10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011.

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission file number 001-34143

RACKSPACE HOSTING, INC.

(Exact Name of registrant as specified in its charter)

Delaware	74-3016523
(State or other jurisdiction of incorporation or organization)	(IRS Employer 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange of which registered
Common Stock, par value $0.001 per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o    No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o    No R

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   R    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   R    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer," "accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer R Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No R

As of June 30, 2011, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the New York Stock Exchange on June 30, 2011) was $3,274,366,449.

On February 14, 2012, 131,960,849 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2012 Annual Meeting of Stockholders to be filed within 120 days of the Registrant's fiscal year ended December 31, 2011 are incorporated by reference into Part III of this Form 10-K.

RACKSPACE HOSTING, INC.

TABLE OF CONTENTS

PART I		Page
Item 1.	Business	4
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	26
Item 4.	Reserved	26
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	29
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 8.	Financial Statements and Supplementary Data	56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	89
Item 9A.	Controls and Procedures	89
Item 9B.	Other Information	89
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	90
Item 11.	Executive Compensation	90
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	90
Item 13.	Certain Relationships and Related Transactions, and Director Independence	90
Item 14.	Principal Accountant Fees and Services	90
PART IV
Item 15.	Exhibits and Financial Statement Schedules	93
SIGNATURES

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this Annual Report on Form 10-K that are subject to risks and uncertainties. Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are subject to the “safe harbor” created by those sections. The forward-looking statements in this report are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “aspires,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will” or “would” or the negative of these terms and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this document in greater detail under the heading “Risk Factors.” We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in “Risk Factors” included in this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of the events described in “Risk Factors” and elsewhere in this report could harm our business.

Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this document completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume 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.

TRADEMARKS AND SERVICE MARKS

Rackspace^® and Fanatical Support^® are our registered service marks. Net Promoter^® is a registered trademark of Bain & Company, Fred Reichheld and Satmetrix Systems, Inc.; NPS is a service mark of Bain & Company, Inc. EVA^® is a registered trademark of Stern Stewart & Co. and EVAdimensions. Other trademarks and tradenames appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ tradenames, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

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PART I

ITEM 1 - BUSINESS

References to “we,” “our,” “our company,” “us,” “the company,” “Rackspace Hosting,” or “Rackspace” refer to Rackspace Hosting, Inc. and its consolidated subsidiaries. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the related Notes for additional information regarding the business and our operating results.

Overview

Rackspace is the service leader in cloud computing, an industry best described as delivering computing, storage, and applications as a service over the Internet. We and other cloud computing companies free our business customers from much of the expense and hassle of owning and managing their own computer hardware and software. What distinguishes Rackspace from its competitors is our unique blend of user-friendly technology and high-touch human support, which makes cloud computing simple for businesses of all sizes. Our rapid growth over the last 13 years has been fueled by our commitment to provide customers with a unique customer experience known as Fanatical Support^®.

We were incorporated in Delaware on March 7, 2000 under the name Rackspace.com, Inc., but our operations began in 1998 as a limited partnership, which became our subsidiary through a corporate reorganization completed on August 21, 2001. Our principal executive offices are located at 5000 Walzem Rd., San Antonio, Texas 78218. Our telephone number is (210) 312-4000. Our website address is www.rackspace.com.

Our mission is to be recognized as one of the world’s great service companies.

Our Industry

The cloud computing industry is a fast-growing and crowded industry, and Rackspace has earned a well-defined leadership role within it. We are a cloud computing specialist and the industry's service leader. Our employees, who are called Rackers, are focused on providing cloud computing services for our business customers.

Unlike some of our rivals who essentially rent access to computer hardware and software, Rackspace specializes in offering a set of support and managed services on top of raw computing services. Our approach positions Rackspace as a mission-critical extension of our business customers' IT departments.

Today, there are three ways that businesses can fulfill their IT requirements:

1. The first approach is commonly referred to as “do it yourself,” or DIY. This is the legacy approach to managing IT services, in which a business retains complete ownership and responsibility for ongoing maintenance and management of servers, software, networking equipment, IT staff, etc. Companies may choose to house this equipment in their own data centers or server closets, or may rent data center space from a colocation provider.

2. The second approach is outsourcing, where businesses transfer full responsibility for their IT systems, operations, and employees to a third party.

3. The third approach is cloud computing, which is the delivery of IT services on demand, usually over the Internet.

We believe that cloud computing delivers better quality and a more cost-competitive solution than do the outsourcing approach or the do-it-yourself approach. We believe demand for cloud computing will continue to grow for four reasons:

1. Lack of In-House IT Expertise and Equipment. Most smaller companies do not have the IT staff needed to manage complicated, mission-critical websites or other IT applications, and they do not want to purchase expensive hardware with their available capital. Yet they must have an increasingly robust, reliable online presence in order to succeed in today’s market.

2. Strategic Resource Utilization. Larger companies that do have specialized, dedicated IT resources would rather deploy these resources to more strategic areas of their business rather than managing servers or running a website.

