0001107694-12-000006.txt : 20120213 0001107694-12-000006.hdr.sgml : 20120213 20120213163228 ACCESSION NUMBER: 0001107694-12-000006 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20120213 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20120213 DATE AS OF CHANGE: 20120213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RACKSPACE HOSTING, INC. CENTRAL INDEX KEY: 0001107694 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 743016523 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-34143 FILM NUMBER: 12599561 BUSINESS ADDRESS: STREET 1: 5000 WALZEM RD. CITY: SAN ANTONIO STATE: TX ZIP: 78218 BUSINESS PHONE: 2103124000 MAIL ADDRESS: STREET 1: 5000 WALZEM RD. CITY: SAN ANTONIO STATE: TX ZIP: 78218 FORMER COMPANY: FORMER CONFORMED NAME: RACKSPACE INC DATE OF NAME CHANGE: 20080403 FORMER COMPANY: FORMER CONFORMED NAME: RACKSPACE MANAGED HOSTING INC DATE OF NAME CHANGE: 20000725 FORMER COMPANY: FORMER CONFORMED NAME: RACKSPACE COM INC DATE OF NAME CHANGE: 20000224 8-K 1 rax8k_q42011.htm RESULTS OF OPERATIONS AND FINANCIAL CONDITION rax8k_Q4.2011



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 8-K

Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 13, 2012

Rackspace Hosting, Inc.
(Exact name of registrant as specified in its charter)

Commission File Number: 001-34143

Delaware
 
74-3016523
(State or other jurisdiction of
 
(IRS Employer
incorporation)
 
Identification No.)

5000 Walzem Rd.
San Antonio, Texas 78218
(Address of principal executive offices, including zip code)

(210) 312-4000
(Registrant’s telephone number, including area code)


(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




Item 2.02. Results of Operation and Financial Condition

The information in Item 2.02 of this Current Report is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in Item 2.02 of this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

On February 13, 2012, Rackspace Hosting, Inc. issued a press release announcing its financial results for the fourth quarter of 2011 and the year ended December 31, 2011. A copy of the press release is attached as Exhibit 99.1. Rackspace Hosting, Inc. released certain non-GAAP information in the press release, and attached to the press release is a reconciliation to the non-GAAP information.

On February 13, 2012, in connection with the issuance of the press release, Rackspace Hosting, Inc. will hold a conference call to discuss the press release.

Item 9.01. Financial Statements and Exhibits

(d) Exhibits.

99.1 Press Release of Rackspace Hosting, Inc., dated February 13, 2012, reporting financial results for the fourth quarter of 2011 and year ended December 31, 2011.


- 2 -



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 
Rackspace Hosting, Inc.
 
 
 
 
Date:
February 13, 2012
By:
/s/ Karl Pichler
 
 
 
Karl Pichler
 
 
 
Chief Financial Officer and Treasurer


- 3 -



EXHIBIT INDEX
Exhibit No.
 
Description
EX-99.1
 
Press Release of Rackspace Hosting, Inc., dated February 13, 2012, reporting financial results for the fourth quarter of 2011 and the year ended December 31, 2011.


- 4 -
 EX-99.1 2 rax991_q42011.htm FINANCIAL STATEMENTS AND EXHIBITS rax99.1_Q4 2011


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 - February 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 the 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.

- 1 -


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.

Contact:

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


- 2 -


Consolidated Statements of Income

 
 
Three Months Ended
 
Year Ended
 
 
(Unaudited)
 
 
 
(Unaudited)
(In thousands, except per share data)
 
December 31,
2010
 
September 30,
2011
 
December 31,
2011
 
December 31,
2010
 
December 31,
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



- 3 -


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



- 4 -


Consolidated Statements of Cash Flows
 
Three Months Ended
 
Year Ended
 
(Unaudited)
 
 
 
(Unaudited)
(in thousands)
December 31,
2010
 
September 30,
2011
 
December 31,
2011
 
December 31,
2010
 
December 31,
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


- 5 -


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
 %
 
 
 
 
 
 
 
 
 
 

- 6 -


 
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
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 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 Key Metrics table.

 
 
Three Months Ended
(Dollar amounts in thousands)
 
December 31,
2010
 
March 31,
2011
 
June 30,
2011
 
September 30,
2011
 
December 31,
2011
Megawatts under contract
 
32.7

 
35.7

 
38.0

 
41.9

 
48.1

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



- 7 -


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
 %
 
 
 
 

- 8 -


 
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
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



- 9 -


Consolidated Quarterly Statements of Income
(Unaudited)
 
Three Months Ended
(In thousands)
December 31,
2010
 
March 31,
2011
 
June 30,
2011
 
September 30,
2011
 
December 31,
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
(Percent of net revenue)
December 31,
2010
 
March 31,
2011
 
June 30,
2011
 
September 30,
2011
 
December 31,
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.




- 10 -


(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)
(Dollars in thousands)
December 31,
2010
 
March 31,
2011
 
June 30,
2011
 
September 30,
2011
 
December 31,
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
%

- 11 -


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)
(Dollars in thousands)
December 31,
2010
 
March 31,
2011
 
June 30,
2011
 
September 30,
2011
 
December 31,
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
%

- 12 -


 
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
)


- 13 -


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


- 14 -