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Rackspace Hosting Reports Fourth Quarter 2011 Results

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 3rd 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.

Consolidated Statements of Income

   
Three Months Ended Year Ended
(Unaudited)     (Unaudited)

 

December 31,   September 30,   December 31, December 31, December 31,

(In thousands, except per share data)

2010 2011 2011 2010 2011
Net revenue $ 214,726 $ 264,572 $ 283,261 $ 780,555 $ 1,025,064
Costs and expenses:
Cost of revenue 66,747 82,445 82,851 249,840 309,095
Sales and marketing 26,294 31,838 33,452 96,207 126,505
General and administrative 56,748 69,701 72,349 199,011 270,581
Depreciation and amortization   41,529     49,518     54,844     155,895     195,412  
Total costs and expenses   191,318     233,502     243,496     700,953     901,593  
Income from operations   23,408     31,070     39,765     79,602     123,471  
Other income (expense):
Interest expense (1,897 ) (1,531 ) (1,304 ) (7,984 ) (5,848 )
Interest and other income (expense)   57     (276 )   (226 )   (207 )   (1,194 )
Total other income (expense)   (1,840 )   (1,807 )   (1,530 )   (8,191 )   (7,042 )
Income before income taxes 21,568 29,263 38,235 71,411 116,429
Income taxes   8,029     9,281     13,188     25,053     40,018  
Net income $ 13,539   $ 19,982   $ 25,047   $ 46,358   $ 76,411  
 
Net income per share
Basic $ 0.11   $ 0.15   $ 0.19   $ 0.37   $ 0.59  
Diluted $ 0.10   $ 0.14   $ 0.18   $ 0.35   $ 0.55  
 
Weighted average number of shares outstanding
Basic   126,473     130,662     131,423     125,097     129,922  
Diluted   134,786     138,453     138,912     133,429     138,064  
 
 

Consolidated Balance Sheets

   
(In thousands) December 31, 2010 December 31, 2011
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 104,941 $ 159,856
Accounts receivable, net of allowance for doubtful accounts and customer credits of $2,846 as of December 31, 2010 and $3,420 as of December 31, 2011 47,734 68,709
Income taxes receivable 4,397
Deferred income taxes 6,416 9,841
Prepaid expenses 16,738 22,006
Other current assets   5,219     2,953  
Total current assets 185,445 263,365
 
Property and equipment, net 495,228 627,490
Goodwill 57,147 59,993
Intangible assets, net 9,675 26,034
Other non-current assets   14,082     49,600  
Total assets $ 761,577   $ 1,026,482  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 111,645 $ 156,004
Current portion of deferred revenue 15,822 14,835
Current portion of obligations under capital leases 59,763 66,031
Current portion of debt   1,912     879  
Total current liabilities 189,142 237,749
 
Non-current deferred revenue 2,927 3,446
Non-current obligations under capital leases 69,173 72,216
Non-current debt 879
Non-current deferred income taxes 35,238 68,781
Non-current deferred rent 14,595 23,343
Other non-current liabilities   10,760     21,524  
Total liabilities 322,714 427,059
 
COMMITMENTS AND CONTINGENCIES
 
Stockholders' equity:
Common stock 127 132
Additional paid-in capital 296,571 383,031
Accumulated other comprehensive loss (12,416 ) (14,732 )
Retained earnings   154,581     230,992  
Total stockholders’ equity   438,863     599,423  
Total liabilities and stockholders’ equity $ 761,577   $ 1,026,482  
 
 

