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Rackspace Hosting Reports Third Quarter 2008 Results

  • Continued industry-leading growth in revenues, with net revenues up 5.8% quarter-over-quarter and up 44.0% year-over-year
  • Increased profit and profit margins with a well funded balance sheet
  • Unveiled cloud hosting product suite including acquisitions of cloud computing pioneers Slicehost and Jungle Disk

SAN ANTONIO--(BUSINESS WIRE)--Nov. 5, 2008--Rackspace(R) Hosting, Inc. (NYSE:RAX), the world's leading hosting services provider, today reported quarterly results for the quarter ended September 30, 2008. Rackspace continued to deliver on its growth strategy in the third quarter of 2008. Net revenues for the third quarter ended September 30, 2008 were $138.4 million, up 5.8% from the second quarter of 2008 and up 44.0% from the quarter ended September 30, 2007. Net revenues in the third quarter were negatively impacted by the recent depreciation of the Pound Sterling, relative to the USD. Net revenues for the first nine months of 2008 were $388.8 million, an increase of 52.3% relative to net revenues for the first nine months of 2007. The installed base continued to provide a significant portion of growth during the third quarter 2008, growing at an average rate of 0.6% per month. Customer count increased to more than 36,000 customers (including more than 15,000 mail customers) and server count increased to more than 45,200.

"By consistently delivering Fanatical Support(R) in this tough economic climate, Rackspace continues to outperform both the market and our competitors through the acquisition of new customers and the growth of our existing customer base," said Lanham Napier, president and chief executive officer, Rackspace Hosting. "The acquisitions of two key players in the cloud computing space, Slicehost and Jungle Disk, allow us to offer the most comprehensive suite of services in the industry. The combination of managed hosting and cloud offerings will provide a broad spectrum of hosting solutions to our customers, which creates increased flexibility at lower costs. The acquisitions closed on October 28, 2008."

Adjusted EBITDA(1) was $37.0 million for the third quarter, a 9.3% increase compared to the second quarter and a 39.7% increase compared to the same quarter last year. Net income was $5.2 million for the third quarter, a 25.2% increase compared to the second quarter.

Cash flow from operating activities was $33.2 million for the third quarter of 2008. Capital expenditures were $68.3 million, including $27.6 million for purchases of customer gear, $21.7 million for data center buildouts, $11.2 million for office buildouts, and $7.8 million for capitalized software and other expenditures. Of the $68.3 million in capital expenditures, $23.0 million were vendor financed equipment purchases.

The company is reducing its anticipated capital expenditures estimate for 2008 from $310 million to $270 million. The reduction is due to revised build out plans for its data centers and headquarters and reduced customer equipment spend due to better pricing, a proportionately larger use of recycled equipment and a strengthening dollar.

At the end of the third quarter, cash and cash equivalents were $260.3 million. Included in that amount are investments in money market funds in the amount of $235.4 million. Debt obligations totaled $297.9 million. Of those, $212.0 million were related to current and non-current debt, and $85.9 million were related to obligations under capital and finance method leases.

On a worldwide basis, Rackspace employed 2,536 Rackers as of September 30, 2008, up from 2,422 Rackers as of June 30, 2008, and 1,829 Rackers as of September 30, 2007.

Significant Developments During the Third Quarter of 2008

  • Capital inflows: On August 8, Rackspace Hosting began trading its shares on the New York Stock Exchange under the symbol RAX. Through this offering, the company received net proceeds of $144.6 million. The company has further increased its outstanding borrowings under its revolving line of credit to $200 million. All proceeds are temporarily invested in money market funds that invest in Treasury and Government-backed securities and will be used to fund the company's growth opportunities.
  • -
  • Expansion to Asia: On Sept. 8, Rackspace announced the opening of its Asian headquarters and data center in Hong Kong. The data center, located in the Fo Tan district of Hong Kong, will represent an investment of at least US$20 million when complete, inclusive of data center lease obligations and infrastructure, equipment and personnel expenses. The new data center will initially have approximately 9,500 gross square feet and will be expandable to about 18,000 gross square feet. Rackspace already has several hundred customers based in the Asia Pacific region and the establishment of the data center in Hong Kong is an important step in strengthening the company's presence to build on its hosting service offerings.
  • Platform Hosting: On Sept. 18, Rackspace announced the availability of its new Platform Hosting solution. Created as a unique alternative to colocation, Platform Hosting gives customers the control to manage all aspects of their hosting environment, with the added benefit of managed hardware and aggressive service level agreements, backed by a world-class data center and network infrastructure. This offering gives customers that require more control and flexibility the ability to administer their environment, without the burden of provisioning and maintaining the hardware infrastructure.

