Rackspace Pops 5% After Reporting Lackluster Q2 Results Buttressed By The Promise Of Share Buybacks

Following the bell today, Rackspace reported its second-quarter financial performance. The company mostly missed street expectations, with lower-than-expected revenue, and earnings-per-share that just met expectations. Shares in the hosting company are up just under 6 percent in after-hours trading.

Rackspace reported profit of $0.20 per share on revenue of $489 million in the three-month period. Investors had expected the company to report a $0.20 per-share profit on revenue of $490.54 million. The company grew its revenue 11 percent compared to the year-ago quarter; the company was quick to note that using a constant-currency basis for measurement, it grew 13.7 percent.

In raw dollar terms, Rackspace earned $29.2 million in GAAP profits, up from its sequential-quarter tally of $28.4 million, and its year-ago score of $22.5 million.

Heading into earnings, Rackspace was worth just over $4.5 billion. According to Yahoo Finance, investors are currently valuing the company at a price/sales ratio — using trailing data — of 2.47. Contrast that figure with the firm’s forward price/earnings ratio of 28.73, and the data feels a bit odd until you realize that the company’s net income margin is 6 percent.

Buybacks, Yo

If Rackspace missed on its top-line projections, and barely met its profit requirements as set by the street, why are its shares up? The following line item should snag your attention:

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There we go. Now, as we previously mentioned, the company’s current market cap is around four and a half billion. A solid billion out of that is 22.22 percent. That implies an earnings-per-share concentration of $0.044 in the last quarter, equivalent. In short, Rackspace is deploying cash to buy equity from selling parties, both supporting its share price,and boosting the value of each piece of its equity by profiting more on a per-share basis than before.

Investors like such things. To make the point again, moves like the above are why share-based comp should count against a company’s profit, since non-cash costs have a way of becoming cash costs in time.

How in the flying fuck, please excuse my Dutch, can Rackspace afford to make such a steep share buyback? Well, the proof is in the cash reserves, future cash flows, and, you guessed it, debt:

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So, Rackspace intends to borrow money to buy its own shares to reward shareholders with presents it can only slightly afford.

For now, Rackspace managed a quarter that has impressed investors, revenue miss aside. Debt is the new profit, or something.