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Rackspace Hosting Reports Second Quarter 2008 Results
  • Delivered strong revenue growth during the quarter, an increase of 9.4% quarter-over-quarter and 55.7% year-over-year


  • Rackspace served more than 33,600 customers and managed more than 42,400 servers, an increase of 6.1% and 6.7% quarter-over-quarter


  • Continued international expansion, opening U.K. data center in June and Hong Kong data center in September

SAN ANTONIO--(BUSINESS WIRE)--Sept. 10, 2008--Rackspace(R) Hosting, Inc. (NYSE: RAX), the world's leading hosting services provider, today reported quarterly results for the quarter ended June 30, 2008. Summary results were provided in the company's S-1 filed on August 5, 2008 for its subsequent Initial Public Offering.

Rackspace continued to deliver on its growth strategy in the second quarter of 2008. Net revenues for the second quarter ended June 30, 2008 were $130.8 million, up 9.4% from the first quarter of 2008 and up 55.7% from the quarter ended June 30, 2007. Net revenues for the first six months of 2008 were $250.4 million, an increase of 57.3% relative to net revenues for the first six months of 2007. The installed base continued to provide a significant portion of growth during the second quarter 2008, growing at an average rate of 1.0% per month. Relative to the quarter ended March 31, 2008, customer count increased by 6.1% to more than 33,600 customers (including more than 13,800 mail customers) and server count increased by 6.7% to more than 42,400.

"We delivered strong growth despite a challenging macroeconomic environment, which demonstrates the strength of Rackspace's Fanatical Support(R) and its ability to win and keep customers in a tough climate," said Lanham Napier, president and chief executive officer, Rackspace Hosting. "We are seeing significant global growth, and we will continue to make disciplined, long-term investments in order to capitalize on the demand for hosting."

Adjusted EBITDA(1) was $33.8 million for the second quarter, a 5.9% increase compared to the previous quarter and a 56.5% increase compared to the same quarter last year. Net income was $4.2 million for the second quarter, a 23.2% decline compared to the previous quarter and a 13.1% decline compared to the same quarter last year. The reduction in net income was due mainly to current infrastructure projects and the associated increases in depreciation and amortization and interest expenses.

Cash flow from operating activities was $32.8 million for the second quarter of 2008. Capital expenditures were $66.3 million, including $27.3 million for purchases of customer gear, $18.5 million for data center buildouts, $12.8 million for office buildouts, and $7.7 million for capitalized software and other expenditures. Of the $66.3 million in capital expenditures, $26.0 million were vendor financed equipment purchases.

The company is reducing its anticipated capital expenditures estimate for 2008 to $310 million from $335 million. Of this reduction, $10 million is for office space that has been deferred to 2009. The remaining $15 million is in Other Capital that was originally budgeted for unspecified price increases that the company no longer anticipates to occur. This new estimate also includes the capital to build out the Hong Kong datacenter. Of the $20 million investment referred to in the company's September 8, 2008 press release, $10 million is scheduled to be spent this year, most of which is capital.

At the end of the second quarter, cash and cash equivalents were $35.1 million. Debt obligations totaled $183.6 million. Of those, $109.9 million were related to current and non-current debt, and $73.7 million were related to obligations under capital and finance method leases.

On a worldwide basis, Rackspace employed 2,422 Rackers as of June 30, 2008, up from 2,254 Rackers as of March 31, 2008, and 1,663 Rackers as of June 30, 2007.

Significant Developments During the Second Quarter of 2008

  • Named Best Place to Work in IT: IDG's Computerworld magazine named Rackspace as one of the best places to work in the information technology field. This is solid recognition of the company's culture, and Rackspace's ability to retain and hire a skilled workforce that continually goes above and beyond to develop solutions for its customers.


