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Rackspace reports strong Q2, but braces itself for Brexit fallout

Despite a healthy Q2, Rackspace lowers its annual forecast, blaming currency movements and asset divestitures

Rackspace lowered its annual expectations yesterday, despite reporting a 26% climb in Q2 profits.

Revenue was up 7.2% to $524m, while the firm reported a profit of $35.m, or 28 cents a share, up from $28.3m, or 20 cents a share in the year ago period.

While the figures looked healthy on paper, the results confirm that revenue growth is slowing as Rackspace finds its core hosting business under increasing pressure.

There has been growing media speculation that the company is in talks with private equity buyers over a possible takeover deal. The Wall Street Journal reported last week that Rackspace was in discussions with several suitors. This was followed by a report from Reuters, which suggested that Apollo Global Management was a strong contender for a buy out.

CEO Taylor Rhodes refused to give anything away on his call with analysts, saying ‘our policy over time has been to not comment on any of these types of speculations’.

Rhodes did speculate when it came to the impact of Brexit, however. With nearly a quarter of Rackspace’s revenue coming from the UK, the CEO said that he expected H2 revenues from the region to be 'noticeably lighter'.

“We've seen somewhat higher churn rates and some slowdown in spending among our UK customers, some of whose businesses have suffered from the currency fluctuations and uncertainty that have followed the Brexit vote,” he told analysts. “One of our large customers in the travel business for example has recently sought bankruptcy protection, creating an unforeseen churn event for us.”

“We expect this slowdown in spending and uptick in churn due to several specific customers to affect our business in the second half of the year,” he added.

Rackspace said that, for the full year, it expected $70m of negative impact from currency movements and asset divestitures.

Rackspace forecasted Q3 growth (adjusted) of 4.9%-5.9% or $534-$539m. Factoring in the $70m hit from currency movements and asset divestitures, the San Antonio-based company lowered its annual estimate for revenue to a $2.06bn-$2.08bn from a previous range of $2.08bn-$2.16bn.

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