Press Release

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Rackspace Reports Fourth Quarter Results
Revenue Grew 10.7 Percent Compared to the Fourth Quarter of 2014
Adjusted EBITDA Grew 11.0 Percent Compared to the Fourth Quarter of 2014
Net Income was $32 Million for the Fourth Quarter of 2015
On a Fully Diluted Basis, GAAP EPS was 24 Cents and Non-GAAP EPS was 31 Cents in the Fourth Quarter of 2015

SAN ANTONIO, TX  -- (Marketwired) -- 02/16/16 -- Rackspace® (NYSE: RAX), the #1 managed cloud company, today announced financial results for the quarter that ended December 31, 2015.

On a GAAP basis, net revenue for the fourth quarter of 2015 was $523 million, up 10.7 percent from the fourth quarter of 2014. These results were adversely affected by shifts in currency exchange rates. On a constant currency basis, net revenue grew 12.0 percent from the fourth quarter of 2014.

Adjusted EBITDA for the fourth quarter of 2015 was $184 million, for a margin of 35.1 percent, up 11.0 percent from the fourth quarter of 2014. Net income for the fourth quarter of 2015 was $32.1 million, for a margin of 6.1 percent, down from 7.8 percent in the fourth quarter of 2014.

For the fourth quarter of 2015, cash flow from operating activities was $204 million, capital expenditures were $97 million, and Adjusted Free Cash Flow was $85 million. At the end of the fourth quarter of 2015, cash and cash equivalents were $485 million, and interest-bearing debt including capital lease obligations totaled $502 million. Return on Capital was 12.8 percent in the fourth quarter of 2015 compared to 15.7 percent in the fourth quarter of 2014.

In the fourth quarter, pursuant to the buyback authorized by the Rackspace board of directors, the company purchased $117 million worth of shares.

"We made significant progress on our strategic and financial goals in the fourth quarter, including the launch of Fanatical Support for the world's leading clouds," said Taylor Rhodes, CEO and president of Rackspace. "We saw encouraging demand for our Fanatical Support for AWS offer, signing up our first 100 customers through the end of January. We intend to be the number one managed services provider for AWS, and we are well on our way toward that goal. Second, we showed that our business is becoming less capital intensive, resulting in higher free cash flow, which we continued to share with our stockholders through our buyback program."

For the first quarter of 2016, Rackspace expects revenue to be between $517 million and $521 million. Excluding the expected negative impact of currency movements and a small divestiture, we expect our normalized year-over-year growth rate for the quarter to range between 9.2 percent and 10.2 percent. For the full year of 2016, Rackspace expects revenue to be between $2.08 billion and $2.16 billion. Excluding the expected negative impact of currency movements and a small divestiture, we expect our normalized growth rate for the year to range between 6 percent and 10 percent. Adjusted EBITDA margins are expected to range between 33 percent and 35 percent for the first quarter and the full year. Capital expenditures as a percent of revenue are expected to range between 20 percent and 22 percent for the full year.

Highlights

  • Rackspace launched support for Amazon Web Services (AWS), Microsoft's private cloud, Azure public cloud, and Microsoft Office 365. These strategic moves open up huge and fast-growing new markets, and strongly differentiate Rackspace as the only company that can provide expertise and service for the world's leading clouds.
  • Since the October launch of Rackspace Fanatical Support for AWS, Rackspace has already secured 100 customers, while its technical support team has collectively earned more than 230 AWS technical certifications and more than 1,100 business and technical accreditations.
  • Capital efficiency initiatives helped Rackspace reduce capital expenditures to 23 percent of revenue, and the company's Adjusted Free Cash Flow rose to $196 million for 2015.
  • Rackspace shared its increased Adjusted Free Cash Flow with stockholders through a major share buyback that is still underway.
  • Rackspace hired key leadership talent. The company's new global sales and marketing leader, Alex Pinchev, brings deep experience and proven success in the technology industry, including as a senior executive at Red Hat. Brian Stein, Rackspace's new head of global engineering who joined in January 2016, commands great respect in the technology industry for his innovative work at Red Hat and Puppet Labs.

Non-GAAP Financial Information

Adjusted EBITDA, constant currency revenue growth, Return on Capital, Adjusted Free Cash Flow, and Non-GAAP EPS are non-GAAP financial measures. Rackspace believes these measures provide helpful information with respect to evaluating the company's performance. Other companies may calculate non-GAAP measures differently, limiting their usefulness as a comparative measure. The financial statement tables that accompany this press release include reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures.

Conference Call and Webcast

Rackspace's executive management will host a conference call to discuss the results for the fourth quarter of 2015 starting today at 4:30 p.m. ET.

To access the conference call from the United States and Canada, please dial 800-954-0628; from the United Kingdom, dial 0800-528-4998; and from Hong Kong, dial 800-962-091.

A live webcast and a replay of the conference call, along with an earnings slide presentation, will be available on Rackspace's website, located at ir.rackspace.com.