  • Slough, U.K. Data Center Opened: June 9 marked the opening of a new data center in Slough, U.K. This unique facility with approximately 50,000 square feet is powered by renewable resources and is consistent with Rackspace's goal to minimize energy requirements and the burning of fossil fuel. This opening marks Rackspace's first solely managed data center in Europe, which will serve as the foundation of the company's expansion in the region. In the initial phase, 18,713 square feet of technical space were deployed.


  • Significant Recent Developments (after June 30, 2008)

  • Initial Public Offering: On August 8, Rackspace began trading its shares on the New York Stock Exchange under the symbol RAX. Through this offering, the company received net proceeds of $144.9 million, which will be primarily used to fund the company's growth initiatives.


  • Launch of Hong Kong Operations: On September 8, Rackspace opened its Asian headquarters and data center in Hong Kong to meet global demand. This expansion into Asia marks the company's continued investment in superior customer service and exhibits its confidence in the business opportunity that Asia represents.

"We have marked a major milestone in Rackspace's history," said Bruce Knooihuizen, senior vice president and chief financial officer, Rackspace Hosting. "Completing the initial public offering provides us with the financial flexibility to pursue our growth plans. The proceeds of this offering, together with the committed debt capital available to us, allow for the necessary infrastructure investments to support our growth and the development of new products, geographies and markets. While the U.S. remains the most important market for the company for the foreseeable future, we are excited about the company's prospects in EMEA and Asia, which are attractive markets for us. Our returns in the core managed hosting services remain strong, and we continue to invest in this area as well as in our newer technologies such as email and cloud hosting services."

Conference Call and Webcast

Management will host a conference call to discuss its second quarter 2008 financial results today at 4:30 p.m. ET. To access the conference call, please dial 877-856-1969 and reference passcode 9143062. A live webcast of the conference call also will be available on Rackspace's website, located at www.rackspace.com. A replay of the call will be available through midnight, September 24, 2008 by calling 888-203-1112 in the United States or for calls from outside the United States, 719-457-0820. The replay passcode is 9143062.

About Rackspace Hosting

As the world's leader and specialist in hosting, Rackspace(R) Hosting is changing the way businesses worldwide buy IT. Rackspace delivers computing-as-a-service, integrating the industry's best technologies into a flexible service offering, making computing more reliable and affordable. A trusted partner to companies of all sizes, Rackspace enables IT departments to be more effective. Rackspace is distinguished by its award-winning Fanatical Support(R), furthering the company's mission to be one of the world's greatest service companies. Rackspace is recognized as one of FORTUNE'S(R) "100 Best Companies to Work For", ranking number 32 on the 2008 list. Rackspace's portfolio of hosted IT services includes managed hosting (www.rackspace.com), email hosting (www.mailtrust.com) and cloud hosting (www.mosso.com). For more information on Rackspace Hosting please visit www.rackspace.com or call 800-961-2888.

Forward-Looking Statements

This Press Release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of Rackspace Hosting could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements concerning expected operational and financial results, long term investment strategies, growth plans including international expansion plans, the performance or market share relating to products and services; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. These risks, uncertainties and assumptions include the effectiveness of managing company growth, infrastructure failures, changes in the economy, technological and competitive factors, regulatory factors, and other risks that are described in Rackspace's amended registration statement on Form S-1, filed with the SEC on August 5, 2008. Additional information will also be set forth in Rackspace's report on Form 10-Q for the quarter ended June 30, 2008, which will be filed with the SEC in September 2008. These forward-looking statements speak as of the date of this press release. Except as required by law, Rackspace assumes no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Consolidated Statements of Income

