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Rackspace Hid Impending Loss of Major Client Securities Class Action

Rackspace Equipment

Rackspace provides cloud-based services that allow businesses to operate in a public or private cloud. One of its biggest customers was the UK-based Vodafone Group, which Rackspace CEO Taylor Rhodes called one of Rackspace’s “largest and longest-tenured customers.” Yet the company seems to have ignored the fact that losing the Vodafone contract would impact its revenues.

The class for this action is all investors who acquired Rackspace common Stock between November 11, 2014 and August 10, 2015.

Vodafone runs M-Pesa (from “M” for mobile and “pesa,” the Swahili word for money), a mobile-phone-based service that makes possible money transfers, banking, and financing services. According to the complaint, M-Pesa, a valuable service in economies where banking services are not available outside of large cities, has become “the most successful mobile-phone-based financial service in the developing world” with tens of millions of users.

Vodafone’s M-Pesa contract with Rackspace was due to expire on April 1, 2015. The complaint claims that by the beginning of the class period, Rackspace and Vodafone were discussing the non-renewal of the contract, and Vodafone had begun moving data away from Rackspace servers.

Still, on November 11, 2014, when Rackspace issued a press release on its third-quarter 2014 results, the company made confident statements about the company’s prospective growth. In December, during the Credit Suisse Annual Technology Conference, CEO Rhodes continued to project growth for the company’s international segment. In a conference call the following February, he talked about the “low churn rate” in the UK market.

On March 2, 2015, Rackspace filed a Form 10-K annual report for 2014, which did not disclose that Vodafone was not intending to renew its contract the following month.

On May 11, 2015, the company’s first-quarter financial report showed disappointing revenue and margin results, which it said was due to the expiration of a contract with a large client. In a later conference call, CEO Rhodes the event “significant” but tried to ease investor anxieties, even saying that the company had “a healthy relationship” with the client and expected “to grow this revenue back with them over time.”

In response, the company’s share price fell by nearly 18%. Yet on May 27, the company insisted that its 2015 guidance had not changed. In response to analysts’ doubts about this, the company’s stock price dropped again.

Finally, on August 10, 2015, Rackspace lowered its 2015 revenue guidance. For a third time, the company’s stock price fell. In all, it fell from $53.13 on May 11 to $29.24 on August 11.

The complaint claims that the company knew that its contract with Vodafone was not going to be renewed and that its concealing of the fact violated the Securities Exchange Act of 1934.

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