About Rackspace

Rackspace (NYSE: RAX), the #1 managed cloud company, helps businesses tap the power of cloud computing without the challenge and expense of managing complex IT infrastructure and application platforms on their own. Rackspace engineers deliver specialized expertise on top of leading technologies developed by AWS, Microsoft, OpenStack, VMware and others, through a results-obsessed service known as Fanatical Support®. The company has more than 300,000 customers worldwide, including a majority of the FORTUNE 100. Rackspace was named a leader in the 2015 Gartner Magic Quadrant for Cloud-Enabled Managed Hosting, and has been honored as one of Fortune's Best Companies to Work For in six of the past eight years. Learn more at 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, or 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, 2014, filed with the SEC on March 2, 2015, and subsequent filings. 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)
(In millions, except per share data)   December 31,
2014
    September 30,
2015
    December 31,
2015
    December 31,
2014
    December 31,
2015
 
Net revenue   $ 472.5     $ 508.9     $ 522.8     $ 1,794.4     $ 2,001.3  
Costs and expenses:                                        
  Cost of revenue     153.9       171.2       179.1       582.3       675.5  
  Research and development     31.4       29.9       29.8       117.0       124.9  
  Sales and marketing     59.2       61.8       58.3       237.6       243.5  
  General and administrative     82.8       88.2       90.1       322.1       351.4  
  Depreciation and amortization     95.2       101.3       104.0       371.9       399.9  
    Total costs and expenses     422.5       452.4       461.3       1,630.9       1,795.2  
      Income from operations     50.0       56.5       61.5       163.5       206.1  
Other income (expense):                                        
  Interest expense     (0.4 )     (2.8 )     (6.2 )     (1.9 )     (11.3 )
  Interest and other income (expense)     (0.3 )     (1.1 )     0.5       (2.0 )     (1.2 )
    Total other income (expense)     (0.7 )     (3.9 )     (5.7 )     (3.9 )     (12.5 )
      Income before income taxes     49.3       52.6       55.8       159.6       193.6  
Income taxes     12.3       16.1       23.7       49.0       67.4  
      Net income   $ 37.0     $ 36.5     $ 32.1     $ 110.6     $ 126.2  
                                         
Net income per share                                        
  Basic   $ 0.26     $ 0.26     $ 0.24     $ 0.78     $ 0.91  
  Diluted   $ 0.26     $ 0.26     $ 0.24     $ 0.77     $ 0.90  
                                         
Weighted average number of shares outstanding                                        
  Basic     141.8       139.0       133.3       142.0       139.0  
  Diluted     144.5       140.6       134.2       144.5       141.0  
                                           
                                           

Consolidated Balance Sheets

(In millions) December 31, 2014   December 31, 2015
      (Unaudited)
ASSETS          
Current assets:          
  Cash and cash equivalents $ 213.5     $ 484.7  
  Accounts receivable, net of allowance for doubtful accounts and customer credits of $5.3 as of December 31, 2014 and $7.3 as of December 31, 2015   156.5       174.4  
  Prepaid expenses   33.6       46.6  
  Other current assets   8.8       12.7  
    Total current assets   412.4       718.4  
           
Property and equipment, net   1,057.7       1,148.0  
Goodwill   81.1       81.1  
Intangible assets, net   16.6       9.1  
Other non-current assets (1)   48.3       57.6  
      Total assets $ 1,616.1     $ 2,014.2  
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
  Accounts payable and accrued expenses $ 137.3     $ 136.3  
  Accrued compensation and benefits   66.7       57.3  
  Income and other taxes payable   11.8       12.0  
  Deferred revenue   20.9       29.6  
  Capital lease obligations   15.0       1.7  
  Debt   25.1       -  
    Total current liabilities   276.8       236.9  
           
Non-current liabilities:          
  Deferred revenue   1.4       1.6  
  Capital lease obligations (2)   1.5       0.2  
  Finance lease obligations for build-to-suit leases (2)   117.4       164.3  
  Debt   -       492.4  
  Deferred income taxes (1)   63.0       60.0  
  Deferred rent   49.9       49.5  
  Other liabilities   32.3       32.8  
    Total liabilities   542.3       1,037.7  
           
Commitments and Contingencies          
           
Stockholders' equity:          
  Common stock   0.1       0.1  
  Additional paid-in capital   696.0       834.5  
  Accumulated other comprehensive loss   (20.7 )     (36.2 )
  Retained earnings   398.4       178.1  
    Total stockholders' equity   1,073.8       976.5  
      Total liabilities and stockholders' equity $ 1,616.1     $ 2,014.2  
                     
(1) December 31, 2014 amounts have been revised to reflect the impact of the adoption of accounting guidance related to balance sheet classification of deferred taxes to conform to the current period presentation.
(2) December 31, 2014 amounts have been revised to reflect the impact of a reclassification of certain finance obligations associated with build-to-suit leases to conform to the current period presentation.
   