Recent Developments (after September 30, 2008)

  • Cloud Hosting Strategy and Acquisitions: On Oct. 22, Rackspace unveiled its cloud hosting strategy and product suite. Rackspace's acquisition of two innovators in the cloud community, Slicehost and Jungle Disk, bring proven solutions to the suite including on-demand, virtualized servers and online storage software and services, respectively. Slicehost is a leader in Xen-based virtual machine hosting with more than 15,000 "slices" online today. Jungle Disk offers reliable cloud storage solutions that allow users to easily share an unlimited amount of cloud storage between multiple users through a secure, mountable network drive and automatic backup. Over time, Rackspace intends to integrate their capabilities into its complete hosting portfolio to provide business customers a suite of hosting solutions to meet all of their IT needs.

"We've delivered a strong quarter with nearly every metric improving over the second quarter of 2008," said Bruce Knooihuizen, senior vice president and chief financial officer, Rackspace Hosting. "We are well funded with excess cash to act opportunistically and make the right investments to continue to fuel our growth. In addition, we will continue to focus on business execution and delivering attractive returns on the investments we have made over the last two years."

Conference Call and Webcast

Management will host a conference call to discuss its third quarter 2008 financial results today at 5:00 p.m. ET. To access the conference call, please dial 866-394-0797 (international dial-in: +1 706-679-3454) and reference pass code 71122385. A live webcast and a replay of the conference call will be available on Rackspace's website, located at ir.rackspace.com.

About Rackspace Hosting

As the world's leader and specialist in hosting, Rackspace Hosting(R) 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 which 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, expected results from the integration of technologies and acquired businesses, 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 continuation of the current difficult economic conditions or further fluctuations, disruptions, instability or downturns in the economy, the effectiveness of managing company growth, infrastructure failures, technological and competitive factors, regulatory factors, and other risks that are described in Rackspace's Form 10-Q for the quarter ended June 30, 2008, which was filed with the SEC on September 10, 2008, and its Form 10-Q for the quarter ended September 30, 2008, which will be filed with the SEC in November of 2008 and will supplement such information. 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
                                 -------------------------------------
                                 September 30, June 30,  September 30,
(In thousands, except per share
 data)                               2007        2008        2008
                                 ------------- --------- -------------
                                              (Unaudited)
Net revenues                     $     96,097  $130,829  $    138,354
Costs and expenses:
  Cost of revenues                     30,555    42,842        45,499
  Sales and marketing                  14,222    19,846        21,462
  General and administrative           26,277    38,108        38,729
  Depreciation and amortization        14,047    21,637        23,174
                                 ------------- --------- -------------
    Total costs and expenses           85,101   122,433       128,864
                                 ------------- --------- -------------
      Income from operations           10,996     8,396         9,490
                                 ------------- --------- -------------

Other income (expense):
  Interest expense                     (1,000)   (1,834)       (1,912)
  Interest and other income
   (expense)                              273       173          (144)
                                 ------------- --------- -------------
    Total other income (expense)         (727)   (1,661)       (2,056)
                                 ------------- --------- -------------
      Income before income taxes       10,269     6,735         7,434
Income taxes                            3,978     2,553         2,199
                                 ------------- --------- -------------
      Net Income                 $      6,291  $  4,182  $      5,235
                                 ============= ========= =============

Net income per share
  Basic                          $       0.06  $   0.04  $       0.05
                                 ============= ========= =============
  Diluted                        $       0.06  $   0.04  $       0.04
                                 ============= ========= =============

Weighted average number of
 shares outstanding
  Basic                               101,100   103,227       111,231
                                 ============= ========= =============
  Diluted                             106,261   110,508       118,724
                                 ============= ========= =============

