Rackspace (NYSE: RAX) announced 3Q results of $509M in revenue/$0.26 in GAAP EPS vs. consensus estimates of $503M/$0.20. Guidance had implied revenue of $499-507M. Adjusted EBITDA Margin was 34.9%, up from 33.1% q/q (and above guidance for 33-34%).

Consolidated revenue was up 4% q/q (+3.8% in local currency) and up 10.7% y/y (or +12.9% cc). Results this quarter benefitted from (1) recognition of certain enterprise contracts whose delay had affected 2Q results; and (2) a moderate increase in Public Cloud growth. Importantly, on the second point RAX’s churn is stable with the uptick driven by seasonality ahead of the Q4 e-commerce season.

RAX repurchased roughly $250M (~8.2M shares) of the $1B program announced last quarter. The company reiterated its intention to complete $500M of the new program within 6-9 months (i.e., $250M more over the next 3-6 months), funding the overall program with a combination of cash on hand, cash flow, and short-term debt (targeting 1.5x debt/EBITDA).

RAX announced a $350M Senior Notes offering to pay down its existing revolver and put toward the buyback. The company is in the process of obtaining a $200M facility maturing 2020, as well as LT debt

Needham & Company analyst, Richard Kugele, believes that "if RAX executes with its AWS, Azure and Equinex efforts (among others) that require little capex and (over time) could generate more favorable cash flow characteristics, the name could become more interesting. However, that year is likely 2017.

No change to Hold rating, no published price target.

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Shares of Rackspace closed at $27.09 yesterday.