Consolidated Statements of Cash Flows

         
Three Months Ended Year Ended
(Unaudited)   (Unaudited)
December 31, September 30, December 31, December 31, December 31,
(in thousands) 2010 2011 2011 2010 2011
Cash Flows From Operating Activities
Net income $ 13,539 $ 19,982 $ 25,047 $ 46,358 $ 76,411
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 41,529 49,518 54,844 155,895 195,412
Loss on disposal of equipment, net 189 85 (110 ) 758 247
Provision for bad debts and customer credits 1,354 1,224 1,451 4,330 5,913
Deferred income taxes 3,806 3,330 4,802 6,788 13,991
Deferred rent 2,893 2,457 1,200 7,064 9,471
Share-based compensation expense 7,087 7,395 7,585 26,624 28,773
Excess tax benefits from share-based compensation arrangements (2,370 ) (10,326 ) (8,711 ) (2,370 ) (20,627 )
Changes in certain assets and liabilities
Accounts receivable (3,790 ) 507 (9,442 ) (12,864 ) (26,805 )
Income taxes receivable (1,746 ) 2,469 2,606 4,397
Prepaid expenses and other current assets 4,479 (12,569 ) 7,494 (10,125 ) (2,597 )
Accounts payable and accrued expenses 3,783 7,477 19,261 16,765 57,476
Deferred revenue 2,201 (773 ) 614 (488 ) (482 )
All other operating activities   1,316     (461 )   888     2,894     1,405  
Net cash provided by operating activities 74,270 70,315 104,923 244,235 342,985
 
Cash Flows From Investing Activities
Purchases of property and equipment, net (46,884 ) (70,379 ) (67,020 ) (144,778 ) (269,804 )
Acquisitions, net of cash acquired (29,854 ) (29,854 ) (952 )
Earn-out payments for acquisitions (490 )
All other investing activities       105     63     (75 )   168  
Net cash used in investing activities (76,738 ) (70,274 ) (66,957 ) (175,197 ) (270,588 )
 
Cash Flows From Financing Activities
Principal payments of capital leases (14,182 ) (17,434 ) (16,924 ) (52,129 ) (65,778 )
Principal payments of notes payable (864 ) (435 ) (437 ) (4,893 ) (1,913 )
Payments on line of credit (50,000 ) (50,000 )
Payments for debt issuance costs (1,114 ) (1,114 )
Payments of earn-out provisions for acquisitions (2,900 ) (2,399 ) (5,299 )
Proceeds from employee stock plans 3,877 4,815 8,505 15,250 36,287
Excess tax benefits from share-based compensation arrangements   2,370     10,326     8,711     2,370     20,627  
Net cash used in financing activities (58,799 ) (6,742 ) (2,544 ) (89,402 ) (17,190 )
 
Effect of exchange rate changes on cash and cash equivalents (349 ) (644 ) (246 ) (120 ) (292 )
         
Increase (decrease) in cash and cash equivalents (61,616 ) (7,345 ) 35,176 (20,484 ) 54,915
 
Cash and cash equivalents, beginning of period 166,557 132,025 124,680 125,425 104,941
         
Cash and cash equivalents, end of period $ 104,941   $ 124,680   $ 159,856   $ 104,941   $ 159,856  
 
Supplemental cash flow information:
Acquisition of property and equipment by capital leases $ 16,596 $ 23,179 $ 12,335 $ 71,363 $ 75,090
Shares issued in business combinations $ $ $ $ 510 $
Cash payments for interest, net of amount capitalized $ 1,892 $ 1,580 $ 1,221 $ 7,743 $ 5,577
Cash payments for income taxes $ 4,351 $ 3,782 $ 3,671 $ 20,112 $ 19,088
 
 
Key Metrics - Quarter to Date
(Unaudited)
 
Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server and annualized net revenue per average technical square foot)

December 31,
2010

 

March 31,
2011

 

June 30,
2011

 

September 30,
2011

 

December 31,
2011

Growth
Dedicated Cloud, net revenue $ 183,311 $ 192,895 $ 204,275 $ 213,899 $ 224,808
Public Cloud, net revenue $ 31,415   $ 37,107   $ 42,954   $ 50,673   $ 58,453  
Net revenue $ 214,726 $ 230,002 $ 247,229 $ 264,572 $ 283,261
Revenue growth (year over year) 26.7 % 28.6 % 32.0 % 32.5 % 31.9 %
 
Net upgrades (monthly average) 1.6 % 1.8 % 1.8 % 1.8 % 2.0 %
Churn (monthly average)   -1.0 %   -0.9 %   -0.9 %   -0.9 %   -0.8 %
Growth in installed base (monthly average) (2) 0.6 % 0.9 % 0.9 % 0.9 % 1.2 %
 
Number of customers at period end (3) 130,291 142,441 152,578 161,422 172,510
Number of employees (Rackers) at period end 3,262 3,492 3,712 3,799 4,040
 
