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Rackspace Hosting Reports First Quarter 2012 Results

For the quarter ended March 31, 2012:

  • Net revenue of $301 million grew 31% year-over-year
  • Adjusted EBITDA (1) of $101 million grew 33% year-over-year
  • Achieved adjusted EBITDA margin of 33.4%, up from 33.0% year-over-year
  • Net income of $23 million grew 68% year-over-year

SAN ANTONIO--(BUSINESS WIRE)--May. 7, 2012-- Rackspace® Hosting, Inc. (NYSE: RAX), the service leader in cloud computing, announced financial results for the quarter ended March 31, 2012.

Net revenue for the first quarter of 2012 was $301 million, up 6.4% from the previous quarter and 31% from the first quarter of 2011. Net revenue for the first quarter of 2012 was negatively impacted by currency exchange rates when compared to the first quarter of 2011 by $2.0 million and negatively impacted compared to the fourth quarter of 2011 by $0.6 million.

Total server count increased to 82,438 up from 79,805 servers at the end of the previous quarter, and total customers increased to 180,866, up from 172,510 at the end of the previous quarter.

“With the first quarter of the year completed, we believe we have made good progress toward our operational and financial goals,” said Karl Pichler, chief financial officer.

Adjusted EBITDA for the quarter was $101 million, a 1.4% decrease compared to the fourth quarter of 2011 and a 33% increase compared to the first quarter of 2011. The adjusted EBITDA margin for the quarter was 33.4% compared to 36.1% in the previous quarter and 33.0% for the first quarter of 2011.

Consistent with prior periods, adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge relating to data center operating leases. During the first quarter, the non-cash data center lease charge was $1.9 million.

Net income was $23 million for the quarter, down 7.5% from the previous quarter and up 68% from the first quarter of 2011. Net income margin for the quarter was 7.7% compared to 8.8% for the previous quarter and 6.0% in the first quarter of 2011.

Cash flow from operating activities was $70 million for the first quarter of 2012. Capital expenditures were $82 million, including $53 million for purchases of customer gear, $9 million for data center build outs, $5 million for office build outs and $15 million for capitalized software and other projects.

Adjusted free cash flow (1) for the quarter was $17 million.

At the end of the first quarter of 2012, cash and cash equivalents were $187 million, and debt including capital lease obligations totaled $144 million.

On a worldwide basis, Rackspace employed 4,335 Rackers as of March 31, 2012, up from 4,040 in the previous quarter.

“While we’ve made a lot of progress so far in 2012, we have much more to do. We are executing through a very important platform shift to our next generation cloud, and we need to make this experience incredible for our customers. Massive technology disruptions like this create once in a lifetime opportunities for companies to seize the moment, take the initiative, and lead the revolution.  Our goal is to lead the revolution,” said Lanham Napier, chief executive officer.

Rackspace Developments and Business Highlights

  • OpenStack announces new products and newer versions of operating system.
  • IBM and Red Hat join OpenStack and announce their support.
  • Rackspace places 1st in the Magic Quadrant, surpassing our competitors.
  • Rackspace acquires SharePoint-911 to strengthen business.
  • Sony adopts OpenStack.

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 888-437-9318 from the United States and Canada or dial 719-325-2201 from abroad and reference pass code 9390104. 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 “2011 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, 2011, filed with the SEC on February 17, 2012 and in Rackspace Hosting’s Form 10-Q for the quarter ended March 31, 2012, expected to 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
(In thousands, except per share data) March 31, 2011     December 31, 2011 March 31, 2012
Net revenue $ 230,002 $ 283,261 $ 301,355
 
Costs and expenses:
Cost of revenue 69,742 82,851 87,240
Sales and marketing 29,738 33,452 38,502
General and administrative 62,441 72,349 83,378
Depreciation and amortization   44,098     54,844     55,151  
Total costs and expenses   206,019     243,496     264,271  
Income from operations   23,983     39,765     37,084  
Other income (expense):
Interest expense (1,491 ) (1,304 ) (1,272 )
Interest and other income (expense)   (78 )   (226 )   137  
Total other income (expense)   (1,569 )   (1,530 )   (1,135 )
Income before income taxes 22,414 38,235 35,949
Income taxes   8,593     13,188     12,769  
Net income $ 13,821   $ 25,047   $ 23,180  
 
