SAN ANTONIO, Nov 08, 2010 (BUSINESS WIRE) --

Rackspace(R) Hosting, Inc. (NYSE: RAX), the world's leader in the hosting and cloud computing industry, announced financial results for the quarter ended September 30, 2010.

Net revenue for the third quarter of 2010 was $199.7 million, up 6.6% from the previous quarter and 23.0% from the third quarter of 2009. Net revenue for the third quarter of 2010 was positively impacted by currency exchange rates when compared to the second quarter of 2010, but was negatively impacted when compared to the third quarter of 2009.

Changes in currency exchange rates had a positive impact on net revenue of $1.8 million quarter-over-quarter, and a negative impact on net revenue of $2.9 million on a year-over-year basis.

Managed hosting revenue for the quarter increased to $172.9 million, up from $164.1 million in the prior quarter. Cloud revenue increased to $26.8 million in the quarter, up from $23.2 million in the previous quarter.

Total server count increased to 63,996, up from 61,874 servers at the end of the second quarter of 2010, and total customers increased to 118,732, up from 108,023 at the end of the previous quarter.

"Our efforts to improve the business model are working. We have been making investments to enhance the capital efficiency of our business, and we are beginning to see the early returns on those investments now," said Lanham Napier, president and chief executive officer.

Adjusted EBITDA for the quarter was $68.5 million, a 10.1% increase compared to the second quarter of 2010 and a 33.2% increase compared to the third quarter of 2009. The adjusted EBITDA margin for the quarter was 34.3%, up from 33.2% in the previous quarter and 31.7% in the third quarter of 2009. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge of $1.1 million for the quarter relating to operating leases.

Net income was $11.8 million for the quarter, up 5.5% from the previous quarter and 55.3% from the third quarter of 2009. Net income margin for the quarter was 5.9% compared to 6.0% for the previous quarter and 4.7% in the third quarter of 2009.

"At the beginning of the year we outlined our objectives for 2010, to grow faster than 2009, while maintaining margins and investing in our business. We also said that we expected adjusted free cash flow to be positive at growth rates below 35%. With 3 out of 4 quarters complete, we believe that we will achieve these objectives for 2010," said Bruce Knooihuizen, chief financial officer.

Cash flow from operating activities was $67.1 million for the third quarter of 2010. Capital expenditures were $52.4 million, including $36.2 million for purchases of customer gear, $6.2 million for data center build outs, $1.3 million for office build outs, and $8.8 million for capitalized software and other projects. For the full year of 2010, the company continues to expect total capital expenditures of $185 to $235 million.

Adjusted free cash flow ⁽¹⁾ for the quarter was $11.7 million.

At the end of the third quarter of 2010, cash and cash equivalents were $166.6 million. Included in that amount are investments in money market funds in the amount of $60.7 million. Debt obligations totaled $180.2 million consisting of $126.5 million related to capital leases and $53.7 million related to current and non-current debt. $50.0 million of non-current debt is related to borrowings on the company's line of credit. The company has an additional $194.4 million available for future borrowings on the company's line of credit.

On a worldwide basis, Rackspace employed 3,130 Rackers as of September 30, 2010, up from 3,002 Rackers as of June 30, 2010 and 2,730 Rackers as of September 30, 2009.

Rackspace Developments and Business Highlights

• General availability of Cloud Servers(TM) for Windows: In August, Rackspace announced the launch of its Cloud Servers for Windows offering. The new service delivers a highly scalable environment ideal for Windows-based hosting, testing and developing applications and supporting the high levels of traffic required for launching online gaming platforms or the next social networking phenomenon. Cloud Servers for Windows provides a full suite of features supported by an industry leading Service Level Agreement (SLA) and Rackspace's hallmark customer service, Fanatical Support(R).
• Continued Traction with Enterprise Customers: During the third quarter of 2010, Rackspace added several new enterprise customers to its installed base including CA Technologies. Additionally, Anheuser-Busch expanded its partnership with Rackspace to manage key distributor applications in addition to their public facing websites.

Conference Call and Webcast

Management will host a conference call to discuss the results starting today at 4:30 p.m. ET.

To access the conference call, please dial 888-286-2314 from the United States or dial 719-325-2355 from abroad and reference pass code 9910374. 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

Rackspace Hosting is the world leader in hosting. The San Antonio-based company provides its customers Fanatical Support(R) in their portfolio of hosted IT services, including Managed Hosting, Cloud Computing and Email and Apps. For more information, visit www.rackspace.com.

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-K for the year ended December 31, 2009, filed with the SEC on February 26, 2010 and in Rackspace Hosting's Form 10-Q for the quarter ended September 30, 2010, expected to be filed on November 9, 2010. 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.

* Prior quarter averages have been updated to reflect a change in our methodology, which was revised to include the full impact of our utility business. Previously, results from our utility business were only included as part of the total revenue number from which the percentages for growth in installed base were calculated. For additional details relating to this methodology, please refer to our third quarter Form 10-Q for the period ended September 30, 2010, expected to be filed with the SEC on November 9, 2010. Due to rounding, totals may not equal the sum of the line items in the table above. The table below is a comparison of our installed base growth metric over the last five quarters using our old methodology compared to what it would have been if we had been using our new methodology:

** Amounts include SaaS customers for Jungle Disk using a Rackspace storage solution. Jungle Disk customers using a third party storage solution are excluded.

*** Technical square footage as of September 30, 2010 excludes 24,400 square feet and 3,300 square feet for unused portions of the Chicago and Northern Virginia facilities, respectively.

(1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.

(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 net 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 to net income reconciliations in the table below.

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.

We define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which is calculated as three percent of our annualized net revenue for the three months prior to period end. 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.

Adjusted Free Cash Flow (Non-GAAP financial measure)

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

We believe that Adjusted Free Cash Flow is an important metric for investors in evaluating how a company is currently using cash generated, and may indicate its ability to generate cash that can potentially be used by the business for capital investments, acquisitions, reduction of debt, payment of dividends, etc. 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.

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.

SOURCE: Rackspace Hosting

Rackspace Hosting
Investor Relations:
Bryan McGrath, 210-312-5230
ir@rackspace.com
or
Corporate Communications:
Rachel Ferry, 210-312-3732
rachel.ferry@rackspace.com