                                             Three months ended
                                       -------------------------------
                                        June 30,   March 31, June 30,
(In thousands, except per share data)     2007       2008      2008
                                       ----------- --------- ---------
                                                 (Unaudited)
Net revenues                           $   84,012  $119,613  $130,829
Costs and expenses:
  Cost of revenues                         26,148    39,223    42,842
  Sales and marketing                      12,609    17,568    19,846
  General and administrative               24,279    33,633    38,108
  Depreciation and amortization            13,133    19,051    21,637
                                       ----------- --------- ---------
    Total costs and expenses               76,169   109,475   122,433
                                       ----------- --------- ---------
      Income from operations                7,843    10,138     8,396
                                       ----------- --------- ---------
Other income (expense):
  Interest expense                           (663)   (1,330)   (1,834)
  Interest and other income                   127       247       173
                                       ----------- --------- ---------
    Total other income (expense)             (536)   (1,083)   (1,661)
                                       ----------- --------- ---------
      Income before income taxes            7,307     9,055     6,735
Income taxes                                2,495     3,613     2,553
                                       ----------- --------- ---------
  Net Income                           $    4,812  $  5,442  $  4,182
                                       =========== ========= =========

Net income per share
  Basic                                $     0.05  $   0.05  $   0.04
                                       =========== ========= =========
  Diluted                              $     0.05  $   0.05  $   0.04
                                       =========== ========= =========

Weighted average number of shares
 outstanding
  Basic                                   100,959   102,574   103,227
                                       =========== ========= =========
  Diluted                                 106,217   109,085   110,508
                                       =========== ========= =========

                                                   Six Months Ended
                                                 ---------------------
                                                  June 30,   June 30,
(In thousands, except per share data)               2007       2008
                                                 ----------- ---------
                                                      (Unaudited)
Net revenues                                     $  159,237  $250,442
Costs and expenses:
  Cost of revenues                                   49,741    82,065
  Sales and marketing                                24,270    37,414
  General and administrative                         45,225    71,741
  Depreciation and amortization                      24,968    40,688
                                                 ----------- ---------
    Total costs and expenses                        144,204   231,908
                                                 ----------- ---------
      Income from operations                         15,033    18,534
                                                 ----------- ---------
Other income (expense):
  Interest expense                                   (1,188)   (3,164)
  Interest and other income                             227       420
                                                 ----------- ---------
    Total other income (expense)                       (961)   (2,744)
                                                 ----------- ---------
      Income before income taxes                     14,072    15,790
Income taxes                                          5,088     6,166
                                                 ----------- ---------
  Net Income                                     $    8,984  $  9,624
                                                 =========== =========

Net income per share
  Basic                                          $     0.09  $   0.09
                                                 =========== =========
  Diluted                                        $     0.08  $   0.09
                                                 =========== =========

Weighted average number of shares outstanding
  Basic                                             100,926   102,901
                                                 =========== =========
  Diluted                                           106,007   109,810
                                                 =========== =========
Consolidated Balance Sheets
(In thousands, except share and per share     December 31,  June 30,
 data)
                                                  2007        2008
                                              ------------ -----------
                                                           (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                   $    24,937  $   35,094
  Accounts receivable, net of allowance for
   doubtful accounts and
  customer credits of $2,841 as of December
   31, 2007, and $2,453
  as of June 30, 2008                              25,449      25,902
  Prepaid expenses and other current assets         7,757      11,418
                                              ------------ -----------
    Total current assets                           58,143      72,414

Property and equipment, net                       227,055     315,526
Goodwill                                            3,574       3,518
Intangible assets, net                              5,812       9,760
Other non-current assets                            7,229       7,092
                                              ------------ -----------
    Total assets                              $   301,813  $  408,310
                                              ============ ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses       $    67,087  $   77,933
  Current portion of deferred revenue              13,540      15,516
  Current portion of obligations under capital
   and finance method leases                       25,198      32,983
  Current portion of debt                           2,902       4,989
                                              ------------ -----------
    Total current liabilities                     108,727     131,421

Non-current deferred revenue                        4,402       4,582
Non-current obligations under capital and
 finance method leases                             23,312      40,629
Non-current debt                                   60,039     104,952
Other non-current liabilities                       8,460       9,309
                                              ------------ -----------
    Total liabilities                             204,940     290,893

