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Rackspace Hosting Reports Second Quarter 2009 Results

For the quarter ended June 30, 2009:

  • Record net revenue of $152.0 million grew 16.2% year-over-year and 4.8% sequentially
  • Record adjusted EBITDA(1) of $48.1 million grew 42.2% year-over-year and 6.8% sequentially
  • Achieved record adjusted EBITDA margin of 31.7%, up from 25.9% one year ago
  • Record net income of $7.0 million grew 67.2% year-over-year and 6.1% sequentially

SAN ANTONIO--(BUSINESS WIRE)--Aug. 10, 2009-- Rackspace® Hosting, Inc. (NYSE: RAX), the world’s leader and specialist in hosting services, today reported financial results for the quarter ended June 30, 2009.

Net revenue for the second quarter ended June 30, 2009 was $152.0 million, up 4.8% from the first quarter of 2009 and up 16.2% from the quarter ended June 30, 2008. Revenue for the quarter was impacted by $2.4 million of service credits relating to service interruptions in a portion of the company’s DFW data center in June, offset by a sequential quarterly lift of $2.7 million in currency exchange rate fluctuation.

Managed hosting revenue increased to $138.9 million for the second quarter of 2009, up from $134.2 million in the first quarter of 2009. Cloud revenue increased to $13.1 million in the quarter, up from $10.9 million in the first quarter of 2009. Total customer count increased to 70,803, up from 62,078 customers in the first quarter of 2009. The 70,803 customer count includes 19,363 managed hosting customers and 51,440 cloud computing customers.

“We have made several improvements over the past few months that have made us a stronger, more profitable and tougher competitor as we position for another cycle of growth. Today, we believe we are even better positioned for profitable growth as the economy improves. We have been running the business to scale the profits and returns in our managed hosting offering while investing in the long-term, game changing offerings in our cloud business,” said Lanham Napier, president and chief executive officer. “Additionally, we have strengthened our pipeline by competing for larger opportunities and we are gaining traction in the enterprise space with several key customer wins.”

Adjusted EBITDA for the second quarter of 2009 was $48.1 million, a 6.8% increase compared to the first quarter of 2009 and a 42.2% increase compared to the second quarter of last year. Adjusted EBITDA margin for the second quarter of 2009 was 31.7% compared to 31.1% for the first quarter of 2009, and 25.9% for the second quarter of 2008.

“We delivered solid revenue growth and adjusted EBITDA margins this quarter,” said Bruce Knooihuizen, chief financial officer. “With our focus on operational discipline, we successfully continued on our path to improve the cost side of our business for enhanced profitability. We posted a company record adjusted EBITDA margin this quarter showing that great companies can differentiate during challenging times.”

Net income was $7.0 million for the second quarter of 2009, a 6.1% increase compared to the first quarter of 2009 and a 67.2% increase compared to the second quarter of last year. Net income margin for the second quarter of 2009 was 4.6% compared to 4.5% for the first quarter of 2009, and 3.2% for the second quarter of 2008.

Cash flow from operating activities was $58.0 million for the second quarter of 2009. Capital expenditures were $54.7 million, including $32.4 million for purchases of customer gear, $13.9 million for data center build outs, $1.7 million for office build outs, and $6.7 million for capitalized software and other expenditures.

For the full year of 2009, the company expects to have total capital expenditures of $165 million to $185 million, including $100 million to $115 million dollars for customer gear, approximately $30 million to $35 million for data centers, approximately $15 million for office space, and $20 million for capitalized software and other. Previous expectations for 2009 capital expenditures were between $120 million to $160 million. The increased spend is based on improved expectations for growth for the next twelve months.

At the end of the second quarter, cash and cash equivalents were $147.9 million. Included in that amount are investments in money market funds in the amount of $100.7 million. Debt obligations totaled $210.3 million. Of those, $106.2 million were related to current and non-current debt, primarily $100.0 million of borrowings on the company’s line of credit, and $104.1 million were related to obligations under capital and finance method leases. In July 2009, the company repaid $50.0 million on its line of credit, reducing outstanding debt under the line of credit to $50.0 million, thus increasing the amount available for future borrowings to $194.3 million.

On a worldwide basis, Rackspace employed 2,648 Rackers as of June 30, 2009, compared to 2,661 Rackers as of March 31, 2009, and up from 2,422 Rackers as of June 30, 2008.