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3. Market Acceptance. As companies have experienced the benefits of using cloud computing providers to manage some of their IT workloads, they have become more comfortable having those providers manage additional IT services. As time goes by, they will move more and more of their IT workloads to the Cloud.

4. Accelerated Business Creation. Cloud computing removes many of the traditional barriers to new business formation, through its low cost, its high speed and nimbleness, and the way it lowers upfront capital requirements. Cloud computing is driving innovation and new business formation at a rapid rate, in much the way that the iPhone has driven a fast-growing market for applications. The rising supply of cloud computing is, to a large extent, creating new demand.

Cloud computing is at the center of a multi-year shift that is changing the way businesses buy computing power and IT services. New virtualization technologies, which deliver greater agility and cost savings to businesses, make cloud computing even more compelling for a broader market.

Our Business

We are a global company. Our corporate headquarters is located in San Antonio, with operations located in eight other cities in the United States, along with London, Amsterdam, Hong Kong, and Sydney. Our services are sold to businesses in more than 120 countries. In 2011 we had net revenue of $1,025.1 million, and as of December 31, 2011, we served more than 172,000 business customers, and we managed more than 79,000 servers and 2,700,000 email accounts. No single customer accounted for more than 2% of our net revenue in any of the past three years.

We began our business by providing customers with dedicated hosting services in which our customers were provided access to an entire server that was not shared with anyone. As technology advanced, we were also able to offer hosting and other services that utilized pooled infrastructure in order to more efficiently utilize our infrastructure while providing customers with benefits such as more flexibility in accessing their computing needs and lower pricing points than dedicated hosting provides. We have historically referred to the pooled infrastructure service offering as our “Cloud” business and the dedicated hosting services as “Managed Hosting.” However, the meaning of the terms “cloud” and “cloud computing” have evolved to the point where they are now thought to mean the delivery of both pooled and dedicated computing as a service, over a network (typically the Internet). Because all of our services fit under this new definition, we have decided that our nomenclature for our services should change to be more effectively described and understood. Therefore, we intend to refer to the former Cloud services as “Public Cloud” hosting and our Managed Hosting services as “Dedicated Cloud" hosting. "Managed" will refer to a service level available to all customers, whether they are using Public Cloud or Dedicated Cloud resources.

We are focused on the segment of the cloud computing market that demands, and is willing to pay for, strong support and management services on top of raw computing services. Our services are productized and repeatable, which enables us to operate IT systems for our customers with high levels of up-time, rapid deployment of new systems and significant cost savings, which in turn allows our customers' IT departments to focus on their core business. Our service offering combines hosting on dedicated hardware and on multi-tenant pools of virtualized hardware in a way that best suits each customer’s requirements. We have adopted a portfolio approach to our services, which allows customers the flexibility to choose the best combination of support level, Dedicated Cloud hosting and Public Cloud hosting to meet their unique IT needs. The major components of our products and services are described in greater detail below:

Our Service

Customer Experience. This is where we differentiate. Fanatical Support, our unique brand of customer experience, is backed by a complex business process that we have built and refined over the past 13 years, and it distinguishes our company in the market. We incorporate Fanatical Support into all aspects of our hosting services. Fanatical Support is designed to generate an extraordinary customer experience. It involves everything from the way we recruit, interview and test prospective employees; to the way we continuously train new and veteran Rackers alike; to the way we make expert U.S. and U.K. based technicians available to customers 24/7 by phone or email or chat; to the way we empower those Rackers to spend time and money on customers without asking permission; to the way we measure customer satisfaction and churn on a daily basis, team by team; to the way we incentivize our teams and managers; to the way we design and implement hardware and software solutions and processes to make our services highly reliable and easy for the customer to use and navigate.

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When we first launched Fanatical Support^®, it was mainly about answering the phone and providing extraordinary support when things went wrong with a customer's computing. Since then, our conception of Fanatical Support^® has expanded to include technological improvements that make our services more reliable and easier to use, in line with our company's purpose statement: to make cloud computing simple for business.

We have built our business around an understanding that things go wrong in computing and always will in a field so complex and fast-changing. We believe that many business customers want a trusted partner who is available 24/7 to help them safely and reliably take advantage of the enhanced capabilities and cost savings available through cloud computing.

Our Product Categories

Everything that we do at Rackspace falls under the umbrella of cloud computing, defined as the delivery of computing, storage, and applications over the Internet. All of our computer hardware is located in our secure, business-class data centers in the U.S., the U.K. and Hong Kong. Our services are defined by particular form factors, as follows:

Dedicated Cloud, sometimes known as "managed hosting," refers to IT services that we provide on a server or servers reserved for a specific customer. Our customers have full administrator privileges and are responsible for most administrative functions. We provide a customer management portal and other management tools. This service frees the customer from the burden of managing the data center, network, hardware devices, and operating system software. Dedicated Cloud hosting is largely a recurring, subscription-based business and is a core service offering of Rackspace. Included in Dedicated Cloud hosting is private cloud, which refers to a pool of computing resources that is virtualized for greater efficiency and nimbleness, but that is dedicated to one particular customer, rather than being used by multiple customers. This approach is especially popular with some of our larger corporate customers.