COMMITMENTS AND CONTINGENCIES

Stockholders' equity:
  Series A Convertible Preferred stock, $0.001
   par value per share (aggregate
    involuntary liquidation preference:
     $13,412) 50,000,000 shares authorized
    as of December 31, 2007, and June 30,
     2008; 1,214,837, issued
    and outstanding shares                              1           1
  Common stock, $0.001 par value per share:
   300,000,000 shares authorized;
    101,211,223 shares issued and 101,128,518
     shares outstanding
    as of December 31, 2007, 102,251,652
     shares issued and 102,168,947 shares
    outstanding as of June 30, 2008                   101         102
  Treasury stock, at cost: 82,705 common
   shares held                                       (126)       (126)
  Additional paid-in capital                       40,082      51,152
  Accumulated other comprehensive income              513         362
  Retained earnings                                56,302      65,926
                                              ------------ -----------
    Total stockholders' equity                     96,873     117,417
                                              ------------ -----------
      Total liabilities and stockholders'
       equity                                 $   301,813  $  408,310
                                              ============ ===========
Consolidated Statements of Cash Flows

(In thousands)                                Three Months Ended
                                         -----------------------------
                                         June 30,  March 31, June 30,
                                           2007      2008      2008
                                         --------- --------- ---------
                                                  (Unaudited)
Cash Flows From Operating Activities

Net income                               $  4,812  $  5,442  $  4,182
  Adjustments to reconcile net income to
   net cash provided by operating
   activities
    Depreciation and amortization          13,133    19,051    21,637
    Loss on disposal and impairment of
     equipment, net                           676     1,327       650
    Provision for bad debts and customer
     credits                                  566       398       812
    Deferred income taxes                    (597)    1,157     1,367
    Share-based compensation expense          645     2,752     3,804
    Other noncash compensation expense          -        31       109
    Excess tax benefits from share-based
     compensation arrangements                (96)     (708)   (1,913)
    Changes in certain assets and
     liabilities
      Accounts receivables                 (2,974)      380    (2,020)
      Prepaid expenses and other current
       assets                                 (52)   (1,208)   (1,381)
      Accounts payable and accrued
       expenses                            14,721     6,268     4,809
      Deferred revenues                     1,598     1,484       673
      Other non-current assets                 59         9        93
      Other non-current liabilities        (1,729)     (225)       24
                                         --------- --------- ---------
    Net cash provided by operating
     activities                            30,762    36,158    32,846

Cash Flows From Investing Activities
  Purchases of property and equipment,
   net                                    (27,058)  (47,248)  (40,273)
                                         --------- --------- ---------
    Net cash used in investing
     activities                           (27,058)  (47,248)  (40,273)

Cash Flows From Financing Activities
  Principal payments of capital and
   finance method leases                   (3,469)   (7,549)   (6,595)
  Principal payments of notes payable        (225)   (1,152)   (1,777)
  Borrowings on line of credit              9,146    20,000    20,000
  Payments for debt issuance costs            (45)     (158)        -
  Proceeds from sale leaseback
   transactions                                 -       761       782
  Proceeds from issuance of common
   stock, net                                   -       548         -
  Proceeds from exercise of stock
   options                                     61       503       702
  Excess tax benefits from share-based
   compensation arrangements                   96       708     1,913
                                         --------- --------- ---------
    Net cash provided by financing
     activities                             5,564    13,661    15,025

Effect of exchange rate changes on cash       (76)      (11)       (1)

                                         --------- --------- ---------
  Increase in cash and cash equivalents     9,192     2,560     7,597

Cash and equivalents, beginning of
 period                                     8,374    24,937    27,497

                                         --------- --------- ---------
Cash and cash equivalents, end of period $ 17,566  $ 27,497  $ 35,094
                                         ========= ========= =========

  Supplemental cash flow information:
    Acquisition of property and
     equipment by capital and finance
     method leases                       $  9,410  $ 18,512  $ 19,191
    Acquisition of property and
     equipment by notes payable               742     3,107     6,823
                                         --------- --------- ---------
      Vendor financed equipment
       purchases                         $ 10,152  $ 21,619  $ 26,014