Net income per share
Basic $ 0.11   $ 0.19   $ 0.17  
Diluted $ 0.10   $ 0.18   $ 0.17  
 
Weighted average number of shares outstanding
Basic   127,845     131,423     133,062  
Diluted   136,224     138,912     139,964  
 
     

Consolidated Balance Sheets

 
(In thousands) December 31, 2011 March 31, 2012
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 159,856 $ 186,531
Accounts receivable, net of allowance for doubtful accounts and customer credits of $3,420 as of December 31, 2011 and $3,633 as of March 31, 2012 68,709 77,095
Deferred income taxes 9,841 6,478
Prepaid expenses 22,006 19,563
Other current assets   2,953     3,793  
Total current assets 263,365 293,460
 
Property and equipment, net 627,490 659,867
Goodwill 59,993 62,177
Intangible assets, net 26,034 25,470
Other non-current assets   49,600     48,419  
Total assets $ 1,026,482   $ 1,089,393  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 156,004 $ 153,668
Current portion of deferred revenue 14,835 16,795
Current portion of obligations under capital leases 66,031 67,469
Current portion of debt   879     440  
Total current liabilities 237,749 238,372
 
Non-current deferred revenue 3,446 3,400
Non-current obligations under capital leases 72,216 76,069
Non-current deferred income taxes 68,781 52,896
Non-current deferred rent 23,343 25,433
Other non-current liabilities   21,524     24,787  
Total liabilities 427,059 420,957
 
COMMITMENTS AND CONTINGENCIES
 
Stockholders' equity:
Common stock 132 135
Additional paid-in capital 383,031 424,369
Accumulated other comprehensive loss (14,732 ) (10,240 )
Retained earnings   230,992     254,172  
Total stockholders’ equity   599,423     668,436  
Total liabilities and stockholders’ equity $ 1,026,482   $ 1,089,393  
 
 
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
(in thousands) March 31, 2011     December 31, 2011     March 31, 2012
Cash Flows From Operating Activities
Net income $ 13,821 $ 25,047 $ 23,180
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 44,098 54,844 55,151
Loss (gain) on disposal of equipment, net 182 (110 ) 279
Provision for bad debts and customer credits 1,603 1,451 1,455
Deferred income taxes 3,680 4,802 4,275
Deferred rent 3,031 1,200 1,930
Share-based compensation expense 7,810 7,585 8,509
Excess tax benefits from share-based compensation arrangements (898 ) (8,711 ) (20,235 )
Changes in certain assets and liabilities
Accounts receivable (5,716 ) (9,442 ) (9,008 )
Prepaid expenses and other current assets 1,210 7,494 1,708
Accounts payable and accrued expenses 16,690 19,261 1,989
Deferred revenue 153 614 1,496
All other operating activities   2,589     888     (820 )
Net cash provided by operating activities 88,253 104,923 69,909
 
Cash Flows From Investing Activities
Purchases of property and equipment (57,651 ) (67,020 ) (59,752 )
Acquisitions, net of cash acquired (952 ) - (712 )
All other investing activities   -     63     7  
Net cash used in investing activities (58,603 ) (66,957 ) (60,457 )
 
Cash Flows From Financing Activities
Principal payments of capital leases (15,222 ) (16,924 ) (17,273 )
Principal payments of notes payable (608 ) (437 ) (439 )
Payments of earn-out provisions for acquisitions - (2,399 ) (1,826 )
Receipt of Texas Enterprise Fund Grant - - 3,500
Proceeds from employee stock plans 13,751 8,505 12,381
Excess tax benefits from share-based compensation arrangements   898     8,711     20,235  
Net cash provided by (used in) financing activities (1,181 ) (2,544 ) 16,578
 