Public Cloud refers to pooled computing resources delivered on-demand over the Internet. Virtualization and other cloud technologies allow us to effectively provision and manage a pool of computing resources across a larger base of customers and deliver more computing resources to businesses when they need them. At the same time, pooled cloud computing substantially lowers the cost of IT services. There are multiple varieties of pooled cloud hosting services that are priced on a pay-per-use basis and that can be quickly and easily scaled up or down on-demand. Today we offer Cloud Servers for computing, Cloud Files for storage, and Cloud Applications, which includes email, collaboration and file back-ups. Public Cloud services are emerging technologies and are core elements of our service offering.

Our Integrated Approach

Hybrid Hosting - we are pioneering this emerging category, which allows a customer to easily and seamlessly utilize the benefits of both Dedicated Cloud hosting and Public Cloud hosting. A customer is able to use any combination of dedicated and pooled resources and to manage them seamlessly through our RackConnect service. Each form factor has specific and unique customer benefits, and through Hybrid Hosting the two can be combined and adjusted to address each customer's changing and diverse needs. Furthermore, Rackspace’s set of managed support services and Fanatical Support are critical in this new world of computing as customers increasingly need help to make the transition and utilize these new services.

Competition

Given the significant market potential of cloud computing, we operate in a rapidly evolving and highly competitive environment.

Our principal areas of competition include:

Do-it-Yourself Solutions. Businesses may choose to house and maintain their own IT systems or use a colocation provider to house IT hardware and provide connectivity. Companies that provide colocation services include AT&T, Equinix, CenturyLink, and other telecommunications companies. We believe that over time it will be difficult for the vast majority of businesses to replicate the capabilities and low costs of specialized service providers, making the do-it-yourself option less attractive.

IT Outsourcing Providers. Businesses may choose to outsource their entire IT systems and staff to a provider such as CSC, HP or IBM. Outsourcing has long been an option for only the largest companies because of the cost, complexity and duration of outsourcing contracts. Rarely is this a viable option for small and medium-sized businesses with rapidly changing needs. Even some large corporations are questioning the cost-benefit ratio and the slow response times associated with the outsourcing approach.

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Cloud Computing Providers. Businesses may choose to use a cloud computing provider other than Rackspace to provide services and support for their IT systems. Competitors include AT&T, British Telecom, CenturyLink, Softlayer, Verizon and others. We also face competition from large, diversified technology companies such as Amazon, Microsoft, Google, IBM and Dell, who are making substantial investments in cloud computing.

Our Approach and Sources of Competitive Advantage

We are focused on creating sustainable competitive advantage in four key areas. First, our vision is to be recognized as one of the world’s great service companies. Because companies must trust their cloud computing provider with their mission-critical IT assets, service reputation is a key selection criterion. Second, our singular focus is to provide cloud computing services, which enables us to operate with a financial discipline that keeps costs low, thereby generating returns that exceed our cost of capital. Third, our portfolio approach to services allows customers to select the solution that best fits their requirements. Fourth, we are committed to open technology standards, which address one of the main barriers to adoption of cloud computing: the customer's fear of being locked in to a particular vendor who then wields great power to raise prices and stifle innovation. These key principles form the foundation of our business model, which is described in more detail below.

Fanatical Support - We believe that excellent customer service creates customer loyalty, which in turn leads to higher profits and growth. We call our unique, industry-leading customer service model “Fanatical Support.” Our entire company is focused on going above and beyond expectations to delight the customer. Fanatical Support builds customer loyalty, which in turn delivers three key benefits:

• Loyal customers buy more, both as they grow and as they hand a larger proportion of their total IT workload over to us.

• Loyal customers stay with us longer and refer other customers to us. Both factors help reduce customer acquisition costs and other sales and marketing costs.

• Loyal customers can be served more cost effectively. The average cost of serving a customer is reduced after initial provisioning and our ability to provide additional service levels that are not capital intensive both lead to higher average profits and profit margins over time.

As a measure of customer loyalty, we make extensive use of the Net Promoter Score^® (NPS), developed by Bain & Company, Inc., Fred Reichheld, and Satmetrix Systems, Inc. to track the likelihood that customers will refer us to friends or colleagues. Surveys are conducted on an ongoing basis, and broken down by support team, with results summarized monthly and analyzed to determine areas for improvement. We work with our customers to understand what they consider “must haves” and what they would like to see in terms of incremental improvements to our service offerings.

Fanatical Support is a result of our unique culture. Employees are called Rackers and are rewarded for going above and beyond to serve customers. The highest form of recognition is the Straightjacket Award, which is given to the employee who best demonstrates Fanatical Support in action. We are also very selective in our hiring process. Our philosophy is that technical and functional skills can be taught, but attitude and temperament are ingrained. We strive to hire employees with the personality traits that fit well within our culture and our teams. Periodically, we conduct employee engagement surveys as a measure of cultural health and reward those managers who create an engaging and high-performance environment. For the last two years, Fortune magazine has ranked us in its list of “100 Best Companies to Work For.” We firmly believe that our unique culture is a point of sustained differentiation because our corporate culture, and the complex business process that sustains it, cannot be easily or quickly replicated by competitors.