Rackspace Cloud Highlights and Other Developments

  • Launch of Open API for Cloud: In July 2009, Rackspace announced the availability of the public beta of its Cloud Servers API. Through the open, standards-based API, Rackspace Cloud customers can now programmatically manage their cloud servers allowing for deep integration between applications and infrastructure which makes on demand scaling a reality. The Cloud Servers API also includes four new features, which are server metadata, server data injection, host identification and shared IP groups.
  • Private Cloud Launch: In July 2009, Rackspace announced its new Private Cloud offering, which allows customers to run the centrally managed VMware virtualization platform on private dedicated hardware environments. The Rackspace Private Cloud’s single-tenant architecture offers increased control and security, while still maintaining the scalability, flexibility and resource optimization that make shared cloud offerings so compelling.
  • IDG Best Places to Work: In July 2009, IDG’s Computerworld selected Rackspace as one of the top workplaces for information technology (IT) professionals.
  • Data Center Expansion: In July 2009, Rackspace entered into an agreement with Tarantula Ventures LLC, a DuPont Fabros Technology company, to lease approximately 36,700 square feet of raised floor space in a data center facility located in the Chicago area. The leased space will be provided with a maximum critical load power of 5.633 megawatts. The company expects to commence operations in this facility in late 2009.

Conference Call and Webcast

Management will host a conference call to discuss its second quarter 2009 financial results today at 4:30 p.m. EDT. To access the conference call, please dial 877-718-5111 from the United States or dial 719-325-4907 from abroad and reference pass code 7023514. 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 leader and specialist in hosting services, Rackspace 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®, furthering the company’s mission to be one of the world’s greatest service companies. Rackspace is recognized as one of FORTUNE’S® “100 Best Companies to Work For,” ranking number 43 on the 2009 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 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, 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 or assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include infrastructure failures, the continuation or further deterioration of the current difficult economic conditions or further fluctuations, disruptions, instability or downturns in the economy, the effectiveness of managing company growth, technological and competitive factors, regulatory factors, and other risks that are described in Rackspace Hosting’s Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on May 12, 2009 and in Rackspace Hosting’s Form 10-Q for the quarter ended June 30, 2009 that will be filed later this week. Except as required by law, Rackspace Hosting 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

(Unaudited)

   
Three Months Ended Six Months Ended
June 30,   March 31,   June 30, June 30,   June 30,
(In thousands, except per share data) 2008 2009 2009 2008 2009
 
Net revenue $ 130,829 $ 145,077 $ 151,995 $ 250,442 $ 297,072
Costs and expenses:
Cost of revenue 42,842 46,210 48,235 82,065 94,445
Sales and marketing 19,846 20,502 19,080 37,414 39,582
General and administrative 38,108 37,540 41,566 71,741 79,106
Depreciation and amortization   21,637   27,804   29,711   40,688   57,515
Total costs and expenses   122,433   132,056   138,592   231,908   270,648
Income from operations   8,396   13,021   13,403   18,534   26,424
Other income (expense):
Interest expense (1,834) (2,535) (2,172) (3,164) (4,707)
Interest and other income (expense)   173   (91)   (267)   420   (358)
Total other income (expense)   (1,661)   (2,626)   (2,439)   (2,744)   (5,065)
Income before income taxes 6,735 10,395 10,964 15,790 21,359
Income taxes   2,553   3,807   3,973   6,166   7,780
Net income $ 4,182 $ 6,588 $ 6,991 $ 9,624 $ 13,579
 
Net income per share
Basic $ 0.04 $ 0.06 $ 0.06 $ 0.09 $ 0.11
Diluted $ 0.04 $ 0.05 $ 0.06 $ 0.09 $ 0.11
 
Weighted average number of shares outstanding
Basic   103,227   117,608   120,214   102,901   118,918
Diluted   110,508   121,889   126,442   109,810   124,007

Consolidated Balance Sheets

     
(In thousands) December 31, June 30,
2008 2009
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 238,407 $ 147,877
Accounts receivable, net of allowance for doubtful accounts and
customer credits of $3,295 as of December 31, 2008
and $6,901 as of June 30, 2009 30,932 38,642
Income taxes receivable 12,318 13,353
Prepaid expenses and other current assets   10,838   11,572
Total current assets 292,495 211,444
 