Effect of exchange rate changes on cash and cash equivalents 458 (246 ) 645
     
Increase in cash and cash equivalents 28,927 35,176 26,675
 
Cash and cash equivalents, beginning of period 104,941 124,680 159,856
     
Cash and cash equivalents, end of period $ 133,868   $ 159,856   $ 186,531  
 
Supplemental cash flow information:
Acquisition of property and equipment by capital leases $ 19,009 $ 12,335 $ 22,564
Cash payments for interest, net of amount capitalized $ 1,463 $ 1,221 $ 1,258
Cash payments for income taxes $ 4,570 $ 3,671 $ 1,955
 
       

Key Metrics – Quarter to Date (Unaudited)

 
Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server) March 31, 2011   June 30, 2011 September 30, 2011 December 31, 2011 March 31, 2012
Growth
Dedicated Cloud, net revenue $ 192,895 $ 204,275 $ 213,899 $ 224,808 $ 236,604
Public Cloud, net revenue $ 37,107     $ 42,954     $ 50,673     $ 58,453     $ 64,751  
Net revenue $ 230,002 $ 247,229 $ 264,572 $ 283,261 $ 301,355
Revenue growth (year over year) 28.6 % 32.0 % 32.5 % 31.9 % 31.0 %
 
Net upgrades (monthly average) 1.8 % 1.8 % 1.8 % 2.0 % 1.5 %
Churn (monthly average)   -0.9 %     -0.9 %     -0.9 %     -0.8 %     -0.8 %
Growth in installed base (monthly average) (2) 0.9 % 0.9 % 0.9 % 1.2 % 0.7 %
 
Number of customers at period end (3) 142,441 152,578 161,422 172,510 180,866
Number of employees (Rackers) at period end 3,492 3,712 3,799 4,040 4,335
 
Number of servers deployed at period end 70,473 74,028 78,717 79,805 82,438
Average monthly revenue per server $ 1,123 $ 1,141 $ 1,155 $ 1,191 $ 1,238
 
Profitability
Income from operations $ 23,983 $ 28,653 $ 31,070 $ 39,765 $ 37,084
Depreciation and amortization $ 44,098 $ 46,952 $ 49,518 $ 54,844 $ 55,151
Share-based compensation expense
Cost of revenue $ 1,412 $ 756 $ 1,005 $ 1,047 $ 1,236
Sales and marketing (4) $ 1 $ 609 $ 864 $ 839 $ 1,114
General and administrative $ 6,397     $ 4,618     $ 5,526     $ 5,699     $ 6,159  
Total share-based compensation expense $ 7,810     $ 5,983     $ 7,395     $ 7,585     $ 8,509  
Adjusted EBITDA (1) $ 75,891 $ 81,588 $ 87,983 $ 102,194 $ 100,744
Adjusted EBITDA margin 33.0 % 33.0 % 33.3 % 36.1 % 33.4 %
Operating income margin 10.4 % 11.6 % 11.7 % 14.0 % 12.3 %
 
Income from operations $ 23,983 $ 28,653 $ 31,070 $ 39,765 $ 37,084
Effective tax rate   38.3 %     33.8 %     31.7 %     34.5 %     35.5 %
Net operating profit after tax (NOPAT) (1) $ 14,798 $ 18,968 $ 21,221 $ 26,046 $ 23,919
NOPAT margin 6.4 % 7.7 % 8.0 % 9.2 % 7.9 %
 
Capital efficiency and returns
Interest bearing debt $ 134,905 $ 138,841 $ 144,152 $ 139,126 $ 143,978
Stockholders' equity $ 478,307 $ 511,843 $ 551,049 $ 599,423 $ 668,436
Less: Excess cash $ (106,268 )   $ (102,358 )   $ (92,931 )   $ (125,865 )   $ (150,368 )
Capital base $ 506,944 $ 548,326 $ 602,270 $ 612,684 $ 662,046
Average capital base $ 499,180 $ 527,635 $ 575,298 $ 607,477 $ 637,365
Capital turnover (annualized) 1.84 1.87 1.84 1.87 1.89
Return on capital (annualized) (1) 11.9 % 14.4 % 14.8 % 17.2 % 15.0 %
 