Singular Focus - We specialize exclusively in providing computing power over the Internet using dedicated and pooled technologies. Modern computing infrastructure is complex and ever-changing, so this specialist focus has allowed us to build a productized set of services that are repeatable, efficient, high-quality and valuable to customers. Our employees, systems, management practices and organizational processes are constantly tuned to improve our high-volume cloud computing offerings. Many of our competitors have to balance their cloud computing lines of business with other areas of focus. These other products and services vie internally for the resources and talent needed to make cloud computing successful. Our exclusive focus on cloud computing enables us to concentrate our capital and our Rackers' talents on a single mission and purpose. We can more rapidly and accurately deploy, upgrade and scale our systems and services. This focus has generated industry-leading revenue growth, profitability and customer satisfaction.

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Seamless Portfolio - Many hosting providers offer a limited set of services or rely on third-party reselling relationships to complete their hosting portfolio. Our portfolio of services allows us to deliver the right offering at the right budget for the customer. Because of the breadth of our portfolio, customers can host their entire environment with us, allowing them to benefit from the simplicity of working with one hosting specialist, rather than managing multiple providers. Our Hybrid Hosting approach allows customers the flexibility to combine both traditional and emerging services for a solution that best addresses their unique IT requirements, and our RackConnect product allows the customer to employ all of our services in a seamless, easy-to-use manner.

Open Standards at Cloud Scale - When we partnered with NASA in July 2010 to launch OpenStack, an open-source cloud computing platform, our goal was to provide an alternative to the proprietary software that then powered all of the major cloud-computing environments. We wanted to help overcome one of the major barriers to adoption of cloud computing: business customers' fear of vendor lock-in and rising prices. Over the past year, OpenStack has attracted significant support, with the addition of approximately 100 new companies, two successful Design Summits with participants from six continents, and the successful release of two new versions of the software.

Research and Development

For the years ended December 31, 2009, 2010 and 2011, we recognized $12.6 million, $18.8 million and $25.0 million of research and development expense, respectively. Our research and development efforts are focused on developing new services including:

• Deployment of new technologies to address emerging trends, such as Public Cloud, private cloud and OpenStack;

• Development and enhancement of proprietary tools;

• Development and enhancement of processes for sales and support; and

• Development and enhancement of data center operations.

We believe cloud computing is a paradigm shift in IT, and we are investing heavily to take advantage of these new technologies. In addition to the research and development expenses incurred, we have capitalized internal software development and other project costs in the amount of $25.0 million, $32.3 million and $63.1 million in the years ended December 31, 2009, 2010 and 2011, respectively.

Intellectual Property Rights

We rely on a combination of patent, copyright, trademark, service mark and trade secret laws in the U.S., the European Union, and various countries in Asia, South America, and elsewhere and contractual restrictions to establish and protect certain proprietary rights in our data, applications, and services. We have rights to patents on a wide range of technologies, and we have patents pending. We have trademarks registered or pending in the U.S., the European Union, and various countries in Asia, South America, and elsewhere for our name and certain words and phrases that we use in our business. We rely on copyright laws and licenses to use and protect software and certain other elements of our proprietary technologies. We also enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties, and we actively monitor access to our proprietary technologies.

In addition, we license third-party software, open source software and other technologies that are used in the provision of or incorporated into some elements of our services.

Employees

As of December 31, 2011, we employed 4,040 Rackers, a net increase of 778, or 23.9%, compared to December 31, 2010. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppages. We believe that our relations with our employees are good.

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Sales and Marketing

Our service suite is sold via direct sales teams, through third-party channel partners and via online ordering. Our direct sales model is based on centralized sales teams with leads generated primarily from customer referrals and corporate marketing efforts. This model also includes a centralized enterprise field sales force, which targets select businesses in that segment. Our channel partners include management and technical consultancies, technology integrators, software application providers, and web developers. Online sales occur via online stores located in the relevant sections of our website.

Our marketing efforts generate interest and market demand by communicating the advantages of our services and unique support model. Our marketing activities include web-based paid and natural search, participation in technology trade shows, conferences and customer events, advertisements in traditional and electronic (web and email-based) media, and targeted regional public relations activities.

Our Support Team Structure

Our support teams are specifically structured based on our customer’s product and service choices. Service teams are comprised of personnel that can address a wide range of business and technical issues for a customer and are available 24/7/365.

Financial Information About Geographic Areas

See Item 8 of Part II, “Financial Statements and Supplementary Data – Note 16 – Segment Information” for financial information related to our geographic areas. For information regarding certain risks relating to our foreign operations, please see the risk titled, “Our ability to operate and expand our business is susceptible to risks associated with international sales and operations” in Item 1A, “Risk Factors.”

Available Information

We file annual, quarterly, and special reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any materials that we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov. In addition, we make available free of charge on or through our Internet website, http://www.rackspace.com under “Investors,” all of the annual, quarterly and special reports, proxy statements, Section 16 insider reports on Form 3, Form 4 and Form 5 and amendments to these reports and other information we file with the SEC. Additionally, our board committee charters and code of ethics are available on our website and in print to any stockholder who requests them. The information contained on our website is not incorporated herein by reference and does not comprise a part of this Annual Report on Form 10-K.