    Cash payments for interest, net of
     amount capitalized                  $    446  $  1,690  $  1,586
    Cash payments for income taxes          4,312         -     3,540

(In thousands)                                      Six Months Ended
                                                   -------------------
                                                   June 30,  June 30,
                                                     2007      2008
                                                   --------- ---------
                                                       (Unaudited)
Cash Flows From Operating Activities

Net income                                         $  8,984  $  9,624
  Adjustments to reconcile net income to net cash
   provided by operating activities
    Depreciation and amortization                    24,968    40,688
    Loss on disposal and impairment of equipment,
     net                                              1,041     1,977
    Provision for bad debts and customer credits      1,471     1,210
    Deferred income taxes                            (1,467)    2,524
    Share-based compensation expense                  1,236     6,556
    Other noncash compensation expense                  156       140
    Excess tax benefits from share-based
     compensation arrangements                         (150)   (2,621)
    Changes in certain assets and liabilities
      Accounts receivables                           (4,982)   (1,640)
      Prepaid expenses and other current assets        (922)   (2,589)
      Accounts payable and accrued expenses          25,079    11,077
      Deferred revenues                               2,523     2,157
      Other non-current assets                           98       102
      Other non-current liabilities                  (1,482)     (201)
                                                   --------- ---------
    Net cash provided by operating activities        56,553    69,004

Cash Flows From Investing Activities
  Purchases of property and equipment, net          (50,409)  (87,521)
                                                   --------- ---------
    Net cash used in investing activities           (50,409)  (87,521)

Cash Flows From Financing Activities
  Principal payments of capital and finance
   method leases                                     (5,735)  (14,144)
  Principal payments of notes payable                  (439)   (2,929)
  Borrowings on line of credit                       14,146    40,000
  Payments for debt issuance costs                     (277)     (158)
  Proceeds from sale leaseback transactions               -     1,543
  Proceeds from issuance of common stock, net             -       548
  Proceeds from exercise of stock options                76     1,205
  Excess tax benefits from share-based
   compensation arrangements                            150     2,621
                                                   --------- ---------
    Net cash provided by financing activities         7,921    28,686

Effect of exchange rate changes on cash                 (48)      (12)

                                                   --------- ---------
  Increase in cash and cash equivalents              14,017    10,157

Cash and equivalents, beginning of period             8,374    24,937

                                                   --------- ---------
Cash and cash equivalents, end of period           $ 22,391  $ 35,094
                                                   ========= =========

  Supplemental cash flow information:
    Acquisition of property and equipment by
     capital and finance method leases             $ 15,632  $ 37,703
    Acquisition of property and equipment by
     notes payable                                      742     9,930
                                                   --------- ---------
      Vendor financed equipment purchases          $ 16,374  $ 47,633

    Cash payments for interest, net of amount
     capitalized                                   $    800  $  3,276
    Cash payments for income taxes                    5,147     3,540

Key Metrics

                                           Three Months Ended
                                      -----------------------------
                                      June 30,  March 31, June 30,
                                        2007      2008      2008
                                      --------- --------- ---------
                                               (Unaudited)
Growth
  Number of employees (Rackers) at
   period end                            1,663     2,254     2,422
  Number of customers at period end
   (a)                                  14,694    31,662    33,607
  Number of servers deployed at
   period end                           31,140    39,755    42,424
  Net upgrades (monthly average)           2.6%      2.1%      2.1%
  Churn (monthly average)                 -0.8%     -1.2%     -1.1%
                                      --------- --------- ---------
  Growth in Installed Base (monthly
   average)                                1.8%      0.9%      1.0%
  Net revenues (in thousands)         $ 84,012  $119,613  $130,829
  Revenue growth (year over year)         61.5%     59.0%     55.7%