Capital expenditures
Purchases of property and equipment $ 57,651 $ 74,754 $ 70,379 $ 67,020 $ 59,752
Vendor-financed equipment purchases $ 19,009     $ 20,567     $ 23,179     $ 12,335     $ 22,564  
Total capital expenditures $ 76,660 $ 95,321 $ 93,558 $ 79,355 $ 82,316
 
Customer gear $ 46,300 $ 48,777 $ 53,643 $ 47,376 $ 52,999
Data center build outs $ 9,173 $ 17,491 $ 16,715 $ 6,568 $ 9,473
Office build outs $ 2,957 $ 14,074 $ 8,806 $ 9,915 $ 4,666
Capitalized software and other projects $ 18,230     $ 14,979     $ 14,394     $ 15,496     $ 15,178  
Total capital expenditures $ 76,660 $ 95,321 $ 93,558 $ 79,355 $ 82,316
 
Infrastructure capacity and utilization
Megawatts under contract at period end 35.7 38.0 41.9 48.1 47.8
Megawatts available for use at period end 24.7 27.0 29.7 30.7 32.2
Megawatts utilized at period end 18.0 19.0 20.2 20.9 21.4
Annualized net revenue per average Megawatt of power utilized $ 53,026 $ 53,455 $ 53,994 $ 55,136 $ 56,994
(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 would be 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.
 
 
Consolidated Quarterly Statements of Income
(Unaudited)
 
Three Months Ended
(In thousands) March 31, 2011   June 30, 2011   September 30, 2011   December 31, 2011   March 31, 2012
 
Net revenue $ 230,002 $ 247,229 $ 264,572 $ 283,261 $ 301,355
Costs and expenses:
Cost of revenue 69,742 74,057 82,445 82,851 87,240
Sales and marketing 29,738 31,477 31,838 33,452 38,502
General and administrative 62,441 66,090 69,701 72,349 83,378
Depreciation and amortization   44,098     46,952     49,518     54,844     55,151  
Total costs and expenses   206,019     218,576     233,502     243,496     264,271  
Income from operations   23,983     28,653     31,070     39,765     37,084  
Other income (expense):
Interest expense (1,491 ) (1,522 ) (1,531 ) (1,304 ) (1,272 )
Interest and other income (expense)   (78 )   (614 )   (276 )   (226 )   137  
Total other income (expense)   (1,569 )   (2,136 )   (1,807 )   (1,530 )   (1,135 )
Income before income taxes 22,414 26,517 29,263 38,235 35,949
Income taxes   8,593     8,956     9,281     13,188     12,769  
Net income $ 13,821   $ 17,561   $ 19,982   $ 25,047   $ 23,180  
 
Three Months Ended
(Percent of net revenue) March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 March 31, 2012
 
Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 30.3 % 30.0 % 31.2 % 29.2 % 28.9 %
Sales and marketing 12.9 % 12.7 % 12.0 % 11.8 % 12.8 %
General and administrative 27.1 % 26.7 % 26.3 % 25.5 % 27.7 %
Depreciation and amortization   19.2 %   19.0 %   18.7 %   19.4 %   18.3 %
Total costs and expenses   89.6 %   88.4 %   88.3 %   86.0 %   87.7 %
Income from operations   10.4 %   11.6 %   11.7 %   14.0 %   12.3 %
Other income (expense):
Interest expense (0.6 )% (0.6 )% (0.6 )% (0.5 )% (0.4 )%
Interest and other income (expense)   (0.0 )%   (0.2 )%   (0.1 )%   (0.1 )%   0.0 %
Total other income (expense)   (0.7 )%   (0.9 )%   (0.7 )%   (0.5 )%   (0.4 )%
Income before income taxes 9.7 % 10.7 % 11.1 % 13.5 % 11.9 %
Income taxes   3.7 %   3.6 %   3.5 %   4.7 %   4.2 %
Net income   6.0 %   7.1 %   7.6 %   8.8 %   7.7 %
 