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ITEM 1A – RISK FACTORS

Risks Related to Our Business and Industry

Our physical infrastructure is concentrated in a few facilities, and any failure in our physical infrastructure or services could lead to significant costs and disruptions and could reduce our revenue, harm our business reputation and have a material adverse effect on our financial results.

Our network, power supplies and data centers are subject to various points of failure.  Problems with our cooling equipment, generators, uninterruptible power supply, or UPS, routers, switches, or other equipment, whether or not within our control, could result in service interruptions for our customers as well as equipment damage.  Because our hosting services do not require geographic proximity of our data centers to our customers, our infrastructure is consolidated into a few large facilities. While data backup services and disaster recovery services are available as a part of our hosting services offerings, the majority of our customers do not elect to pay the additional fees required to have disaster recovery services store their backup data offsite in a separate facility, which could substantially mitigate the adverse effect to a customer from a single data center failure. Accordingly, any failure or downtime in one of our data center facilities could affect a significant percentage of our customers. The total destruction or severe impairment of any of our data center facilities could result in significant downtime of our services and the loss of customer data. Since our ability to attract and retain customers depends on our ability to provide customers with highly reliable service, even minor interruptions in our service could harm our reputation. The services we provide are subject to failure resulting from numerous factors, including:

▪ Power loss;

▪ Equipment failure;

▪ Human error or accidents;

▪ Sabotage and vandalism;

▪ Failure by us or our vendors to provide adequate service or maintenance to our equipment;

▪ Network connectivity downtime;

▪ Improper building maintenance by the landlords of the buildings in which our facilities are located;

▪ Physical or electronic security breaches;

▪ Fire, earthquake, hurricane, tornado, flood, and other natural disasters;

▪ Water damage; and

▪ Terrorism. 

Additionally, in connection with the expansion or consolidation of our existing data center facilities from time to time, there is an increased risk that service interruptions may occur as a result of server relocation or other unforeseen construction-related issues.

We have experienced interruptions in service in the past due to such things as power outages, power equipment failures, cooling equipment failures, routing problems, hard drive failures, database corruption, system failures, software failures, and other computer failures. While we have not experienced a material increase in customer attrition following these events, the extent to which our reputation suffers is difficult to assess. We have taken and continue to take steps to improve our infrastructure to prevent service interruptions, including upgrading our electrical and mechanical infrastructure. However, service interruptions continue to be a significant risk for us and could materially impact our business.

Any future service interruptions could:

▪ Cause our customers to seek damages for losses incurred;

▪ Require us to replace existing equipment or add redundant facilities;

▪ Affect our reputation as a reliable provider of hosting services;

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▪ Cause existing customers to cancel or elect to not review their contracts; or

▪ Make it more difficult for us to attract new customers.

Any of these events could materially increase our expenses or reduce our revenue, which would have a material adverse effect on our operating results.

If we are unable to adapt to evolving technologies and customer demands in a timely and cost-effective manner, our ability to sustain and grow our business may suffer.

Our market is characterized by rapidly changing technology, evolving industry standards, and frequent new product announcements, all of which impact the way hosting services are marketed and delivered. The adoption of new technologies, a change in industry standards or introduction of more attractive products or services could make some or all of our offerings less desirable or even obsolete. These potential changes are magnified by the continued rapid growth of the Internet and the intense competition in our industry. To be successful, we must adapt to our rapidly changing market by continually improving the performance, features, and reliability of our services and modifying our business strategies accordingly. We cannot guarantee that we will be able to identify the emergence of all of these new service alternatives successfully, modify our services accordingly, or develop and bring new products and services to market in a timely and cost-effective manner to address these changes. Our failure to provide products and services to compete with new technologies or the obsolescence of our services would likely lead us to lose current and potential customers or cause us to incur substantial costs by attempting to catch our offerings up to the changed environment.

We could also incur substantial costs if we need to modify our services or infrastructure in order to adapt to these changes. For example, our data center infrastructure could require improvements due to (i) the development of new systems to deliver power to or eliminate heat from the servers we house, (ii) the development of new server technologies that require levels of critical load and heat removal that our facilities are not designed to provide, or (iii) a fundamental change in the way in which we deliver services. We may not be able to timely adapt to changing technologies, if at all. Our ability to sustain and grow our business would suffer if we fail to respond to these changes in a timely and cost-effective manner.

Our ability to introduce new products into the market in a timely manner is reliant on how well we can forecast customer demands, develop new products and services and bring the services and products to market. In addition, our ability to develop new products and services is reliant on how accurately we can balance our need to replace our older legacy systems in order to provide scalability with our continued utilization of available resources. If we continue to push our older systems beyond their functional limits, those systems could fail. Such failure could cause us to breach our service level obligations, take resources form ongoing projects to supplement for the non-functionality and distract our management. Alternatively, trying to replace legacy systems on too large of a scale and too quickly could result in material disruption in normal business operations.