Profitability
  Income from Operations (in
   thousands)                         $  7,843  $ 10,138  $  8,396
  Depreciation and amortization (in
   thousands)                         $ 13,133  $ 19,051  $ 21,637
  Share-based compensation expense
   (in thousands)
    Cost of revenues                  $     21  $    365  $    603
    Sales & marketing                 $     98  $    401  $    533
    General & administrative          $    526  $  1,986  $  2,668
                                      --------- --------- ---------
      Total share-based compensation
       expense                        $    645  $  2,752  $  3,804
                                      --------- --------- ---------
  Adjusted EBITDA (in thousands) (1)  $ 21,621  $ 31,941  $ 33,837
                                      --------- --------- ---------

  Adjusted EBITDA margin                  25.7%     26.7%     25.9%

  Operating income margin                  9.3%      8.5%      6.4%

  Income from Operations (in
   thousands)                         $  7,843  $ 10,138  $  8,396
  Effective Tax Rate                      34.1%     39.9%     37.9%
                                      --------- --------- ---------
  Net Operating Profit After Tax
   (NOPAT, in thousands) (1)          $  5,169  $  6,093  $  5,214
  NOPAT margin                             6.2%      5.1%      4.0%

Capital efficiency and returns
  Interest bearing debt (in
   thousands)                         $ 43,670  $145,130  $183,553
  Shareholders' equity (in thousands) $ 81,299  $105,770  $117,417
                                      --------- --------- ---------
  Capital (in thousands)              $124,969  $250,900  $300,970
  Average capital base (in thousands) $114,302  $229,612  $275,935
  Capital turnover (annualized)           2.94      2.08      1.90

  Return on Capital (annualized) (1)      18.1%     10.6%      7.6%

Capital expenditures (in thousands)
  Cash flows used in investing
   activities                         $ 27,058  $ 47,248  $ 40,273
  Vendor financed equipment purchases $ 10,152  $ 21,619  $ 26,014
                                      --------- --------- ---------
    Total capital expenditures        $ 37,210  $ 68,867  $ 66,287

  Customer gear                       $ 23,668  $ 27,558  $ 27,347
  Data center build outs              $  4,320  $ 25,392  $ 18,509
  Office build outs                   $  1,052  $  8,832  $ 12,815
  Capitalized software and other      $  8,170  $  7,085  $  7,616
                                      --------- --------- ---------
    Total capital expenditures        $ 37,210  $ 68,867  $ 66,287

Infrastructure capacity and
 utilization
  Technical square feet of data
   center space at period end           91,905   114,749   133,462 (b)
  Annualized net revenue per average
   square foot                        $  3,656  $  4,170  $  4,217
  Utilization rate at period end          68.8%     67.3%     59.1%


                                                 Six Months Ended
                                                -------------------
                                                June 30,  June 30,
                                                  2007      2008
                                                --------- ---------
                                                    (Unaudited)
Growth
  Number of employees (Rackers) at period end      1,663     2,422
  Number of customers at period end (a)           14,694    33,607
  Number of servers deployed at period end        31,140    42,424
  Net upgrades (monthly average)                     2.6%      2.1%
  Churn (monthly average)                           -1.1%     -1.2%
                                                --------- ---------
  Growth in Installed Base (monthly average)         1.5%      0.9%
  Net revenues (in thousands)                   $159,237  $250,442
  Revenue growth (year over year)                   62.9%     57.3%

Profitability
  Income from Operations (in thousands)         $ 15,033  $ 18,534
  Depreciation and amortization (in thousands)  $ 24,968  $ 40,688
  Share-based compensation expense (in
   thousands)
    Cost of revenues                            $     55  $    968
    Sales & marketing                           $    170  $    934
    General & administrative                    $  1,011  $  4,654
                                                --------- ---------
      Total share-based compensation expense    $  1,236  $  6,556
                                                --------- ---------
  Adjusted EBITDA (in thousands) (1)            $ 41,237  $ 65,778
                                                --------- ---------