Number of servers deployed at period end 66,015 70,473 74,028 78,717 79,805
Average monthly revenue per server $ 1,101 $ 1,123 $ 1,141 $ 1,155 $ 1,191
 
Profitability
Income from operations $ 23,408 $ 23,983 $ 28,653 $ 31,070 $ 39,765
Depreciation and amortization $ 41,529 $ 44,098 $ 46,952 $ 49,518 $ 54,844
Share-based compensation expense
Cost of revenue $ 1,223 $ 1,412 $ 756 $ 1,005 $ 1,047
Sales and marketing (4) $ 1,052 $ 1 $ 609 $ 864 $ 839
General and administrative $ 4,812   $ 6,397   $ 4,618   $ 5,526   $ 5,699  
Total share-based compensation expense $ 7,087   $ 7,810   $ 5,983   $ 7,395   $ 7,585  
Adjusted EBITDA (1) $ 72,024 $ 75,891 $ 81,588 $ 87,983 $ 102,194
 
Adjusted EBITDA margin 33.5 % 33.0 % 33.0 % 33.3 % 36.1 %
 
Operating income margin 10.9 % 10.4 % 11.6 % 11.7 % 14.0 %
 
Income from operations $ 23,408 $ 23,983 $ 28,653 $ 31,070 $ 39,765
Effective tax rate   37.2 %   38.3 %   33.8 %   31.7 %   34.5 %
Net operating profit after tax (NOPAT) (1) $ 14,700 $ 14,798 $ 18,968 $ 21,221 $ 26,046
NOPAT margin 6.8 % 6.4 % 7.7 % 8.0 % 9.2 %
 
Capital efficiency and returns
Interest bearing debt $ 131,727 $ 134,905 $ 138,841 $ 144,152 $ 139,126
Stockholders' equity $ 438,863 $ 478,307 $ 511,843 $ 551,049 $ 599,423
Less: Excess cash $ (79,174 ) $ (106,268 ) $ (102,358 ) $ (92,931 ) $ (125,865 )
Capital base $ 491,416 $ 506,944 $ 548,326 $ 602,270 $ 612,684
Average capital base $ 471,119 $ 499,180 $ 527,635 $ 575,298 $ 607,477
Capital turnover (annualized) 1.82 1.84 1.87 1.84 1.87
 
Return on capital (annualized) (1) 12.5 % 11.9 % 14.4 % 14.8 % 17.2 %
 
Capital expenditures
Purchases of property and equipment, net $ 46,884 $ 57,651 $ 74,754 $ 70,379 $ 67,020
Vendor-financed equipment purchases $ 16,596   $ 19,009   $ 20,567   $ 23,179   $ 12,335  
Total capital expenditures $ 63,480 $ 76,660 $ 95,321 $ 93,558 $ 79,355
 
Customer gear $ 38,052 $ 46,300 $ 48,777 $ 53,643 $ 47,376
Data center build outs $ 9,754 $ 9,173 $ 17,491 $ 16,715 $ 6,568
Office build outs $ 5,145 $ 2,957 $ 14,074 $ 8,806 $ 9,915
Capitalized software and other projects $ 10,529   $ 18,230   $ 14,979   $ 14,394   $ 15,496  
Total capital expenditures $ 63,480 $ 76,660 $ 95,321 $ 93,558 $ 79,355
 
Infrastructure capacity and utilization
Technical square feet of data center space at period end (5) 180,173 181,848 198,868 227,988

233,960

Annualized net revenue per average technical square foot $ 4,807 $ 5,083 $ 5,195 $ 4,959 $

4,906

Utilization rate at period end 72.0 % 76.7 % 72.9 % 69.0 %

68.1

%
 

(1)

 

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

(2)

Due to rounding, totals may not equal the sum of the line items in the table above.

(3)

Customers are counted on an account basis, and therefore a customer with more than one account with us is included as more than one customer. Furthermore, amounts include SaaS customers for Jungle Disk using a Rackspace storage solution. Jungle Disk customers using a third-party storage solution are excluded.