Finally, even if we succeed in adapting to a new technology or the changing industry standard and developing attractive products and services and successfully bringing them to market, there is no assurance that our use of the new technology or standard or our introduction of the new products or services would have a positive impact on our financial performance and could even result in lower revenue, lower margins and/or higher costs and therefore could negatively impact our financial performance.

We may not be able to compete successfully against current and future competitors.

The market for cloud computing is highly competitive. We expect to face intense competition from our existing competitors as well as additional competition from new market entrants in the future as the actual and potential market for hosting and cloud computing continues to grow.

Our current and potential competitors vary by size, service offerings and geographic region. These competitors may elect to partner with each other or with focused companies like us to grow their businesses. They include:

▪ Do-it-yourself solutions with a colocation partner such as AT&T, Equinix, CenturyLink and other telecommunications companies;

▪ IT outsourcing providers such as CSC, HP, and IBM;

▪ Hosting providers such as AT&T, British Telecom, CenturyLink, Softlayer, Verio and other telecommunications companies; and

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▪ Large technology companies such as Amazon, Microsoft, Google, IBM, Hewlett-Packard and Dell, who have made substantial investments in cloud computing offerings and initiatives.

The primary competitive factors in our market are: customer service and technical expertise, security reliability and functionality, reputation and brand recognition, financial strength, breadth of services offered, and price.

Many of our current and potential competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater brand recognition, and more established relationships in the industry than we do. As a result, some of these competitors may be able to:

▪ Develop superior products or services, gain greater market acceptance, and expand their service offerings more efficiently or more rapidly;

▪ Adapt to new or emerging technologies and changes in customer requirements more quickly;

▪ Bundle hosting services with other services they provide at reduced prices;

▪ Take advantage of acquisition and other opportunities more readily;

▪ Adopt more aggressive pricing policies and devote greater resources to the promotion, marketing, and sales of their services; and

▪ Devote greater resources to the research and development of their products and services.

If we do not prevent security breaches and other interruptions to our infrastructure, we may be exposed to lawsuits, lose customers, suffer harm to our reputation, and incur additional costs.

The services we offer involve the transmission of large amounts of sensitive and proprietary information over public communications networks, as well as the processing and storage of confidential customer information. Unauthorized access, remnant data exposure, computer viruses, denial of service attacks, accidents, employee error or malfeasance, intentional misconduct by computer “hackers,” and other disruptions can occur, and infrastructure gaps, hardware and software vulnerabilities, inadequate or missing security controls and exposed or unprotected customer data can exist that (i) interfere with the delivery of services to our customers, (ii) impede our customers' ability to do business, or (iii) compromise the security of systems and data, which exposes information to unauthorized third parties.

Techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and generally are not recognized until launched against a target. We may be unable to implement security measures in a timely manner, or, if and when implemented, these measures could be circumvented as a result of accidental or intentional actions by parties within or outside of our organization. Any breaches that occur could expose us to increased risk of lawsuits, loss of existing or potential customers, harm to our reputation and increases in our security costs. Although we typically require our customers to sign agreements that contain provisions attempting to limit our liability for security breaches, we cannot assure you that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against us as the result of a security breach that they may ascribe to us. Additionally, we may decide to negotiate settlements with affected customers regardless of such contractual limitations. The outcome of any such lawsuit would depend on the specific facts of the case and legal and policy considerations that we may not be able to mitigate. In such cases, we could be liable for substantial damage awards that may significantly exceed our liability insurance coverage by unknown but significant amounts, which could seriously impair our financial condition. The laws of some states and countries may also require us to inform any person whose data was accessed or stolen, which could harm our reputation and business. Complying with the applicable notice requirements in the event of a security breach could result in significant costs. We may also be subject to investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed, even if such person was not actually a customer.

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If we fail to hire and retain qualified employees and management personnel, our growth strategy and our operating results could be harmed.

Our growth strategy depends on our ability to identify, hire, train, and retain executives, IT professionals, technical engineers, software developers, operations employees, and sales and senior management personnel who maintain relationships with our customers and who can provide the technical, strategic, and marketing skills required for our company to grow. There is a shortage of qualified personnel in these fields, specifically in the San Antonio, Texas area, where we are headquartered and a majority of our employees are located. We compete with other companies for this limited pool of potential employees. In addition, as our industry becomes more competitive, it could become especially difficult to retain personnel with unique in-demand skills and knowledge, who we would expect to become recruiting targets for our competitors. There is no assurance that we will be able to recruit or retain qualified personnel, and this failure could cause a dilution of our service-oriented culture and our inability to develop and deliver new products and services, which could cause our operations and financial results to be negatively impacted.

Our success and future growth also depends to a significant degree on the skills and continued services of our management team, especially Graham Weston, our Chairman; A. Lanham Napier, our Chief Executive Officer; and Lew Moorman, our President. We do not have long-term employment agreements with any members of our management team, including Messrs. Weston, Napier and Moorman. Mr. Napier is the only member of our management team on whom we maintain key man insurance.