  Adjusted EBITDA margin                            25.9%     26.3%

  Operating income margin                            9.4%      7.4%

  Income from Operations (in thousands)         $ 15,033  $ 18,534
  Effective Tax Rate                                36.2%     39.1%
                                                --------- ---------
  Net Operating Profit After Tax (NOPAT, in
   thousands) (1)                               $  9,591  $ 11,287
  NOPAT margin                                       6.0%      4.5%

Capital efficiency and returns
  Interest bearing debt (in thousands)          $ 43,670  $183,553
  Shareholders' equity (in thousands)           $ 81,299  $117,417
                                                --------- ---------
  Capital (in thousands)                        $124,969  $300,970
  Average capital base (in thousands)           $106,139  $253,399
  Capital turnover (annualized)                     3.00      1.98

  Return on Capital (annualized) (1)                18.1%      8.9%

Capital expenditures (in thousands)
  Cash flows used in investing activities       $ 50,409  $ 87,521
  Vendor financed equipment purchases           $ 16,374  $ 47,633
                                                --------- ---------
    Total capital expenditures                  $ 66,783  $135,154

  Customer gear                                 $ 49,037  $ 54,906
  Data center build outs                        $  5,122  $ 43,901
  Office build outs                             $  1,221  $ 21,647
  Capitalized software and other                $ 11,403  $ 14,700
                                                --------- ---------
    Total capital expenditures                  $ 66,783  $135,154

Infrastructure capacity and utilization
  Technical square feet of data center space at
   period end                                     91,905   133,462 (b)
  Annualized net revenue per average square foot$  3,465  $  4,140
  Utilization rate at period end                    68.8%     59.1%


(a) Includes 123 and 13,893 mail customers as of June 30, 2007 and
 2008, and 13,376 customers as of March 31, 2008, respectively
(b) Includes 18,713 square feet added in June 2008
(1) See discussion and reconciliations of Non-GAAP financial measures
 to the most comparable GAAP measure included within the document
    (1) Non-GAAP Financial Measures

    Adjusted EBITDA (Non-GAAP financial measure)

We define Adjusted EBITDA as Net Income, less Total Other Income (Expense), plus Income Taxes, Depreciation and Amortization, and non-cash charges for share-based compensation.

Adjusted EBITDA is a metric that is used in our industry by the investment community for comparative and valuation purposes. We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.

Note that Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States (GAAP) and should not be considered a substitute for operating income, which we consider to be the most directly comparable GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. See our Adjusted EBITDA reconciliation in our key metrics table below.

                                       Three Months Ended
                           ------------------------------------------
(In thousands)             June 30, 2007 March 31, 2008 June 30, 2008
                           ------------- -------------- -------------
                                          (Unaudited)

Net income                 $       4,812 $        5,442 $       4,182
  Less: Total other income
   (expense)               $         536 $        1,083 $       1,661
  Plus: Income taxes       $       2,495 $        3,613 $       2,553
  Plus: Depreciation and
   amortization            $      13,133 $       19,051 $      21,637
  Plus: Share-based
   compensation expense    $         645 $        2,752 $       3,804
                           ------------- -------------- -------------
Adjusted EBITDA            $      21,621 $       31,941 $      33,837

                                             Six Months Ended June 30,
                                             -------------------------
(In thousands)                                   2007         2008
                                             ------------- -----------
                                                    (Unaudited)

Net income                                   $       8,984 $     9,624
  Less: Total other income (expense)         $         961 $     2,744
  Plus: Income taxes                         $       5,088 $     6,166
  Plus: Depreciation and amortization        $      24,968 $    40,688
  Plus: Share-based compensation expense     $       1,236 $     6,556
                                             ------------- -----------
Adjusted EBITDA                              $      41,237 $    65,778
    Return on Capital (ROC) (Non-GAAP financial measure)

    We define Return on Capital (ROC) as follows:

    ROC=Net Operating Profit After Tax (NOPAT)/Average Capital Base

    NOPAT = Income from operations x (1 - Effective tax rate)

Average Capital Base = Average of (Interest bearing debt + stockholders' equity) = Average of (Total assets - accounts payables and accrued expenses - deferred revenues - other non-current liabilities)

We believe that ROC is an important metric for investors in evaluating a company's performance. ROC relates after-tax operating profits with the capital that is placed into service. It is therefore a performance metric that incorporates both the Statement of Income and the Balance Sheet. ROC measures how successfully capital is deployed within a company.