(4)

During the three months ended March 31, 2011, share-based compensation expense within Sales and Marketing was positively impacted by the reversal of previously recorded expense related to terminated employees. The offset of the reversal was a true-up of the forfeiture rate across Cost of Revenue and General and Administrative expenses for options that fully vested within the quarter, negatively impacting these categories.

(5)

Technical square footage as of December 31, 2011 excludes 28,460 square feet for unused portions of our data center facilities.

 

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.

  Three Months Ended
December 31,   March 31,   June 30,  

September 30,

  December 31,
(Dollar amounts in thousands) 2010 2011 2011

2011

2011

Megawatts under contract

32.7

35.7

38.0

41.9

48.2

Megawatts available for use

23.2

24.7

27.0

29.7

30.7

Megawatts utilized

16.7

18.0

19.0

20.2

20.9

Annualized net revenue per average Megawatt of power utilized

$ 53,019 $

53,026

$

53,455

$ 53,994 $

55,136

 
 
Key Metrics - Year to Date
(Unaudited)
   
Year Ended December 31,
(Dollar amounts in thousands, except average monthly revenue per server and annualized net revenue per average technical square foot) 2010 2011
Growth
Dedicated Cloud, net revenue $ 679,888 $ 835,877
Public Cloud, net revenue $ 100,667   $ 189,187  
Net revenue $ 780,555 $ 1,025,064
Revenue growth (year over year) 24.1 % 31.3 %
 
Net upgrades (monthly average) 1.5 % 1.9 %
Churn (monthly average)   -1.0 %   -0.9 %
Growth in installed base (monthly average) (2) 0.5 % 1.0 %
 
Number of customers at period end (3) 130,291 172,510
Number of employees (Rackers) at period end 3,262 4,040
 
Number of servers deployed at period end 66,015 79,805
Average monthly revenue per server $ 1,054 $ 1,157
 
Profitability
Income from operations $ 79,602 $ 123,471
Depreciation and amortization $ 155,895 $ 195,412
Share-based compensation expense
Cost of revenue $ 4,660 $ 4,220
Sales and marketing $ 4,241 $ 2,313
General and administrative $ 17,723   $ 22,240  
Total share-based compensation expense $ 26,624   $ 28,773  
Adjusted EBITDA (1) $ 262,121 $ 347,656
 
Adjusted EBITDA margin 33.6 % 33.9 %
 
Operating income margin 10.2 % 12.0 %
 
Income from operations $ 79,602 $ 123,471
Effective tax rate   35.1 %   34.4 %
Net operating profit after tax (NOPAT) (1) $ 51,662 $ 80,997
NOPAT margin 6.6 % 7.9 %
 
Capital efficiency and returns
Interest bearing debt $ 131,727 $ 139,126
Stockholders' equity $ 438,863 $ 599,423
Less: Excess cash $ (79,174 ) $ (125,865 )
Capital base $ 491,416 $ 612,684
Average capital base $ 445,179 $ 552,328
Capital turnover 1.75 1.86
 
Return on capital (1) 11.6 % 14.7 %
 
Capital expenditures
Purchases of property and equipment, net $ 144,778 $ 269,804
Vendor-financed equipment purchases $ 71,363   $ 75,090  
Total capital expenditures $ 216,141 $ 344,894
 
Customer gear $ 136,348 $ 196,096
Data center build outs $ 38,515 $ 49,947
Office build outs $ 8,942 $ 35,752
Capitalized software and other projects $ 32,336   $ 63,099  
Total capital expenditures $ 216,141 $ 344,894
 
Infrastructure capacity and utilization
Technical square feet of data center space at period end (4) 180,173

233,960

Annualized net revenue per average technical square foot $ 4,477 $

4,866

Utilization rate at period end 72.0 %

68.1

%
 

(1)

 

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

(2)

Due to rounding, totals may not equal the sum of the line items in the table above.

(3)

Customers are counted on an account basis, and therefore a customer with more than one account with us is included as more than one customer. Furthermore, amounts include SaaS customers for Jungle Disk using a Rackspace storage solution. Jungle Disk customers using a third-party storage solution are excluded.

(4)

Technical square footage as of December 31, 2011 excludes 28,460 square feet for unused portions of our data center facilities.

 

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.