   

Consolidated Statements of Cash Flows

  Three Months Ended   Year Ended
  (Unaudited)       (Unaudited)
(in millions) December 31,
2014
  September 30,
2015
  December 31,
2015
  December 31,
2014
  December 31,
2015
Cash Flows From Operating Activities                            
  Net income $ 37.0     $ 36.5     $ 32.1     $ 110.6     $ 126.2  
  Adjustments to reconcile net income to net cash provided by operating activities:                            
    Depreciation and amortization   95.2       101.3       104.0       371.9       399.9  
    Deferred income taxes   30.5       (5.0 )     30.1       0.4       (4.0 )
    Share-based compensation expense   20.2       19.6       18.1       70.0       78.1  
    Excess tax benefits from share-based compensation arrangements   10.8       (12.7 )     2.9       (34.5 )     (48.6 )
    Other operating activities   2.4       2.1       2.7       8.2       9.8  
    Changes in operating assets and liabilities:                            
    Accounts receivable   (26.0 )     (18.0 )     (2.0 )     (41.7 )     (28.3 )
    Prepaid expenses and other current assets   16.1       (17.8 )     7.9       (1.1 )     (17.2 )
      Accounts payable, accrued expenses, and other current liabilities   (38.5 )     2.8       3.5       55.4       49.2  
      Deferred revenue   1.3       2.5       (0.4 )     (3.7 )     9.1  
      Deferred rent   1.1       -       0.1       7.4       0.1  
      Other non-current assets and liabilities   0.8       0.1       5.0       (0.4 )     9.3  
        Net cash provided by operating activities   150.9       111.4       204.0       542.5       583.6  
Cash Flows From Investing Activities                            
  Purchases of property and equipment   (107.2 )     (134.7 )     (143.0 )     (430.3 )     (474.9 )
  All other investing activities   0.3       (6.0 )     0.1       2.2       (4.5 )
        Net cash used in investing activities   (106.9 )     (140.7 )     (142.9 )     (428.1 )     (479.4 )
Cash Flows From Financing Activities                            
  Proceeds from debt   25.0       140.0       500.0       25.0       640.0  
  Repayments of debt   (0.1 )     -       (140.0 )     (1.9 )     (165.1 )
  Payments for debt issuance costs   -       -       (8.3 )     -       (8.3 )
  Proceeds from finance lease obligations for build-to-suit leases   -       2.5       3.7       -       6.2  
  Principal payments of capital and build-to-suit leases   (7.2 )     (3.3 )     (1.7 )     (39.7 )     (15.0 )
  Payments for deferred acquisition obligations   -       (0.1 )     -       (0.2 )     (0.2 )
  Receipt of Texas Enterprise Fund grant   -       -       -       5.5       -  
  Repurchase of common stock   (200.0 )     (250.1 )     (116.9 )     (200.0 )     (367.0 )
  Shares of common stock withheld for employee taxes   -       -       -       (13.6 )     -  
  Proceeds from employee stock plans   15.1       0.7       3.1       33.1       32.3  
  Excess tax benefits from share-based compensation arrangements   (10.8 )     12.7       (2.9 )     34.5       48.6  
        Net cash provided by (used in) financing activities   (178.0 )     (97.6 )     237.0       (157.3 )     171.5  
        Effect of exchange rate changes on cash and cash equivalents   (2.0 )     (1.2 )     (2.4 )     (3.3 )     (4.5 )
          Increase (decrease) in cash and cash equivalents   (136.0 )     (128.1 )     295.7       (46.2 )     271.2  
          Cash and cash equivalents, beginning of period   349.5       317.1       189.0       259.7       213.5  
          Cash and cash equivalents, end of period $ 213.5     $ 189.0     $ 484.7     $ 213.5     $ 484.7  
Supplemental Cash Flow Information                            
  Non-cash purchases of property and equipment (1) $ (2.6 )   $ (7.0 )   $ (46.5 )   $ 4.8     $ (8.9 )
                                         
(1) Non-cash purchases of property and equipment primarily represents changes in amounts accrued but not yet paid.
   
   
Key Metrics - Quarter to Date
(Unaudited)
 
    Three Months Ended  
(Dollar amounts in millions, except average monthly revenue per server)   December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
 
Growth                                        
  Net revenue   $ 472.5     $ 480.2     $ 489.4     $ 508.9     $ 522.8  
  Revenue growth (year over year)     15.8 %     14.1 %     11.0 %     10.7 %     10.7 %
  Constant currency revenue growth (year over year)     16.4 %     16.6 %     13.7 %     12.9 %     12.0 %
                                         
  Number of employees (Rackers) at period end     5,936       5,964       6,115       6,177       6,189  
  Number of servers deployed at period end (1)     112,628       114,105       116,329       118,654       118,177  
  Average monthly revenue per server   $ 1,412     $ 1,412     $ 1,416     $ 1,444     $ 1,472  
                                         
Profitability                                        
  Income from operations   $ 50.0     $ 44.4     $ 43.7     $ 56.5     $ 61.5  
  Depreciation and amortization   $ 95.2     $ 96.9     $ 97.7     $ 101.3     $ 104.0  
  Share-based compensation expense   $ 20.2     $ 20.0     $ 20.4     $ 19.6     $ 18.1  
        Adjusted EBITDA (2)   $ 165.4     $ 161.3     $ 161.8     $ 177.4     $ 183.6  
                                         
