For the quarter ended December 31, 2011:

• Net revenue of $283 million grew 32% year-over-year and 7.1% from Q3 2011
• Adjusted EBITDA ⁽¹⁾ of $102 million grew 42% year-over-year and 16.2% from Q3 2011
• Achieved adjusted EBITDA margin of 36.1%, up from 33.5% year-over-year and 33.3% in Q3 2011
• Net income of $25 million grew 85% year-over-year and 25.3% from Q3 2011

SAN ANTONIO--(BUSINESS WIRE)--Feb. 13, 2012-- Rackspace® Hosting, Inc. (NYSE: RAX), the service leader in cloud computing, announced financial results for the quarter ended December 31, 2011.

Net revenue for the fourth quarter of 2011 was $283 million, up 7.1% from the previous quarter and 32% from the fourth quarter of 2010. Net revenue for the fourth quarter of 2011 was negatively impacted by currency exchange rates when compared to the third quarter of 2011 by $1.6 million and negatively impacted compared to the fourth quarter of 2010 by $0.4 million.

Total server count increased to 79,805, up from 78,717 servers at the end of the previous quarter, and total customers increased to 172,510, up from 161,422 at the end of the previous quarter.

“We are very pleased with the financial results we have generated for the fourth quarter and the full year. We accomplished our financial objectives for 2011 and ended the year really strong,” said Karl Pichler, chief financial officer.

Adjusted EBITDA for the quarter was $102 million, a 16.2% increase compared to the third quarter of 2011 and a 42% increase compared to the fourth quarter of 2010. The adjusted EBITDA margin for the quarter was 36.1% compared to 33.3% in the previous quarter and 33.5% for the fourth quarter of 2010. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge of $1.2 million for the quarter relating to data center operating leases.

Net income was $25 million for the quarter, up 25.3% from the previous quarter and 85% from the fourth quarter of 2010. Net income margin for the quarter was 8.8% compared to 7.6% for the previous quarter and 6.3% in the fourth quarter of 2010.

Cash flow from operating activities was $105 million for the fourth quarter of 2011. Capital expenditures were $79 million, including $47 million for purchases of customer gear, $7 million for data center build outs, $10 million for office build outs and $15 million for capitalized software and other projects.

Adjusted free cash flow ⁽¹⁾ for the quarter was $19 million.

At the end of the fourth quarter of 2011, cash and cash equivalents were $160 million and debt including capital lease obligations totaled $139 million.

On a worldwide basis, Rackspace employed 4,040 Rackers as of December 31, 2011, up from 3,799 Rackers as of September 30, 2011 and 3,262 Rackers as of December 31, 2010.

“During the year we accelerated our revenue growth rate for the second year in a row and crossed one billion dollars in annual revenue, while simultaneously improving margins and returns. In short, we made tremendous progress towards our long-term goal of becoming the service leader in Cloud computing,” said Lanham Napier, chief executive officer.

Rackspace Developments and Business Highlights

• FORTUNE Magazine Names Rackspace Among “100 Best Companies to Work For” and 3^rd on the list for highest job growth.
• Rackspace Hosting Earns a Spot on 2011 InformationWeek 500 List of Top Technology Innovators Across America
• Rackspace Promotes Lew Moorman to President
• Rackspace Appoints Karl Pichler, 39, as Chief Financial Officer
• Recognized as the 'Employer of the Year' at the 2011 National Business Awards UK

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 877-718-5099 from the United States and Canada or dial 719-325-4825 from abroad and reference pass code 8946052. 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 service leader in cloud computing and a founder of OpenStack, an open source cloud platform. The San Antonio-based company provides Fanatical Support® to its customers, across a portfolio of IT services, including Dedicated and Public Cloud. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company and was featured on Fortune’s list of 100 Best Companies to Work For. The company was also positioned in the Leaders Quadrant by Gartner Inc. in the “2010 Magic Quadrant for Cloud Infrastructure as a Service and Web Hosting.” 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 deterioration of economic conditions or 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, 2010, filed with the SEC on February 22, 2011 and in Rackspace Hosting’s Form 10-K for the year ended December 31, 2011, expected to be filed later this month. 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.

We have historically defined technical square feet of data center space as space that can be utilized to support IT equipment. With respect to square footage and utilization, for data centers that are not yet fully utilized, we include square footage and power capacity based on the agreed upon schedule in the lease agreement. For example, if the agreement has ten phases and we are in phase five, we include 50% of the total square footage and power capacity called for in the lease agreement.

As a result of our strategy to continue leasing data centers, beginning in the first quarter of 2012, we will begin disclosing our Megawatts under contract, Megawatts available for use and Megawatts utilized as of period end. We will no longer provide technical square footage as we believe that power is a better metric for evaluating our capacity. The table below shows how the new disclosure would have appeared in the Key Metrics table.

As noted above in the Quarter-to-Date Key Metrics table, beginning in the first quarter of 2012, we will begin disclosing our total Megawatts under contract, Megawatts available for use and Megawatts utilized as of period end. We will no longer provide technical square footage as we believe that power is a better metric for evaluating our capacity. The table below shows how the new disclosure would have appeared in the Year-to-Date Key Metrics table.

(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 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 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 revenue – other non-current liabilities, deferred income taxes, and deferred rent); calculated on a quarterly basis.

Year-to-date average balances are based on an average calculated using the quarter end balances at the beginning of the period and all other quarter ending balances included in the period.

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 the 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 our 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. ROC has limitations as an analytical tool, and when assessing our operating performance, you should not consider ROC in isolation, or as a substitute for other financial data prepared in accordance with GAAP. Other companies may calculate ROC differently than we do, limiting its usefulness as a comparative measure. 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 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, Inc.

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