                                                Nine Months Ended
                                           ---------------------------
                                           September 30, September 30,
(In thousands, except per share data)          2007          2008
                                           ------------- -------------
                                                   (Unaudited)
Net revenues                               $    255,334  $    388,796
Costs and expenses:
  Cost of revenues                               80,296       127,564
  Sales and marketing                            38,492        58,876
  General and administrative                     71,502       110,470
  Depreciation and amortization                  39,015        63,862
                                           ------------- -------------
    Total costs and expenses                    229,305       360,772
                                           ------------- -------------
      Income from operations                     26,029        28,024
                                           ------------- -------------

Other income (expense):
  Interest expense                               (2,188)       (5,076)
  Interest and other income (expense)               500           276
                                           ------------- -------------
    Total other income (expense)                 (1,688)       (4,800)
                                           ------------- -------------
      Income before income taxes                 24,341        23,224
Income taxes                                      9,066         8,365
                                           ------------- -------------
      Net Income                           $     15,275  $     14,859
                                           ============= =============

Net income per share
  Basic                                    $       0.15  $       0.14
                                           ============= =============
  Diluted                                  $       0.14  $       0.13
                                           ============= =============

Weighted average number of shares
 outstanding
  Basic                                         101,052       105,698
                                           ============= =============
  Diluted                                       106,168       112,796
                                           ============= =============
Consolidated Balance Sheets
(In thousands, except share and per share   December 31, September 30,
 data)
                                                2007         2008
                                            ------------ -------------
                                                          (Unaudited)
ASSETS
  Current assets:
    Cash deposits                           $    24,937  $     24,897
    Money market funds                                -       235,421
                                            ------------ -------------
      Cash and cash equivalents                  24,937       260,318
    Accounts receivable, net of allowance
     for doubtful accounts
    and customer credits of $2,841 as of
     December 31, 2007, and
    $2,501 as of September 30, 2008              25,449        27,777
    Prepaid expenses and other current
     assets                                       7,757        22,532
                                            ------------ -------------
      Total current assets                       58,143       310,627

  Property and equipment, net                   227,055       354,308
  Goodwill                                        3,574         3,518
  Intangible assets, net                          5,812         8,614
  Other non-current assets                        7,229         8,144
                                            ------------ -------------
      Total assets                          $   301,813  $    685,211
                                            ============ =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses     $    67,087  $     81,740
  Current portion of deferred revenue            13,540        15,727
  Current portion of obligations under
   capital and finance method leases             25,198        36,409
  Current portion of debt                         2,902         6,690
                                            ------------ -------------
      Total current liabilities                 108,727       140,566

Non-current deferred revenue                      4,402         4,328
Non-current obligations under capital and
 finance method leases                           23,312        49,471
Non-current debt                                 60,039       205,363
Other non-current liabilities                     8,460        16,475
                                            ------------ -------------
      Total liabilities                         204,940       416,203

COMMITMENTS AND CONTINGENCIES

Stockholders' equity:
  Series A Convertible Preferred stock,
   $0.001 par value per share, 50,000,000
   shares authorized, 1,214,837 issued and
   outstanding as of December 31, 2007, and
   zero shares issued and outstanding as of
   September 30, 2008                                 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, 116,898,775 shares issued and
   116,816,070 shares outstanding as of
   September 30, 2008                               101           117
  Treasury stock, at cost: 82,705 common
   shares held                                     (126)         (126)
  Additional paid-in capital                     40,082       201,731
  Accumulated other comprehensive income            513        (3,875)
  Retained earnings                              56,302        71,161
                                            ------------ -------------
    Total stockholders' equity                   96,873       269,008
                                            ------------ -------------
      Total liabilities and stockholders'
       equity                               $   301,813  $    685,211
                                            ============ =============
Consolidated Statements of Cash Flows