        Adjusted EBITDA margin     35.0 %     33.6 %     33.1 %     34.9 %     35.1 %
                                         
        Operating income margin     10.6 %     9.3 %     8.9 %     11.1 %     11.8 %
                                         
  Income from operations   $ 50.0     $ 44.4     $ 43.7     $ 56.5     $ 61.5  
  Adjustment for build-to-suit lease impact (3)   $ -     $ -     $ (0.4 )   $ (1.1 )   $ (2.3 )
    Income from operations, adjusted   $ 50.0     $ 44.4     $ 43.3     $ 55.4     $ 59.2  
    Effective tax rate     25.1 %     32.4 %     32.4 %     30.6 %     42.5 %
      Net operating profit after tax (NOPAT) (2)   $ 37.5     $ 30.0     $ 29.3     $ 38.4     $ 34.0  
      NOPAT margin     7.9 %     6.3 %     6.0 %     7.6 %     6.5 %
                                         
Capital efficiency and returns                                        
  Interest bearing debt (4) (5)   $ 41.6     $ 10.8     $ 6.9     $ 143.6     $ 501.9  
  Stockholders' equity   $ 1,073.8     $ 1,152.9     $ 1,240.3     $ 1,049.4     $ 976.5  
  Less: Excess cash   $ (156.8 )   $ (218.1 )   $ (258.4 )   $ (128.0 )   $ (422.0 )
    Capital base (4)   $ 958.6     $ 945.6     $ 988.8     $ 1,065.0     $ 1,056.4  
    Average capital base (4)   $ 956.0     $ 952.1     $ 967.2     $ 1,027.0     $ 1,060.7  
      Capital turnover (annualized) (4)     1.98       2.02       2.02       1.98       1.97  
                                         
      Return on capital (annualized) (2) (4)     15.7 %     12.6 %     12.1 %     15.0 %     12.8 %
                                         
Capital expenditures                                        
  Cash purchases of property and equipment   $ 107.2     $ 92.5     $ 104.7     $ 134.7     $ 143.0  
  Non-cash purchases of property and equipment (6)   $ (2.6 )   $ (2.3 )   $ 46.9     $ (7.0 )   $ (46.5 )
    Total capital expenditures   $ 104.6     $ 90.2     $ 151.6     $ 127.7     $ 96.5  
                                         
  Customer gear   $ 72.5     $ 58.7     $ 117.3     $ 87.1     $ 61.8  
  Data center build outs   $ 11.1     $ 13.4     $ 15.8     $ 18.8     $ 10.6  
  Office build outs   $ 1.6     $ 2.3     $ 3.3     $ 6.1     $ 7.8  
  Capitalized software and other projects   $ 19.4     $ 15.8     $ 15.2     $ 15.7     $ 16.3  
    Total capital expenditures   $ 104.6     $ 90.2     $ 151.6     $ 127.7     $ 96.5  
                                         
Infrastructure capacity and utilization                                        
  Megawatts under contract at period end (7)     58.1       63.2       63.6       63.6       62.2  
  Megawatts available for customer use at period end (8)     49.7       52.0       54.1       55.3       54.4  
  Megawatts utilized at period end     30.5       31.0       31.6       32.7       32.2  
  Annualized net revenue per average Megawatt of power utilized   $ 62.6     $ 62.5     $ 62.5     $ 63.3     $ 64.5  
                                           
(1) During the fourth quarter of 2015, we decommissioned approximately 2,400 servers in order to replace older, less efficient gear and also as part of the migration of customers from existing data centers to our new London data center.
(2) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.
(3) Reflects additional expense we would have expected to record if our build-to-suit lease arrangements had been deemed operating leases instead of finance lease obligations for build-to-suit leases. Calculated as the excess of estimated straight-line rent expense over actual depreciation expense for completed real estate projects under build-to-suit lease arrangements.
(4) In the first quarter of 2015, we reclassified certain finance obligations associated with build-to-suit leases in the consolidated balance sheets. Prior period amounts have been revised to reflect the impact of this reclassification.
(5) Includes the outstanding principal amount of debt and capital lease obligations.
(6) Non-cash purchases of property and equipment primarily represents changes in amounts accrued but not yet paid.
(7) Megawatts under contract at period end represents data center capacity for which we have a contract enabling us to take control of the space. For our newest data center in London, beginning March 31, 2015, we have included four megawatts.
(8) Megawatts available for customer use at period end represents data center capacity that is built-out and is being used to provide service to customers.
   