Failure to maintain adequate internal systems could cause us to be unable to properly provide service to our customers, causing us to lose customers, suffer harm to our reputation, and incur additional costs.

Some of our enterprise systems have been designed to support individual products, resulting in a fragmentation among various internal systems, making it difficult to serve customers who use multiple services offerings. This causes us to implement manual processes to overcome the fragmentation, which results in increased expense and unnecessary manual errors. Some of these systems are also on aging or undersized infrastructure and are at risk of reaching capacity limits in the near future. If we fail to upgrade, replace or increase capabilities on these systems, we may be unable to meet our customers' requests for certain types of service.

We have systems initiatives underway that span infrastructure, products and business transformation. These initiatives are likely to drive significant change in both infrastructure and business processes and contain overlaps and dependencies among the programs. Our inability to manage competing priorities, execute multiple parallel program tracks, plan effectively, manage resources effectively and meet deadlines and budgets, could result in us not being able to implement the systems needed to deliver our services in a compelling manner to our customers.

We provide service level commitments to our customers, which could require us to issue credits for future services if the stated service levels are not met for a given period and could significantly decrease our revenue and harm our reputation.

Our customer agreements provide that we maintain certain service level commitments to our customers relating primarily to network uptime, critical infrastructure availability, and hardware replacement. If we are unable to meet the stated service level commitments, we may be contractually obligated to provide these customers with credits for future services. As a result, a failure to deliver services for a relatively short duration could cause us to issue these credits to a large number of affected customers. In addition, we cannot be assured that our customers will accept these credits in lieu of other legal remedies that may be available to them. Our failure to meet our commitments could also result in substantial customer dissatisfaction or loss. Because of the loss of future revenue through these credits, potential customer loss and other potential liabilities, our revenue could be significantly impacted if we cannot meet our service level commitments to our customers.

If we are unable to maintain a high level of customer service, customer satisfaction and demand for our services could suffer.

We believe that our success depends on our ability to provide customers with quality service that not only meets our stated commitments, but meets and then exceeds customer service expectations. We refer to this high quality of customer service as Fanatical Support^®. If we are unable to provide customers with quality customer support in a variety of areas, we could face customer dissatisfaction, dilution of our brand, weakening of our main market differentiator, decreased overall demand for our services, and loss of revenue. In addition, our inability to meet customer service expectations may damage our reputation and could consequently limit our ability to retain existing customers and attract new customers, which would adversely affect our ability to generate revenue and negatively impact our operating results.

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Our existing customers could elect to reduce or terminate the services they purchase from us because we do not have long-term contracts with our customers, which could adversely affect our operating results.

Customer contracts for our dedicated cloud hosting services typically have initial terms of one to two years which, unless terminated, may be renewed or automatically extended on a month-to-month basis. Our customers have no obligation to renew their services after their initial contract periods expire on these contracts. In addition, many of our other services and products, including most of our pooled cloud computing products and services, are generally provided on a month-to-month basis and do not have an extended initial term at all. Our costs associated with maintaining revenue from existing customers are generally much lower than costs associated with generating revenue from new customers. Therefore, a reduction in revenue from our existing customers, even if offset by an increase in revenue from new customers, could reduce our operating margins. Any failure by us to continue to retain our existing customers could have a material adverse effect on our operating results.

Customers with mission-critical applications could potentially expose us to lawsuits for their lost profits or damages, which could impair our financial condition.

Because our hosting services are critical to many of our customers’ businesses, any significant disruption in our services could result in lost profits or other indirect or consequential damages to our customers. Although we require our customers to sign agreements that contain provisions attempting to limit our liability for service outages, we cannot assure you that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against us as the result of a service interruption or other Internet site or application problems that they may ascribe to us. The outcome of any such lawsuit would depend on the specific facts of the case and any legal and policy considerations that we may not be able to mitigate. In such cases, we could be liable for substantial damage awards that may exceed our liability insurance coverage by unknown but significant amounts, which could materially impair our financial condition.

We have been accused of infringing the proprietary rights of others and may be accused of infringing on the proprietary rights of others in the future, which could subject us to costly and time consuming litigation and require us to discontinue services that infringe the rights of others.

There may be intellectual property rights held by others, including issued or pending patents, trademarks, and service marks that cover significant aspects of our technologies, branding or business methods, including technologies and intellectual property we have licensed from third parties. Companies in the technology industry, and other patent and trademark holders seeking to profit from royalties in connection with grants of licenses, own large numbers of patents, copyrights, trademarks, service marks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. These or other parties could claim that we have misappropriated or misused intellectual property rights. Any such current or future intellectual property claim against us, regardless of merit, could be time consuming and expensive to settle or litigate and could divert the attention of our technical and management personnel. An adverse determination also could prevent us from offering our services to our customers and may require that we procure or develop substitute services that do not infringe. For any intellectual property rights claim against us or our customers, we may also have to pay damages, indemnify our customers against damages or stop using technology or intellectual property found to be in violation of a third party’s rights. We may be unable to replace those technologies with technologies that have the same features or functionality and that are of equal quality and performance standards on commercially reasonable terms or at all. Licensing replacement technologies and intellectual property may significantly increase our operating expenses or may require us to restrict our business activities in one or more respects. We may also be required to develop alternative non-infringing technology and intellectual property, which could require significant effort, time, and expense.

