring—that’s required to deliver services is typically purchased and managed by the company. Rackspace is headquartered in San Antonio, Texas. It operates data centers on four continents.

In the next part of this series, we’ll discuss the fund’s position change in Akamai Technologies.

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