   
Key Metrics - Year to Date
(Unaudited)
 
  Year Ended December 31,  
(Dollar amounts in millions, except average monthly revenue per server) 2014     2015  
Growth              
  Net revenue $ 1,794.4     $ 2,001.3  
  Revenue growth (year over year)   16.9 %     11.5 %
  Constant currency revenue growth (year over year)   15.5 %     13.7 %
               
  Number of employees (Rackers) at period end   5,936       6,189  
  Number of servers deployed at period end   112,628       118,177  
  Average monthly revenue per server $ 1,382     $ 1,438  
               
Profitability              
  Income from operations $ 163.5     $ 206.1  
  Depreciation and amortization $ 371.9     $ 399.9  
  Share-based compensation expense $ 70.0     $ 78.1  
        Adjusted EBITDA (1) $ 605.4     $ 684.1  
               
        Adjusted EBITDA margin   33.7 %     34.2 %
               
        Operating income margin   9.1 %     10.3 %
               
  Income from operations $ 163.5     $ 206.1  
  Adjustment for build-to-suit lease impact (2) $ -     $ (3.8 )
    Income from operations, adjusted $ 163.5     $ 202.3  
    Effective tax rate   30.7 %     34.8 %
      Net operating profit after tax (NOPAT) (1) $ 113.3     $ 131.9  
      NOPAT margin   6.3 %     6.6 %
               
Capital efficiency and returns              
  Interest bearing debt (3) (4) $ 41.6     $ 501.9  
  Stockholders' equity $ 1,073.8     $ 976.5  
  Less: Excess cash $ (156.8 )   $ (422.0 )
    Capital base (3) $ 958.6     $ 1,056.4  
    Average capital base (3) $ 923.1     $ 1,002.9  
      Capital turnover (3)   1.94       2.00  
               
      Return on capital (1) (3)   12.3 %     13.2 %
               
Capital expenditures              
  Cash purchases of property and equipment $ 430.3     $ 474.9  
  Non-cash purchases of property and equipment (5) $ 4.8     $ (8.9 )
  Total capital expenditures $ 435.1     $ 466.0  
               
  Customer gear $ 276.6     $ 324.9  
  Data center build outs $ 50.6     $ 58.6  
  Office build outs $ 21.2     $ 19.5  
  Capitalized software and other projects $ 86.7     $ 63.0  
    Total capital expenditures $ 435.1     $ 466.0  
               
Infrastructure capacity and utilization              
  Megawatts under contract at period end (6)   58.1       62.2  
  Megawatts available for customer use at period end (7)   49.7       54.4  
  Megawatts utilized at period end   30.5       32.2  
  Net revenue per average Megawatt of power utilized $ 61.9     $ 63.3  
                 
(1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.
(2) Reflects additional expense we would have expected to record if our build-to-suit lease arrangements had been deemed operating leases instead of finance lease obligations for build-to-suit leases. Calculated as the excess of estimated straight-line rent expense over actual depreciation expense for completed real estate projects under build-to-suit lease arrangements.
(3) In the first quarter of 2015, we reclassified certain finance obligations associated with build-to-suit leases in the consolidated balance sheets. Prior period amounts have been revised to reflect the impact of this reclassification.
(4)  Includes the outstanding principal amount of debt and capital lease obligations. 
(5) Non-cash purchases of property and equipment primarily represents changes in amounts accrued but not yet paid.
(6) Megawatts under contract at period end represents data center capacity for which we have a contract enabling us to take control of the space. For our newest data center in London, beginning March 31, 2015, we have included four megawatts.
(7) Megawatts available for customer use at period end represents data center capacity that is built-out and is being used to provide service to customers.
   
   

Consolidated Quarterly Statements of Income
(Unaudited)

   
  Three Months Ended
(In millions) December 31,
2014
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
Net revenue $ 472.5     $ 480.2     $ 489.4     $ 508.9     $ 522.8  
Costs and expenses:                            
  Cost of revenue   153.9       161.3       163.9       171.2       179.1  
  Research and development   31.4       32.0       33.2       29.9       29.8  
  Sales and marketing   59.2       59.0       64.4       61.8       58.3  
  General and administrative   82.8       86.6       86.5       88.2       90.1  
  Depreciation and amortization   95.2       96.9       97.7       101.3       104.0  
    Total costs and expenses   422.5       435.8       445.7       452.4       461.3  
      Income from operations   50.0       44.4       43.7       56.5       61.5  
Other income (expense):                            
  Interest expense   (0.4 )     (0.4 )     (1.9 )     (2.8 )     (6.2 )
  Interest and other income (expense)   (0.3 )     (2.0 )     1.4       (1.1 )     0.5  
    Total other income (expense)   (0.7 )     (2.4 )     (0.5 )     (3.9 )     (5.7 )
      Income before income taxes   49.3       42.0       43.2       52.6       55.8  
Income taxes   12.3       13.6       14.0       16.1       23.7  
      Net income $ 37.0     $ 28.4     $ 29.2     $ 36.5     $ 32.1  
                             