Property and equipment, net 362,042 407,901
Goodwill 6,942 14,329
Intangible assets, net 15,101 13,567
Other non-current assets   8,681   9,552
Total assets $ 685,261 $ 656,793
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 71,387 $ 87,316
Current portion of deferred revenue 16,284 16,812
Current portion of obligations under capital leases 38,909 43,381
Current portion of debt   5,944   52,485
Total current liabilities 132,524 199,994
 
Non-current deferred revenue 3,883 3,199
Non-current obligations under capital leases 50,781 60,707
Non-current debt 204,779 53,711
Non-current deferred income taxes 13,398 20,475
Other non-current liabilities   10,212   9,884
Total liabilities 415,577 347,970
 
COMMITMENTS AND CONTINGENCIES
 
Stockholders' equity:
Common stock 117 121
Additional paid-in capital 207,589 225,345
Accumulated other comprehensive income (loss) (16,027) (8,227)
Retained earnings   78,005   91,584
Total stockholders’ equity   269,684   308,823
Total liabilities and stockholders’ equity $ 685,261 $ 656,793

Consolidated Statements of Cash Flows

(Unaudited)

 
(In thousands) Three Months Ended Six Months Ended
June 30,   March 31,   June 30, June 30,   June 30,
2008

 

2009   2009 2008 2009
 
Cash Flows From Operating Activities
Net income

$

4,182

$

6,588

$

6,991

$

9,624

 

$

13,579
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 21,637 27,804 29,711 40,688

 

57,515
Loss on disposal of equipment, net 650 176 311 1,977

 

487
Provision for bad debts and customer credits 812 2,309 4,073 1,210

 

6,382
Deferred income taxes 1,367 2,507 2,810 2,524

 

5,317
Share-based compensation expense 3,804 4,237 5,017 6,556

 

9,254
Other non-cash compensation expense 109 85 324 140

 

409
Excess tax benefits from share-based
compensation arrangements (1,913) - - (2,621)

 

-
Changes in certain assets and liabilities
Accounts receivables (2,020) (6,336) (6,522) (1,640)

 

(12,858)
Income taxes receivable - (257) (778) - (1,035)
Accounts payable and accrued expenses 4,809 (6,601) 18,627 11,077

 

12,026
Deferred revenues 673 304 (1,096) 2,157

 

(792)
All other operating activities   (1,264)   (17)   (1,419)   (2,688)

 

  (1,436)
Net cash provided by operating activities 32,846 30,799 58,049 69,004 88,848
 
Cash Flows From Investing Activities
Purchases of property and equipment, net (40,273) (25,589) (31,027) (87,521) (56,616)
Earnout payments for acquisitions   -   -   (5,622)   -   (5,622)
Net cash used in investing activities (40,273) (25,589) (36,649) (87,521) (62,238)
 
Cash Flows From Financing Activities
Principal payments of capital leases (6,595) (9,838) (11,084) (14,144)

 

(20,922)
Principal payments of notes payable (1,777) (751) (3,776) (2,929)

 

(4,527)
Borrowings on line of credit 20,000 - - 40,000

 

-
Payments on line of credit - (100,000) - -

 

(100,000)
Payments for debt issuance costs - - (328) (158)

 

(328)
Proceeds from sale leaseback transactions 782 - - 1,543

 

-
Proceeds from issuance of common stock, net - - - 548

 

-
Proceeds from exercise of stock options 702 2,235 3,995 1,205

 

6,230
Excess tax benefits from share-based
compensation arrangements   1,913   -   -   2,621

 

  -
Net cash provided by (used in) financing activities 15,025 (108,354) (11,193) 28,686 (119,547)
 
Effect of exchange rate changes on cash (1) (243) 2,650 (12) 2,407
         
Increase (decrease) in cash and cash equivalents 7,597 (103,387) 12,857 10,157 (90,530)
 
Cash and cash equivalents, beginning of period 27,497 238,407 135,020 24,937 238,407
         
Cash and cash equivalents, end of period $ 35,094 $ 135,020 $ 147,877 $ 35,094 $ 147,877
 
Supplemental cash flow information:
Acquisition of property and equipment by capital leases $ 19,191 $ 11,683 $ 23,637 $ 37,703 $ 35,320
Acquisition of property and equipment by notes payable   6,823   -   -   9,930   -
Vendor financed equipment purchases $ 26,014 $ 11,683 $ 23,637 $ 47,633 $ 35,320

Key Metrics – Quarter to Date

(Unaudited)

