The San Antonio company reported first-quarter non-GAAP earnings of 23 cents a share as revenue rose 11% year over year to $726 million.
Analysts surveyed by FactSet were expecting earnings of 21 cents a share on revenue of $722 million.
For the second quarter, Rackspace expects earnings of 21 cents to 23 cents a share on revenue of $735 million to $745 million.
Analysts are expecting earnings of 23 cents per share on revenue of $735 million.
The company also expects full year revenue between $2.9 billion and $3.1 billion. Analysts are expecting revenue of $3.02 billion.
Rackspace shares at last check were down 21% to $19.08.
Analysts at RBC Capital Markets maintained their outperform rating while raising their price target on the shares to $29 from $27. Still, the investment firm is concerned about pressure on gross margins.
Evercore ISI analyst Amit Daryanani rates the company outperform with a $26 price target. "This was a challenging quarter and RXT needs to show a stabilizing gross margin trajectory for investors to get comfort on the name,” Daryanani said.
Deutsche Bank also rated Rackspace with a buy and $26 price target.
"Although bookings growth of about 6% year over year came in slightly below our expectations" and the company faces difficult comparisons in the near term, "revenue growth should remain strong, growing double digits,” analyst Bryan Keane said.