  Three Months Ended
(Percent of net revenue) December 31,
2014
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
Net revenue   100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Costs and expenses:                            
  Cost of revenue   32.6 %     33.6 %     33.5 %     33.7 %     34.3 %
  Research and development   6.6 %     6.7 %     6.8 %     5.9 %     5.7 %
  Sales and marketing   12.5 %     12.3 %     13.2 %     12.1 %     11.2 %
  General and administrative   17.5 %     18.0 %     17.7 %     17.3 %     17.2 %
  Depreciation and amortization   20.2 %     20.2 %     20.0 %     19.9 %     19.9 %
    Total costs and expenses   89.4 %     90.7 %     91.1 %     88.9 %     88.2 %
      Income from operations   10.6 %     9.3 %     8.9 %     11.1 %     11.8 %
Other income (expense):                            
  Interest expense   (0.1 )%     (0.1 )%     (0.4 )%     (0.5 )%     (1.2 )%
  Interest and other income (expense)   (0.1 )%     (0.4 )%     0.3 %     (0.2 )%     0.1 %
    Total other income (expense)   (0.1 )%     (0.5 )%     (0.1 )%     (0.8 )%     (1.1 )%
      Income before income taxes   10.4 %     8.8 %     8.8 %     10.3 %     10.7 %
Income taxes   2.6 %     2.8 %     2.9 %     3.2 %     4.5 %
      Net income   7.8 %     5.9 %     6.0 %     7.2 %     6.1 %
Due to rounding, totals may not equal the sum of the line items in the table above.

Non-GAAP Financial Measures

Adjusted EBITDA

We use Adjusted EBITDA as a supplemental measure to review and assess our performance. Adjusted EBITDA is a metric that is used by analysts and investors for comparative and valuation purposes. We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.

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. The following tables present a reconciliation of Adjusted EBITDA to net income.

   
  Three Months Ended
(In millions) December 31,
2014
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
Net revenue $ 472.5     $ 480.2     $ 489.4     $ 508.9     $ 522.8  
                             
Income from operations $ 50.0     $ 44.4     $ 43.7     $ 56.5     $ 61.5  
                             
Net income $ 37.0     $ 28.4     $ 29.2     $ 36.5     $ 32.1  
  Plus: Income taxes   12.3       13.6       14.0       16.1       23.7  
  Plus: Total other (income) expense   0.7       2.4       0.5       3.9       5.7  
  Plus: Depreciation and amortization   95.2       96.9       97.7       101.3       104.0  
  Plus: Share-based compensation expense   20.2       20.0       20.4       19.6       18.1  
Adjusted EBITDA $ 165.4     $ 161.3     $ 161.8     $ 177.4     $ 183.6  
                             
Operating income margin   10.6 %     9.3 %     8.9 %     11.1 %     11.8 %
                             
Adjusted EBITDA margin   35.0 %     33.6 %     33.1 %     34.9 %     35.1 %
                                       
                                       
  Year Ended December 31,      
(In millions) 2014   2015      
Net revenue $ 1,794.4     $ 2,001.3        
                 
Income from operations $ 163.5     $ 206.1        
                 
Net income $ 110.6     $ 126.2        
  Plus: Income taxes   49.0       67.4        
  Plus: Total other (income) expense   3.9       12.5        
  Plus: Depreciation and amortization   371.9       399.9        
  Plus: Share-based compensation expense   70.0       78.1        
Adjusted EBITDA $ 605.4     $ 684.1        
                 
Operating income margin   9.1 %     10.3 %      
                 
Adjusted EBITDA margin   33.7 %     34.2 %      
                     
                     

Constant Currency Revenue Growth

We use constant currency revenue growth as an additional metric for understanding and assessing our growth excluding the effect of foreign currency rate fluctuations on our international business operations. We also believe this is an important metric to help investors evaluate our performance in comparison to prior periods. The information presented is calculated by translating current period results using the average exchange rate from the comparative period rather than the actual exchange rates in effect during the respective period. The following table presents a reconciliation of constant currency revenue growth.

       
  Three Months Ended   Year Ended
(In millions) Net Revenue   Foreign Currency Translation   Net Revenue in Constant Currency   Net Revenue   Foreign Currency Translation   Net Revenue in Constant Currency
December 31, 2015 $ 522.8     $ 6.3   $ 529.1     $ 2,001.3     $ 39.1     $ 2,040.4  
December 31, 2014   472.5       -     472.5       1,794.4       -       1,794.4  
Dollar change $ 50.3           $ 56.6     $ 206.9           $ 246.0  
Percent change   10.7 %           12.0 %     11.5 %           13.7 %
                                   
September 30, 2015 $ 508.9     $ 10.2   $ 519.1                    
September 30, 2014   459.7       -     459.7                    
Dollar change $ 49.2           $ 59.4                    
Percent change   10.7 %           12.9 %                  
                                   
June 30, 2015 $ 489.4     $ 12.1   $ 501.5                    
June 30, 2014   441.2       -     441.2                    
Dollar change $ 48.2           $ 60.3                    
Percent change   11.0 %           13.7 %                  
                                   
March 31, 2015 $ 480.2     $ 10.9   $ 491.1                    
March 31, 2014   421.0       -     421.0                    
Dollar change $ 59.2           $ 70.1                    
Percent change   14.1 %           16.6 %                  
                                   
December 31, 2014 $ 472.5     $ 2.6   $ 475.1     $ 1,794.4     $ (22.4 )   $ 1,772.0  
December 31, 2013   408.1       -     408.1       1,534.8       -       1,534.8  
Dollar change $ 64.4           $ 67.0     $ 259.6           $ 237.2  
Percent change   15.8 %           16.4 %     16.9 %           15.5 %
                                           
                                           

Return on Capital (ROC)

We believe that ROC is an important metric for investors in evaluating our company's performance. ROC measures how effectively a company generates profits from the capital that is deployed. We calculate ROC by dividing net operating profit after tax by our average capital base. The following tables present a reconciliation of ROC to return on assets, which we calculate directly from amounts on the Consolidated Statements of Income and the Consolidated Balance Sheets.