  Year Ended December 31,
(Dollar amounts in thousands) 2010   2011

Megawatts under contract

32.7

48.1

Megawatts available for use

23.2

30.7

Megawatts utilized

16.7

20.9

Net revenue per average Megawatt of power utilized $ 52,037 $

54,065

 
 
Consolidated Quarterly Statements of Income
(Unaudited)
         
Three Months Ended

December 31,

March 31,

June 30,

September 30, December 31,
(In thousands) 2010 2011 2011 2011 2011
 
Net revenue $ 214,726 $ 230,002 $ 247,229 $ 264,572 $ 283,261
Costs and expenses:
Cost of revenue 66,747 69,742 74,057 82,445 82,851
Sales and marketing 26,294 29,738 31,477 31,838 33,452
General and administrative 56,748 62,441 66,090 69,701 72,349
Depreciation and amortization   41,529     44,098     46,952     49,518     54,844  
Total costs and expenses   191,318     206,019     218,576     233,502     243,496  
Income from operations   23,408     23,983     28,653     31,070     39,765  
Other income (expense):
Interest expense (1,897 ) (1,491 ) (1,522 ) (1,531 ) (1,304 )
Interest and other income (expense)   57     (78 )   (614 )   (276 )   (226 )
Total other income (expense)   (1,840 )   (1,569 )   (2,136 )   (1,807 )   (1,530 )
Income before income taxes 21,568 22,414 26,517 29,263 38,235
Income taxes   8,029     8,593     8,956     9,281     13,188  
Net income $ 13,539   $ 13,821   $ 17,561   $ 19,982   $ 25,047  
 
Three Months Ended
December 31, March 31, June 30, September 30, December 31,
(Percent of net revenue) 2010 2011 2011 2011 2011
 
Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 31.1 % 30.3 % 30.0 % 31.2 % 29.2 %
Sales and marketing 12.2 % 12.9 % 12.7 % 12.0 % 11.8 %
General and administrative 26.4 % 27.1 % 26.7 % 26.3 % 25.5 %
Depreciation and amortization   19.3 %   19.2 %   19.0 %   18.7 %   19.4 %
Total costs and expenses   89.1 %   89.6 %   88.4 %   88.3 %   86.0 %
Income from operations   10.9 %   10.4 %   11.6 %   11.7 %   14.0 %
Other income (expense):
Interest expense -0.9 % -0.6 % -0.6 % -0.6 % -0.5 %
Interest and other income (expense)   0.0 %   0.0 %   -0.2 %   -0.1 %   -0.1 %
Total other income (expense)   -0.9 %   -0.7 %   -0.9 %   -0.7 %   -0.5 %
Income before income taxes 10.0 % 9.7 % 10.7 % 11.1 % 13.5 %
Income taxes   3.7 %   3.7 %   3.6 %   3.5 %   4.7 %
Net income   6.3 %   6.0 %   7.1 %   7.6 %   8.8 %
 
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 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.

  Three Months Ended
(Unaudited)
December 31,   March 31,   June 30,   September 30,   December 31,
(Dollars in thousands) 2010 2011 2011 2011 2011
Net revenue $ 214,726 $ 230,002 $ 247,229 $ 264,572 $ 283,261
 
Income from operations $ 23,408 $ 23,983 $ 28,653 $ 31,070 $ 39,765
 
Net income $ 13,539 $ 13,821 $ 17,561 $ 19,982 $ 25,047
Plus: Income taxes 8,029 8,593 8,956 9,281 13,188
Plus: Total other (income) expense 1,840 1,569 2,136 1,807 1,530
Plus: Depreciation and amortization 41,529 44,098 46,952 49,518 54,844
Plus: Share-based compensation expense   7,087     7,810     5,983     7,395     7,585  
Adjusted EBITDA $ 72,024 $ 75,891 $ 81,588 $ 87,983 $ 102,194
 
Operating income margin 10.9 % 10.4 % 11.6 % 11.7 % 14.0 %
 
Adjusted EBITDA margin 33.5 % 33.0 % 33.0 % 33.3 % 36.1 %
 
 
  Year Ended December 31,
(Unaudited)
(Dollars in thousands) 2010   2011
Net revenue $ 780,555 $ 1,025,064
 
Income from operations $ 79,602 $ 123,471
 
Net income $ 46,358 $ 76,411
Plus: Income taxes 25,053 40,018
Plus: Total other (income) expense 8,191 7,042
Plus: Depreciation and amortization 155,895 195,412
Plus: Share-based compensation expense   26,624     28,773  
Adjusted EBITDA $ 262,121 $ 347,656
 
Operating income margin 10.2 % 12.0 %
 
Adjusted EBITDA margin 33.6 % 33.9 %
 
 

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.