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

Net income                      $      6,291  $  4,182  $      5,235
  Adjustments to reconcile net
   income to net cash provided
   by operating activities
    Depreciation and
     amortization                     14,047    21,637        23,174
    Loss on disposal and
     impairment of equipment,
     net                                 851       650           300
    Provision for bad debts and
     customer credits                  1,069       812         1,130
    Deferred income taxes               (262)    1,367        (2,875)
    Share-based compensation
     expense                           1,428     3,804         4,317
    Other noncash compensation
     expense                               -       109            72
    Excess tax benefits from
     share-based compensation
     arrangements                        (84)   (1,913)         (591)
    Changes in certain assets
     and liabilities
      Accounts receivables            (3,387)   (2,020)       (3,806)
      Prepaid expenses and other
       current assets                 (1,533)   (1,381)       (1,219)
      Accounts payable and
       accrued expenses               (1,190)    4,809         6,865
      Deferred revenues                  803       673           (43)
      Other non-current assets        (5,178)       93          (829)
      Other non-current
       liabilities                     1,094        24         1,479
                                ------------- --------- -------------
    Net cash provided by
     operating activities             13,949    32,846        33,209

Cash Flows From Investing
 Activities
  Purchases of property and
   equipment, net                    (59,143)  (40,273)      (45,328)
  Acquisition of Webmail.us,
   Inc., net of cash acquired           (338)        -             -
                                ------------- --------- -------------
    Net cash used in investing
     activities                      (59,481)  (40,273)      (45,328)

Cash Flows From Financing
 Activities
  Principal payments of capital
   and finance method leases          (3,904)   (6,595)       (8,737)
  Principal payments of notes
   payable                              (820)   (1,777)       (2,592)
  Borrowings on line of credit        47,000    20,000       160,000
  Payments on line of credit               -         -       (57,301)
  Payments for debt issuance
   costs                                   -         -             -
  Proceeds from sale leaseback
   transactions                        4,791       782             -
  Receipt of Texas Enterprise
   Fund Grant                          5,000         -             -
  Proceeds from issuance of
   common stock in IPO net of
   offering expenses of $13,555            -         -       145,195
  Proceeds from issuance of
   common stock, net                       -         -             -
  Exercise of warrants                     -         -           278
  Proceeds from exercise of
   stock options                          77       702           759
  Excess tax benefits from
   share-based compensation
   arrangements                           84     1,913           591
                                ------------- --------- -------------
    Net cash provided by
     financing activities             52,228    15,025       238,193

Effect of exchange rate changes
 on cash                                 344        (1)         (850)

                                ------------- --------- -------------
  Increase in cash and cash
   equivalents                         7,040     7,597       225,224

Cash and equivalents, beginning
 of period                            22,391    27,497        35,094

                                ------------- --------- -------------
Cash and cash equivalents, end
 of period                      $     29,431  $ 35,094  $    260,318
                                ============= ========= =============

  Supplemental cash flow
   information:
    Acquisition of property and
     equipment by capital and
     finance method leases      $     17,316  $ 19,191  $     21,005
    Acquisition of property and
     equipment by notes payable          415     6,823         2,004
                                ------------- --------- -------------
      Vendor financed equipment
       purchases                $     17,731  $ 26,014  $     23,009

  Cash payments for interest,
   net of amount capitalized    $        785  $  1,586  $      2,400
  Cash payments for income taxes       5,451     3,540         2,535

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

Net income                                 $     15,275  $     14,859
  Adjustments to reconcile net income to
   net cash provided by operating
   activities
    Depreciation and amortization                39,015        63,862
    Loss on disposal and impairment of
     equipment, net                               1,892         2,277
    Provision for bad debts and customer
     credits                                      2,540         2,340
    Deferred income taxes                        (1,729)         (351)
    Share-based compensation expense              2,664        10,873
    Other noncash compensation expense              156           212
    Excess tax benefits from share-based
     compensation arrangements                     (234)       (3,212)
    Changes in certain assets and
     liabilities
      Accounts receivables                       (8,369)       (5,446)
      Prepaid expenses and other current
       assets                                    (2,455)       (3,808)
      Accounts payable and accrued expenses      23,889        17,942
      Deferred revenues                           3,326         2,114
      Other non-current assets                   (5,080)         (727)
      Other non-current liabilities                (388)        1,278
                                           ------------- -------------
    Net cash provided by operating
     activities                                  70,502       102,213