   
  Three Months Ended
(In millions) December 31,
2014
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
Income from operations $ 50.0     $ 44.4     $ 43.7     $ 56.5     $ 61.5  
Adjustment for build-to-suit lease impact (1)   -       -       (0.4 )     (1.1 )     (2.3 )
  Income from operations, adjusted $ 50.0     $ 44.4     $ 43.3     $ 55.4     $ 59.2  
  Effective tax rate   25.1 %     32.4 %     32.4 %     30.6 %     42.5 %
    Net operating profit after tax (NOPAT) $ 37.5     $ 30.0     $ 29.3     $ 38.4     $ 34.0  
                             
Net income $ 37.0     $ 28.4     $ 29.2     $ 36.5     $ 32.1  
                             
Total assets at period end (2) $ 1,616.1     $ 1,685.4     $ 1,826.6     $ 1,749.2     $ 2,014.2  
  Add: Unamortized debt issuance costs (3)            -        -        -        7.6  
  Less: Excess cash (4)   (156.8 )     (218.1 )     (258.4 )     (128.0 )     (422.0 )
  Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable   (215.8 )     (214.8 )     (256.4 )     (236.9 )     (205.6 )
  Less: Deferred revenue (current and non-current)   (22.3 )     (26.1 )     (29.7 )     (31.8 )     (31.2 )
  Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for build-to-suit leases (2) (5)   (262.6 )     (280.8 )     (293.3 )     (287.5 )     (306.6 )
    Capital base (5) $ 958.6     $ 945.6     $ 988.8     $ 1,065.0     $ 1,056.4  
                             
    Average total assets (2) $ 1,665.5     $ 1,650.7     $ 1,756.0     $ 1,787.9     $ 1,881.7  
    Average capital base (5) $ 956.0     $ 952.1     $ 967.2     $ 1,027.0     $ 1,060.7  
                             
    Return on assets (annualized) (2)   8.9 %     6.9 %     6.6 %     8.2 %     6.8 %
    Return on capital (annualized) (5)   15.7 %     12.6 %     12.1 %     15.0 %     12.8 %
                                           
(1) Reflects additional expense we would have expected to record if our build-to-suit lease arrangements had been deemed operating leases instead of finance lease obligations for build-to-suit leases. Calculated as the excess of estimated straight-line rent expense over actual depreciation expense for completed real estate projects under build-to-suit lease arrangements.
(2) In the fourth quarter of 2015, we elected to early adopt accounting guidance related to the balance sheet classification of deferred taxes. Prior period amounts have been revised to reflect the impact of this adoption.
(3)  Amount recorded as a direct deduction from the carrying value of the long-term debt liability in the consolidated balance sheets. 
(4) Defined 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.
(5) In the first quarter of 2015, we reclassified certain finance obligations associated with build-to-suit leases in the consolidated balance sheets. Prior period amounts have been revised to reflect the impact of this reclassification.
   
   
  Year Ended December 31,
(In millions) 2014   2015
Income from operations $ 163.5     $ 206.1  
Adjustment for build-to-suit lease impact (1)   -       (3.8 )
  Income from operations, adjusted $ 163.5     $ 202.3  
  Effective tax rate   30.7 %     34.8 %
    Net operating profit after tax (NOPAT) $ 113.3     $ 131.9  
           
Net income $ 110.6     $ 126.2  
           
Total assets at period end (2) $ 1,616.1     $ 2,014.2  
  Add: Unamortized debt issuance costs (3)    -        7.6  
  Less: Excess cash (4)   (156.8 )     (422.0 )
  Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable   (215.8 )     (205.6 )
  Less: Deferred revenue (current and non-current)   (22.3 )     (31.2 )
  Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for build-to-suit leases (2) (5)   (262.6 )     (306.6 )
    Capital base (5) $ 958.6     $ 1,056.4  
           
    Average total assets (2) (6) $ 1,601.4     $ 1,778.3  
    Average capital base (5) (6) $ 923.1     $ 1,002.9  
           
    Return on assets (Net income/Average total assets) (2)   6.9 %     7.1 %
    Return on capital (NOPAT/Average capital base) (5)   12.3 %     13.2 %
                   
(1) Reflects additional expense we would have expected to record if our build-to-suit lease arrangements had been deemed operating leases instead of finance lease obligations for build-to-suit leases. Calculated as the excess of estimated straight-line rent expense over actual depreciation expense for completed real estate projects under build-to-suit lease arrangements.
(2) In the fourth quarter of 2015, we elected to early adopt accounting guidance related to the balance sheet classification of deferred taxes. Prior period amounts have been revised to reflect the impact of this adoption.
(3)  Amount recorded as a direct deduction from the carrying value of the long-term debt liability in the consolidated balance sheets. 
(4) Defined 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.
(5) In the first quarter of 2015, we reclassified certain finance obligations associated with build-to-suit leases in the consolidated balance sheets. Prior period amounts have been revised to reflect the impact of this reclassification.
(6) Average based on ending balances for the most recent five quarters.
   