 
Three Months Ended
(Dollar amounts in thousands, except annualized net June 30,   September 30,   December 31,   March 31,   June 30,
revenue per average technical square foot) 2008   2008   2008   2009   2009
Growth
Managed hosting customers at period end 17,220 18,012 18,480 19,048 19,363
Cloud customers at period end*   16,387   18,173   34,820   43,030   51,440
Number of customers at period end 33,607 36,185 53,300 62,078 70,803
 
Managed hosting, net revenue $ 125,498 $ 131,908 $ 134,275 $ 134,204 $ 138,943
Cloud, net revenue $ 5,331 $ 6,446 $ 8,862 $ 10,873 $ 13,052
Net revenue $ 130,829 $ 138,354 $ 143,137 $ 145,077 $ 151,995
Revenue growth (year over year) 55.7% 44.0% 34.2% 21.3% 16.2%
Net upgrades (monthly average) 2.1% 1.8% 1.4% 0.9% 1.2%
Churn (monthly average)   -1.1%   -1.2%   -1.3%   -1.1%   -1.0%
Growth in installed base (monthly average) 1.0% 0.6% 0.1% -0.2% 0.2%
 
Number of employees (Rackers) at period end 2,422 2,536 2,611 2,661 2,648
Number of servers deployed at period end 42,424 45,231 47,518 50,038 52,269
 
Profitability
Income from operations $ 8,396 $ 9,490 $ 12,125 $ 13,021 $ 13,403
Depreciation and amortization $ 21,637 $ 23,174 $ 26,310 $ 27,804 $ 29,711
Share-based compensation expense
Cost of revenue $ 603 $ 819 $ 678 $ 629 $ 675
Sales and marketing $ 533 $ 612 $ 595 $ 698 $ 721
General and administrative $ 2,668 $ 2,886 $ 2,871 $ 2,910 $ 3,621
Total share-based compensation expense $ 3,804 $ 4,317 $ 4,144 $ 4,237 $ 5,017
Adjusted EBITDA (1) $ 33,837 $ 36,981 $ 42,579 $ 45,062 $ 48,131
 
Adjusted EBITDA margin (1) 25.9% 26.7% 29.7% 31.1% 31.7%
 
Operating income margin 6.4% 6.9% 8.5% 9.0% 8.8%
 
Income from operations $ 8,396 $ 9,490 $ 12,125 $ 13,021 $ 13,403
Effective tax rate   37.9%   29.6%   27.7%   36.6%   36.2%
Net operating profit after tax (NOPAT) (1) $ 5,214 $ 6,681 $ 8,766 $ 8,255 $ 8,551
NOPAT margin 4.0% 4.8% 6.1% 5.7% 5.6%
 
Capital efficiency and returns
Interest bearing debt $ 183,553 $ 297,933 $ 300,413 $ 201,507 $ 210,284
Stockholders' equity $ 117,417 $ 269,008 $ 269,684 $ 282,880 $ 308,823
Less: Excess cash $ - $ (235,421) $ (200,620) $ (117,611) $ (129,638)
Capital base $ 300,970 $ 331,520 $ 369,477 $ 366,776 $ 389,469
Average capital base $ 275,935 $ 316,245 $ 350,497 $ 368,127 $ 378,123
Capital turnover (annualized) 1.90 1.75 1.63 1.58 1.61
 
Return on capital (annualized) (1) 7.6% 8.5% 10.0% 9.0% 9.0%
 
Capital expenditures
Purchases of property and equipment, net $ 40,273 $ 45,328 $ 32,547 $ 25,589 $ 31,027
Vendor financed equipment purchases $ 26,014 $ 23,009 $ 14,848 $ 11,683 $ 23,637
Total capital expenditures $ 66,287 $ 68,337 $ 47,395 $ 37,272 $ 54,664
 
Customer gear $ 27,347 $ 27,627 $ 23,073 $ 19,255 $ 32,448
Data center build outs $ 18,509 $ 21,679 $ 14,240 $ 11,386 $ 13,914
Office build outs $ 12,815 $ 11,227 $ 8,340 $ 2,239 $ 1,651
Capitalized software and other projects $ 7,616 $ 7,804 $ 1,742 $ 4,392 $ 6,651
Total capital expenditures $ 66,287 $ 68,337 $ 47,395 $ 37,272 $ 54,664
 