Cash Flows From Investing Activities
  Purchases of property and equipment, net     (109,552)     (132,849)
  Acquisition of Webmail.us, Inc., net of
   cash acquired                                   (338)            -
                                           ------------- -------------
    Net cash used in investing activities      (109,890)     (132,849)

Cash Flows From Financing Activities
  Principal payments of capital and finance
   method leases                                 (9,639)      (22,881)
  Principal payments of notes payable            (1,259)       (5,521)
  Borrowings on line of credit                   61,146       200,000
  Payments on line of credit                          -       (57,301)
  Payments for debt issuance costs                 (277)         (158)
  Proceeds from sale leaseback transactions       4,791         1,543
  Receipt of Texas Enterprise Fund Grant          5,000             -
  Proceeds from issuance of common stock in
   IPO net of offering expenses of $13,555            -       145,195
  Proceeds from issuance of common stock,
   net                                                -           548
  Exercise of warrants                                -           278
  Proceeds from exercise of stock options           153         1,964
  Excess tax benefits from share-based
   compensation arrangements                        234         3,212
                                           ------------- -------------
    Net cash provided by financing
     activities                                  60,149       266,879

Effect of exchange rate changes on cash             296          (862)

                                           ------------- -------------
  Increase in cash and cash equivalents          21,057       235,381

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

                                           ------------- -------------
Cash and cash equivalents, end of period   $     29,431  $    260,318
                                           ============= =============

  Supplemental cash flow information:
    Acquisition of property and equipment
     by capital and finance method leases  $     32,948  $     58,708
    Acquisition of property and equipment
     by notes payable                             1,157        11,934
                                           ------------- -------------
      Vendor financed equipment purchases  $     34,105  $     70,642

  Cash payments for interest, net of amount
   capitalized                             $      1,585  $      5,676
  Cash payments for income taxes                 10,598         6,075
Key Metrics

                                         Three Months Ended
                                -------------------------------------
                                September 30, June 30,  September 30,
                                    2007        2008        2008
                                ------------- --------- -------------
                                             (Unaudited)
Growth
  Number of employees (Rackers)
   at period end                       1,829     2,422         2,536
  Number of customers at period
   end *                              26,909    33,607        36,185
  Number of servers deployed at
   period end                         33,972    42,424        45,231
  Net upgrades (monthly average)         2.7%      2.1%          1.8%
  Churn (monthly average)               -0.9%     -1.1%         -1.2%
                                ------------- --------- -------------
  Growth in Installed Base
   (monthly average)                     1.8%      1.0%          0.6%
  Net revenues (in thousands)   $     96,097  $130,829  $    138,354
  Revenue growth (year over
   year)                                62.8%     55.7%         44.0%

Profitability
  Income from Operations (in
   thousands)                   $     10,996  $  8,396  $      9,490
  Depreciation and amortization
   (in thousands)               $     14,047  $ 21,637  $     23,174
  Share-based compensation
   expense (in thousands)
    Cost of revenues            $        186  $    603  $        819
    Sales & marketing           $        163  $    533  $        612
    General & administrative    $      1,079  $  2,668  $      2,886
                                ------------- --------- -------------
      Total share-based
       compensation expense     $      1,428  $  3,804  $      4,317
                                ------------- --------- -------------
  Adjusted EBITDA (in thousands)
   (1)                          $     26,471  $ 33,837  $     36,981
                                ------------- --------- -------------

  Adjusted EBITDA margin                27.5%     25.9%         26.7%

  Operating income margin               11.4%      6.4%          6.9%

  Income from Operations (in
   thousands)                   $     10,996  $  8,396  $      9,490
  Effective Tax Rate                    38.7%     37.9%         29.6%
                                ------------- --------- -------------
  Net Operating Profit After Tax
   (NOPAT, in thousands) (1)    $      6,741  $  5,214  $      6,681
  NOPAT margin                           7.0%      4.0%          4.8%

Capital efficiency and returns
  Interest bearing debt (in
   thousands)                   $    103,678  $183,553  $    297,933
  Shareholders' equity (in
   thousands)                   $     93,491  $117,417  $    269,008
  Less: Excess cash             $          -  $      -  $   (235,421)
                                ------------- --------- -------------
  Capital (in thousands)        $    197,169  $300,970  $    331,520
  Average capital base (in
   thousands)                   $    161,069  $275,935  $    316,245
  Capital turnover (annualized)         2.39      1.90          1.75