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 use Adjusted EBITDA as a supplemental measure to review and assess our performance. 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
(Dollars in thousands) March 31, 2011   June 30, 2011   September 30, 2011   December 31, 2011   March 31, 2012
Net revenue $ 230,002 $ 247,229 $ 264,572 $ 283,261 $ 301,355
 
Income from operations $ 23,983 $ 28,653 $ 31,070 $ 39,765 $ 37,084
 
Net income $ 13,821 $ 17,561 $ 19,982 $ 25,047 $ 23,180
Plus: Income taxes 8,593 8,956 9,281 13,188 12,769
Plus: Total other (income) expense 1,569 2,136 1,807 1,530 1,135
Plus: Depreciation and amortization 44,098 46,952 49,518 54,844 55,151
Plus: Share-based compensation expense   7,810     5,983     7,395     7,585     8,509  
Adjusted EBITDA $ 75,891 $ 81,588 $ 87,983 $ 102,194 $ 100,744
 
Operating income margin 10.4 % 11.6 % 11.7 % 14.0 % 12.3 %
 
Adjusted EBITDA margin 33.0 % 33.0 % 33.3 % 36.1 % 33.4 %
 

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, deferred income taxes, and deferred rent); 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 Comprehensive 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
(Dollars in thousands) March 31, 2011   June 30, 2011   September 30, 2011   December 31, 2011   March 31, 2012
Income from operations $ 23,983 $ 28,653 $ 31,070 $ 39,765 $ 37,084
Effective tax rate   38.3 %   33.8 %   31.7 %   34.5 %   35.5 %
Net operating profit after tax (NOPAT) $ 14,798 $ 18,968 $ 21,221 $ 26,046 $ 23,919
 
Net income $ 13,821 $ 17,561 $ 19,982 $ 25,047 $ 23,180
 
Total assets at period end $ 831,414 $ 887,576 $ 970,677 $ 1,026,482 $ 1,089,393
Less: Excess cash (106,268 ) (102,358 ) (92,931 ) (125,865 ) (150,368 )
Less: Accounts payable and accrued expenses (132,308 ) (145,609 ) (148,464 ) (156,004 ) (153,668 )
Less: Deferred revenue (current and non-current) (19,149 ) (18,687 ) (17,772 ) (18,281 ) (20,195 )
Less: Other non-current liabilities, deferred income taxes, and deferred rent   (66,745 )   (72,596 )   (109,240 )   (113,648 )   (103,116 )
Capital base $ 506,944 $ 548,326 $ 602,270 $ 612,684 $ 662,046
 
Average total assets $ 796,496 $ 859,495 $ 929,127 $ 998,580 $ 1,057,938
Average capital base $ 499,180 $ 527,635 $ 575,298 $ 607,477 $ 637,365
 
Return on assets (annualized) 6.9 % 8.2 % 8.6 % 10.0 % 8.8 %
Return on capital (annualized) 11.9 % 14.4 % 14.8 % 17.2 % 15.0 %
 

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
(In thousands) March 31, 2012
Adjusted EBITDA $ 100,744
Non-cash deferred rent 1,930
Total capital expenditures (82,316 )
Cash payments for interest, net (1,226 )
Cash payments for income taxes, net   (1,675 )
Adjusted free cash flow $ 17,457
 

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. We believe that Net Leverage provides an additional indicator when assessing our liquidity, capital structure and leverage and provides insight into a company’s ability to assume more debt if and when required. A negative Net leverage indicates that our cash and cash equivalents is greater than our total debt as of the balance sheet date. See our Net Leverage calculation below.

  As of
(Dollars in thousands) March 31, 2012
Obligations under capital leases $ 143,538
Debt   440  
Total debt $ 143,978
Less: Cash and cash equivalents   (186,531 )
Net debt $ (42,553 )
Adjusted EBITDA (trailing twelve months) $ 372,509
 
Net leverage (0.11 ) x

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

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