Infrastructure capacity and utilization
Technical square feet of data center space
at period end **
133,462 136,962 134,923 157,523 177,371
Annualized net revenue per average
technical square foot **
$ 4,217 $ 4,093 $ 4,212 $ 3,969 $ 3,631
Utilization rate at period end 59.1% 63.4% 70.4% 64.6% 59.8%
 
* December 31, 2008, March 31, 2009, and June 30, 2009 amounts include customers resulting from the Slicehost acquisition, and
March 31, 2009 and June 30, 2009 amounts include SaaS customers for Jungle Disk.
** The technical square feet as of June 30, 2009, includes the addition of 18,748 square feet for phase two of our Slough, U.K. data center and 1,100
square feet for the first phase of our new Virginia data center. 11,750 square feet will be removed in the 3rd quarter of 2009 for operations
at a U.K. data center that will be decommissioned and migrated to the Slough data center.
(1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.

Consolidated Quarterly Statements of Income

(Unaudited)

 
Three Months Ended
(In thousands) June 30,
2008
September 30,
2008
December 31,
2008

March 31,
2009

June 30,
2009
 
Net revenue $ 130,829 $ 138,354 $ 143,137 $ 145,077 $ 151,995
Costs and expenses:
Cost of revenue 42,842 45,499 45,019 46,210 48,235
Sales and marketing 19,846 21,462 21,447 20,502 19,080
General and administrative 38,108 38,729 38,236 37,540 41,566
Depreciation and amortization   21,637     23,174     26,310     27,804     29,711  
Total costs and expenses   122,433     128,864     131,012     132,056     138,592  
Income from operations   8,396     9,490     12,125     13,021     13,403  
Other income (expense):
Interest expense (1,834 ) (1,912 ) (3,153 ) (2,535 ) (2,172 )
Interest and other income (expense)   173     (144 )   492     (91 )   (267 )
Total other income (expense)   (1,661 )   (2,056 )   (2,661 )   (2,626 )   (2,439 )
Income before income taxes 6,735 7,434 9,464 10,395 10,964
Income taxes   2,553     2,199     2,620     3,807     3,973  
Net income $ 4,182   $ 5,235   $ 6,844   $ 6,588   $ 6,991  
 
 
Three Months Ended
(Percent of net revenue) June 30,
2008
September 30,
2008
December 31,
2008
March 31,
2009
June 30,
2009
 
Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses
Cost of revenue 32.7 % 32.9 % 31.5 % 31.9 % 31.7 %
Sales and marketing 15.2 % 15.5 % 15.0 % 14.1 % 12.6 %
General and administrative 29.1 % 28.0 % 26.7 % 25.9 % 27.3 %
Depreciation and amortization   16.5 %   16.7 %   18.4 %   19.2 %   19.5 %
Total costs and expenses   93.6 %   93.1 %   91.5 %   91.0 %   91.2 %
Income from operations   6.4 %   6.9 %   8.5 %   9.0 %   8.8 %
Other income (expense):
Interest expense -1.4 % -1.4 % -2.2 % -1.7 % -1.4 %
Interest and other income (expense)   0.1 %   -0.1 %   0.3 %   -0.1 %   -0.2 %
Total other income (expense)   -1.3 %   -1.5 %   -1.9 %   -1.8 %   -1.6 %
Income before income taxes 5.1 % 5.4 % 6.6 % 7.2 % 7.2 %
Income taxes   2.0 %   1.6 %   1.8 %   2.6 %   2.6 %
Net income   3.2 %   3.8 %   4.8 %   4.5 %   4.6 %
 
Due to rounding, totals may not equal the sum of the line items in the table above.

(1) Non-GAAP Financial Measures

Adjusted EBITDA (Non-GAAP financial measure)

We define Adjusted EBITDA as Net Income, plus Income Taxes, Total Other Income (Expense), 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 income from operations, 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
(Dollars in thousands) June 30,
2008
  September 30,
2008
  December 31,
2008
  March 31,
2009
  June 30,
2009
(Unaudited)
Net revenue $ 130,829   $ 138,354   $ 143,137   $ 145,077   $ 151,995
 
Income from operations $ 8,396 $ 9,490 $ 12,125 $ 13,021 $ 13,403
 
Net income $ 4,182 $ 5,235 $ 6,844 $ 6,588 $ 6,991
Plus: Income taxes 2,553 2,199 2,620 3,807 3,973
Plus: Total other (income) expense 1,661 2,056 2,661 2,626 2,439
Plus: Depreciation and amortization 21,637 23,174 26,310 27,804 29,711
Plus: Share-based compensation expense   3,804   4,317   4,144   4,237   5,017
Adjusted EBITDA $ 33,837 $ 36,981 $ 42,579 $ 45,062 $ 48,131
 
Operating income margin 6.4% 6.9% 8.5% 9.0% 8.8%
 
Adjusted EBITDA margin 25.9% 26.7% 29.7% 31.1% 31.7%

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 and deferred income taxes); calculated on a quarterly basis.