  Return on Capital (annualized)
   (1)                                  16.7%      7.6%          8.4%

Capital expenditures (in
 thousands)
  Purchases of property and
   equipment, net               $     59,143  $ 40,273  $     45,328
  Vendor financed equipment
   purchases                    $     17,731  $ 26,014  $     23,009
                                ------------- --------- -------------
    Total capital expenditures  $     76,874  $ 66,287  $     68,337

  Customer gear                 $     20,073  $ 27,347  $     27,627
  Data center build outs        $     19,278  $ 18,509  $     21,679
  Office build outs             $     29,096  $ 12,815  $     11,227
  Capitalized software and other$      8,427  $  7,616  $      7,804
                                ------------- --------- -------------
    Total capital expenditures  $     76,874  $ 66,287  $     68,337

Infrastructure capacity and
 utilization
  Technical square feet of data
   center space at period end        111,749   133,462       136,962
  Annualized net revenue per
   average available square foot$      3,775  $  4,217  $      4,093
  Utilization rate at period end        57.9%     59.1%         63.4%



                                                Nine Months Ended
                                           ---------------------------
                                           September 30, September 30,
                                               2007          2008
                                           ------------- -------------
                                                   (Unaudited)
Growth
  Number of employees (Rackers) at period
   end                                            1,829         2,536
  Number of customers at period end *            26,909        36,185
  Number of servers deployed at period end       33,972        45,231
  Net upgrades (monthly average)                    2.6%          2.0%
  Churn (monthly average)                          -1.0%         -1.2%
                                           ------------- -------------
  Growth in Installed Base (monthly
   average)                                         1.6%          0.8%
  Net revenues (in thousands)              $    255,334  $    388,796
  Revenue growth (year over year)                  62.9%         52.3%

Profitability
  Income from Operations (in thousands)    $     26,029  $     28,024
  Depreciation and amortization (in
   thousands)                              $     39,015  $     63,862
  Share-based compensation expense (in
   thousands)
    Cost of revenues                       $        241  $      1,788
    Sales & marketing                      $        333  $      1,546
    General & administrative               $      2,090  $      7,539
                                           ------------- -------------
      Total share-based compensation
       expense                             $      2,664  $     10,873
                                           ------------- -------------
  Adjusted EBITDA (in thousands) (1)       $     67,708  $    102,759
                                           ------------- -------------

  Adjusted EBITDA margin                           26.5%         26.4%

  Operating income margin                          10.2%          7.2%

  Income from Operations (in thousands)    $     26,029  $     28,024
  Effective Tax Rate                               37.2%         36.0%
                                           ------------- -------------
  Net Operating Profit After Tax (NOPAT, in
   thousands) (1)                          $     16,346  $     17,935
  NOPAT margin                                      6.4%          4.6%

Capital efficiency and returns
  Interest bearing debt (in thousands)     $    103,678  $    297,933
  Shareholders' equity (in thousands)      $     93,491  $    269,008
  Less: Excess cash                        $          -  $   (235,421)
                                           ------------- -------------
  Capital (in thousands)                   $    197,169  $    331,520
  Average capital base (in thousands)      $    128,897  $    272,929
  Capital turnover (annualized)                    2.64          1.90

  Return on Capital (annualized) (1)               16.9%          8.7%

Capital expenditures (in thousands)
  Purchases of property and equipment, net $    109,552  $    132,849
  Vendor financed equipment purchases      $     34,105  $     70,642
                                           ------------- -------------
    Total capital expenditures             $    143,657  $    203,491

  Customer gear                            $     69,110  $     82,533
  Data center build outs                   $     24,400  $     65,580
  Office build outs                        $     30,317  $     32,874
  Capitalized software and other           $     19,831  $     22,504
                                           ------------- -------------
    Total capital expenditures             $    143,658  $    203,491