Note that ROC is not a measure of financial performance under accounting principles generally accepted in the United States (GAAP) and should not be considered a substitute for return on assets, which we consider to be the most directly comparable GAAP measure, and may not be comparable to similarly titled measures reported by other companies. See our ROC reconciliation to return on assets below.

ROC decreased from 18.1% for the six months ended June 30, 2007 to 8.9% for the six months ended June 30, 2008. This decrease was due to an increase in income from operations and a proportionately larger increase in the average capital base over the same time period. Included in the average capital base for the six months ended June 30, 2008 are capital expenditures related to our new corporate headquarter facilities and data centers that are in the process of being built out. Return on assets decreased from 11.3% to 5.4% for the six months ended June 30, 2007 and 2008, respectively. For the quarter ended June 30, 2008, ROC was 7.6% and return on assets was 4.4%.

                                       Three Months Ended
                           ------------------------------------------
(In thousands, except        June 30,      March 31,      June 30,
 financial metrics)             2007          2008           2008
                           ------------- -------------- -------------
                                          (Unaudited)

Income from operations     $      7,843         10,138  $      8,396
  Effective tax rate               34.1%          39.9%         37.9%
                           ------------- -------------- -------------
  Net operating profit
   after tax (NOPAT)       $      5,169  $       6,093  $      5,214

Net income                 $      4,812  $       5,442  $      4,182

Average total assets       $    172,399  $     328,567  $    381,815
Less: Average accounts
 payable and accrued
 expenses                  $    (43,645) $     (71,071) $    (76,494)
Less: Average deferred
 revenues (current and
 non-current)              $    (11,691) $     (18,684) $    (19,762)
Less: Average other non-
 current liabilities       $     (2,761) $      (9,200) $     (9,624)
                           ------------- -------------- -------------
Average capital base       $    114,302  $     229,612  $    275,935

Return on assets (Net
 income/Average total
 assets)                           11.2%           6.6%          4.4%
Return on capital
 (NOPAT/Average capital
 base)                             18.1%          10.6%          7.6%

                                             Six Months Ended June 30,
                                             -------------------------
(In thousands, except financial metrics)         2007         2008
                                             ------------- -----------
                                                    (Unaudited)

Income from operations                       $     15,033  $   18,534
  Effective tax rate                                 36.2%       39.1%
                                             ------------- -----------
  Net operating profit after tax (NOPAT)     $      9,591  $   11,287

Net income                                   $      8,984  $    9,624

Average total assets                         $    159,260  $  355,148
Less: Average accounts payable and accrued
 expenses                                    $    (38,683) $  (73,358)
Less: Average deferred revenues (current and
 non-current)                                $    (11,101) $  (19,155)
Less: Average other non-current liabilities  $     (3,337) $   (9,236)
                                             ------------- -----------
Average capital base                         $    106,139  $  253,399

Return on assets (Net income/Average total
 assets)                                             11.3%        5.4%
Return on capital (NOPAT/Average capital
 base)                                               18.1%        8.9%

CONTACT: Rackspace Hosting, Inc., San Antonio
Investor Relations:
Karl Pichler, 210-312-7291
ir@rackspace.com
or
Media Relations:
Annalie Drusch, 210-312-7290
media@rackspace.com
or
Brunswick Group
Erin Becker or Ashley Zandy, 415-293-8461

SOURCE: Rackspace Hosting, Inc.