  Three Months Ended
(Unaudited)
December 31,   March 31,   June 30,   September 30,   December 31,
(Dollars in thousands) 2010 2011 2011 2011 2011
Income from operations $ 23,408 $ 23,983 $ 28,653 $ 31,070 $ 39,765
Effective tax rate   37.2 %   38.3 %   33.8 %   31.7 %   34.5 %
Net operating profit after tax (NOPAT) $ 14,700 $ 14,798 $ 18,968 $ 21,221 $ 26,046
 
Net income $ 13,539 $ 13,821 $ 17,561 $ 19,982 $ 25,047
 
Total assets at period end $ 761,577 $ 831,414 $ 887,576 $ 970,677 $ 1,026,482
Less: Excess cash (79,174 ) (106,268 ) (102,358 ) (92,931 ) (125,865 )
Less: Accounts payable and accrued expenses (111,645 ) (132,308 ) (145,609 ) (148,464 ) (156,004 )
Less: Deferred revenue (current and non-current) (18,749 ) (19,149 ) (18,687 ) (17,772 ) (18,281 )
Less: Other non-current liabilities, deferred income taxes, and deferred rent   (60,593 )   (66,745 )   (72,596 )   (109,240 )   (113,648 )
Capital base $ 491,416 $ 506,944 $ 548,326 $ 602,270 $ 612,684
 
Average total assets $ 760,888 $ 796,496 $ 859,495 $ 929,127 $ 998,580
Average capital base $ 471,119 $ 499,180 $ 527,635 $ 575,298 $ 607,477
 
Return on assets (annualized) 7.1 % 6.9 % 8.2 % 8.6 % 10.0 %
Return on capital (annualized) 12.5 % 11.9 % 14.4 % 14.8 % 17.2 %
 
 
  Year Ended December 31,
(Unaudited)
(Dollars in thousands) 2010   2011
Income from operations $ 79,602 $ 123,471
Effective tax rate   35.1 %   34.4 %
Net operating profit after tax (NOPAT) $ 51,662 $ 80,997
 
Net income $ 46,358 $ 76,411
 
Total assets at period end $ 761,577 $ 1,026,482
Less: Excess cash (79,174 ) (125,865 )
Less: Accounts payable and accrued expenses (111,645 ) (156,004 )
Less: Deferred revenue (current and non-current) (18,749 ) (18,281 )
Less: Other non-current liabilities, deferred income taxes, and deferred rent   (60,593 )   (113,648 )
Capital base $ 491,416 $ 612,684
 
Average total assets $ 720,521 $ 895,545
Average capital base $ 445,179 $ 552,328
 
Return on assets (Net income/Average total assets) 6.4 % 8.5 %
Return on capital (NOPAT/Average capital base) 11.6 % 14.7 %
 
 

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.

  Three Months Ended   Year Ended
(In thousands) December 31, 2011 December 31, 2011
(Unaudited)
Adjusted EBITDA $ 102,194 $ 347,656
Non-cash deferred rent 1,200 9,471
Total capital expenditures (79,355 ) (344,894 )
Cash payments for interest, net (1,208 ) (5,445 )
Cash payments for income taxes, net   (3,667 )   (14,192 )
Adjusted free cash flow $ 19,164 $ (7,404 )
 
 

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.

  As of
(Dollars in thousands) December 31, 2011
(Unaudited)
Obligations under capital leases $ 138,247
Debt   879  
Total debt $ 139,126
Less: Cash and cash equivalents   (159,856 )
Net debt $ (20,730 )
Adjusted EBITDA (trailing twelve months) $ 347,656
 
Net leverage -0.06 x

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

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