   

Adjusted Free Cash Flow

We believe that Adjusted Free Cash Flow is a performance metric used by investors to evaluate the strength and performance of a company's ongoing business. We define Adjusted Free Cash Flow as Adjusted EBITDA plus non-cash deferred rent, less total capital expenditures (including non-cash purchases of property and equipment), cash payments for interest and cash payments for income taxes. The following table presents a reconciliation of Adjusted Free Cash Flow to Adjusted EBITDA as a supplement to our reconciliation of Adjusted EBITDA to net income provided above.

         
    Three Months Ended   Year Ended
(In millions)   December 31,
2014
  December 31,
2015
  December 31,
2014
  December 31,
2015
Adjusted EBITDA   $ 165.4     $ 183.6     $ 605.4     $ 684.1  
  Non-cash deferred rent     1.1       0.1       7.4       0.1  
  Total capital expenditures     (104.6 )     (96.5 )     (435.1 )     (466.0 )
  Cash payments for interest, net of interest received     (0.4 )     (1.9 )     (1.7 )     (4.0 )
  Cash payments for income taxes, net of refunds     (6.7 )     (0.8 )     (13.5 )     (17.8 )
    Adjusted free cash flow   $ 54.8     $ 84.5     $ 162.5     $ 196.4  
                                     
                                     

Non-GAAP EPS

Non-GAAP Net Income and Non-GAAP EPS are used as supplemental measures to facilitate comparisons to peer companies. Non-GAAP Net Income is defined as net income excluding non-cash charges for share-based compensation and other items that may arise from time to time, net of the related tax benefits. Non-GAAP EPS is calculated using Non-GAAP Net Income divided by the weighted-average number of shares on both an unadjusted basis and as adjusted to give effect to dilutive securities. The following table presents a reconciliation of these non-GAAP financial measures.

   
  Three months ended
(In millions, except per share data) December 31,
2014
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
Net income $ 37.0     $ 28.4     $ 29.2     $ 36.5     $ 32.1  
                             
Adjustment:                            
  Share-based compensation expense   20.2       20.0       20.4       19.6       18.1  
  Income tax benefit (1)   (5.0 )     (6.5 )     (6.6 )     (5.9 )     (8.2 )
Total share-based compensation expense, net of tax   15.2       13.5       13.8       13.7       9.9  
                             
Non-GAAP net income $ 52.2     $ 41.9     $ 43.0     $ 50.2     $ 42.0  
                             
Net income per share ("GAAP EPS")                            
  Basic $ 0.26     $ 0.20     $ 0.20     $ 0.26     $ 0.24  
  Diluted $ 0.26     $ 0.20     $ 0.20     $ 0.26     $ 0.24  
                             
Non-GAAP net income per share ("Non-GAAP EPS")                            
  Basic $ 0.37     $ 0.30     $ 0.30     $ 0.36     $ 0.32  
  Diluted $ 0.36     $ 0.29     $ 0.30     $ 0.36     $ 0.31  
                             
Weighted average number of shares outstanding                            
  Basic   141.8       141.4       142.4       139.0       133.3  
  Diluted   144.5       144.2       144.5       140.6       134.2  
                                         
                                         
(1) Based on the GAAP effective tax rate for the period.
   
   
  Year Ended
(In millions, except per share data) December 31,
2014
  December 31,
2015
Net income $ 110.6     $ 126.2  
           
Adjustment:          
  Share-based compensation expense   70.0       78.1  
  Income tax benefit (1)   (21.5 )     (27.2 )
Total share-based compensation expense, net of tax   48.5       50.9  
           
Non-GAAP net income $ 159.1     $ 177.1  
           
Net income per share ("GAAP EPS")          
  Basic $ 0.78     $ 0.91  
  Diluted $ 0.77     $ 0.90  
           
Non-GAAP net income per share ("Non-GAAP EPS")          
  Basic $ 1.12     $ 1.27  
  Diluted $ 1.10     $ 1.26  
           
Weighted average number of shares outstanding          
  Basic   142.0       139.0  
  Diluted   144.5       141.0  
   
(1) Based on the GAAP effective tax rate for the period.
   

Contacts:

Investor Relations:
Jessica Drought
210-312-4191
jessica.drought@rackspace.com

Media Relations:
Brandon Brunson
210-312-1357
brandon.brunson@rackspace.com

Source: Rackspace Hosting