For the periods ending March 31, 2009 and June 30, 2009, we define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which for these periods are calculated as three percent of our annualized net revenue for the three months prior to period end. For prior periods, we defined excess cash as our investments in money market funds. As a result of a decrease in capital requirements due to the completion of the last phase of our Grapevine, Texas data center and phase 2 of our Slough, U.K. data center, as well as the signing of leases to occupy data centers that have minimal data center build out costs, our operating cash requirements have declined. We will periodically review the calculation and adjust it to reflect our projected cash requirements for the upcoming year.

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 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
(Dollars in thousands) June 30,
2008
September 30,
2008
December 31,
2008
March 31,
2009
June 30,
2009
(Unaudited)
Income from operations $ 8,396 $ 9,490 $ 12,125 $ 13,021 $ 13,403
Effective tax rate 37.9% 29.6% 27.7% 36.6% 36.2%
Net operating profit after tax (NOPAT) $ 5,214 $ 6,681 $ 8,766 $ 8,255 $ 8,551
 
Net income $ 4,182 $ 5,235 $ 6,844 $ 6,588 $ 6,991
 
Average total assets $ 381,815 $ 546,761 $ 685,236 $ 643,349 $ 629,114
Less: Average excess cash - (117,710) (218,021) (159,116) (123,625)
Less: Average accounts payable and
accrued expenses
(76,494) (79,837) (76,564) (71,299) (79,263)
Less: Average deferred revenue (current
and non-current)
(19,762) (20,077) (20,111) (20,271) (20,193)
Less: Average other non-current liabilities and
deferred income taxes
(9,624) (12,892) (20,043) (24,536) (27,910)
Average capital base $ 275,935 $ 316,245 $ 350,497 $ 368,127 $ 378,123
 
Return on assets (annualized) 4.4% 3.8% 4.0% 4.1% 4.4%
Return on capital (annualized) 7.6% 8.5% 10.0% 9.0% 9.0%

Adjusted Free Cash Flow (Non-GAAP financial measure)

We define Adjusted Free Cash Flow as Adjusted EBITDA less total capital expenditures (including vendor financed equipment purchases), cash payments for interest, net, and cash payments for income taxes, net.

We believe that Adjusted Free Cash Flow is an important metric for investors in evaluating a company’s operating financial performance and liquidity. Note that Adjusted Free Cash Flow is not a measure of financial performance under GAAP and may not be comparable to similarly titled measures reported by other companies. See our Adjusted Free Cash Flow reconciliation to Adjusted EBITDA below, as well as our reconciliation of Net income to Adjusted EBITDA provided above.

Three Months
Ended
(In thousands) June 30,
2009
(Unaudited)
Adjusted EBITDA $ 48,131
Less: Total capital expenditures (54,664 )
Less: Cash payments for interest, net (2,250 )
Less: Cash payments for income taxes, net   741  
Adjusted free cash flow $ (8,042 )

Net Leverage (Non-GAAP financial measure)

We define Net Leverage as Net Debt divided by Adjusted EBITDA (trailing twelve months).

We believe that Net Leverage is an important metric for investors in evaluating a company’s liquidity. Note that Net Leverage is not a measure of financial performance under GAAP and may not be comparable to similarly titled measures reported by other companies. See our Net Leverage calculation below.

 
(Dollars in thousands) As of June 30,
2009
(Unaudited)
Obligations under capital leases $ 104,088
Debt   106,196
Total debt $ 210,284
Less: Cash and cash equivalents   (147,877)
Net debt $ 62,407
Adjusted EBITDA (trailing twelve months) $ 172,753
 
Net leverage 0.36

Source: Rackspace Hosting, Inc.

Rackspace Hosting, Inc.
Investor Relations
Jason Luce, 210-312-7291
ir@rackspace.com
or
Media Relations
Rachel Ferry, 210-312-3732
rachel.ferry@rackspace.com