Infrastructure capacity and utilization
  Technical square feet of data center
   space at period end                          111,749       136,962
  Annualized net revenue per average
   available square foot                   $      3,515  $      4,148
  Utilization rate at period end                   57.9%         63.4%



* Includes 11,265 and 15,102 mail customers as of September 30, 2007
 and 2008, and 13,893 customers as of June 30, 2008, respectively.
(1) See discussion and reconciliation of our Non-GAAP financial
 measure to the most comparable GAAP measure included within this
 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)    September 30, 2007 June 30, 2008 September 30, 2008
                  ------------------ ------------- ------------------
                                      (Unaudited)

Net income        $            6,291 $       4,182 $            5,235
   Less: Total
    other income
    (expense)                    727         1,661              2,056
   Plus: Income
    taxes                      3,978         2,553              2,199
   Plus:
    Depreciation
    and
    amortization              14,047        21,637             23,174
   Plus: Share-
    based
    compensation
    expense                    1,428         3,804              4,317
                  ------------------ ------------- ------------------
Adjusted EBITDA   $           26,471 $      33,837 $           36,981

                                       Nine Months Ended September 30,
                                       -------------------------------
(In thousands)                               2007            2008
                                       ---------------- --------------
                                                 (Unaudited)

Net income                             $         15,275 $       14,859
   Less: Total other income (expense)             1,688          4,800
   Plus: Income taxes                             9,066          8,365
   Plus: Depreciation and amortization           39,015         63,862
   Plus: Share-based compensation
    expense                                       2,664         10,873
                                       ---------------- --------------
Adjusted EBITDA                        $         67,708 $      102,759
    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 - excess cash) = Average of (Total assets - excess cash - accounts payables and accrued expenses - deferred revenues - other non-current liabilities); calculated on a quarterly basis.

We define excess cash as our investments in money market funds.

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.

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

  Income from
   operations              $ 10,996      $  8,396          $   9,490
    Effective tax
     rate                      38.7%         37.9%              29.6%
                  ------------------ ------------- ------------------
    Net operating
     profit after
     tax (NOPAT)           $  6,741      $  5,214          $   6,681

  Net income               $  6,291      $  4,182          $   5,235

  Average total
   assets                  $232,298      $381,815          $ 546,761
  Less: Average
   excess cash                    -             -           (117,710)
  Less: Average
   accounts
   payable and
   accrued
   expenses                 (52,883)      (76,494)           (79,837)
  Less: Average
   deferred
   revenues
   (current and
   non-current)             (13,606)      (19,762)           (20,077)
  Less: Average
   other non-
   current
   liabilities               (4,740)       (9,624)           (12,892)
                  ------------------ ------------- ------------------
  Average capital
   base                    $161,069      $275,935          $ 316,245

  Return on assets
   (Net
   income/Average
   total assets)               10.8%          4.4%               3.8%
  Return on
   capital
   (NOPAT/Average
   capital base)               16.7%          7.6%               8.5%

                                       Nine Months Ended September 30,
                                       -------------------------------
(In thousands, except financial
 metrics)                                    2007            2008
                                       ---------------- --------------
                                                 (Unaudited)

  Income from operations               $        26,029  $      28,024
    Effective tax rate                            37.2%          36.0%
                                       ---------------- --------------
    Net operating profit after tax
     (NOPAT)                           $        16,346  $      17,935

  Net income                           $        15,275  $      14,859

  Average total assets                 $       187,803  $     437,664
  Less: Average excess cash                          -        (58,855)
  Less: Average accounts payable and
   accrued expenses                            (42,419)       (75,454)
  Less: Average deferred revenues
   (current and non-current)                   (11,998)       (19,380)
  Less: Average other non-current
   liabilities                                  (4,489)       (11,046)
                                       ---------------- --------------
  Average capital base                 $       128,897  $     272,929

  Return on assets (Net income/Average
   total assets)                                  10.8%           4.5%
  Return on capital (NOPAT/Average
   capital base)                                  16.9%           8.8%

CONTACT: Rackspace Hosting
Karl Pichler, 210-312-7291
Investor Relations
ir@rackspace.com
or
Annalie Drusch, 210-312-7290
Media Relations
media@rackspace.com

SOURCE: Rackspace Hosting