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Our use of open source software and contributions to open source projects could impose limitations on our ability to provide our services, expose us to litigation, and cause us to impair some assets which could adversely affect our financial condition and operating results.

We utilize open source software, including Linux-based software, in providing a substantial portion of our services. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to offer our services. Additionally, the use and distribution of open source software can lead to greater risks than the use of third-party commercial software, as open source software does not come with warranties or other contractual protections regarding infringement claims or the quality of the code. From time to time parties have asserted claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes their intellectual property rights. We have been subject to suits, and could be subject to suits in the future, by parties claiming infringement of intellectual property rights with respect to what we believe to be open source software. In such event, we could be required to seek licenses from third parties in order to continue using such software or offering certain of our services or to discontinue the use of such software or the sale of our affected services in the event we could not obtain such licenses, any of which could adversely affect our business, operating results and financial condition. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under some of the open source licenses, be required to release the source code of our proprietary software.

We have also sponsored an open source project called OpenStack, which is designed to foster the emergence of cloud computing technology standards and cloud interoperability. Our participation in the project includes the release of our previously proprietary core cloud storage code, and we expect to release additional core cloud code in the future and contribute to the ongoing development of all of the OpenStack projects. In addition, we also participate in other open source projects and plan to continue to do so in the future. Our participation in and support for these projects could cause us to change our current software development and data center strategies. Our utilization of open source software and open data center design projects like the Facebook Open Compute project, which may replace our current capitalized design and development projects, could result in an impairment of those design and development assets.

In addition, our activities with these open source projects could subject us to additional risks of litigation including indirect infringement claims based on third-party contributors because of our sponsorship of this project.

We may not be successful in protecting and enforcing our intellectual property rights, which could adversely affect our financial condition and operating results.

We rely primarily on patent, copyright, trademark, service mark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We rely on copyright laws to protect software and certain other elements of our proprietary technologies. We cannot assure you that any future copyright, trademark or service mark registrations will be issued for pending or future applications or that any registered or unregistered copyrights, trademarks or service marks will be enforceable or provide adequate protection of our proprietary rights. We currently have onepatent issued and 23 patent applications filed in the U.S. Our patent applications may be challenged and/or ultimately rejected, and our issued patent may be contested, circumvented, found unenforceable or invalidated.

We endeavor to enter into agreements with our employees, contractors, and parties with whom we do business to limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are substantially equivalent, superior to, or otherwise competitive to the technologies we employ in our services or that infringe our intellectual property. We may be unable to prevent competitors from acquiring trademarks or service marks and other proprietary rights that are similar to, infringe upon, or diminish the value of our trademarks and service marks and our other proprietary rights. Enforcement of our intellectual property rights also depends on successful legal actions against infringers and parties who misappropriate our proprietary information and trade secrets, but these actions may not be successful, even when our rights have been infringed.

In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S. Despite the measures taken by us, it may be possible for a third party to copy or otherwise obtain and use our technology and information without authorization. Policing unauthorized use of our proprietary technologies and other intellectual property and our services is difficult, and litigation could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and expensive to prosecute or resolve, result in substantial diversion of management attention and resources, and harm our business, financial condition, and results of operations.

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Our corporate culture has contributed to our success, and if we cannot maintain this culture, we could lose the innovation, creativity, and teamwork fostered by our culture, and our operating results may be harmed.

We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity, and teamwork. If we implement more complex organizational management structures because of growth or other structural changes, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our future operating results. In addition, being a publicly traded company may create disparities in personal wealth among our employees, which may adversely impact our corporate culture and employee relations.

If we are unable to manage our growth effectively, our financial results could suffer.

The growth of our business and our service offerings can strain our operating and financial resources. Further, we intend to continue expanding our overall business, customer base, headcount, and operations.  Creating a global organization and managing a geographically dispersed workforce requires substantial management effort and significant additional investment in our operating and financial system capabilities and controls. If our information systems are unable to support the demands placed on them by our growth, we may be forced to implement new systems, which would be disruptive to our business. We may be unable to manage our expenses effectively in the future due to the expenses associated with these expansions, which may negatively impact our gross margins or operating expenses. If we fail to improve our operational systems or to expand our customer service capabilities to keep pace with the growth of our business, we could experience customer dissatisfaction, cost inefficiencies, and lost revenue opportunities, which may materially and adversely affect our operating results.

We may not be able to continue to add new customers and increase sales to our existing customers, which could adversely affect our operating results.

Our growth is dependent on our ability to continue to attract new customers while retaining and expanding our service offerings to existing customers. Growth in the demand for our services may be inhibited, and we may be unable to sustain growth in our customer base for a number of reasons, such as:

▪ A reduction in the demand for our services due to economic factors;

▪ Our inability to market our services in a cost-effective manner to new customers;

▪ The inability of our customers to differentiate our services from those of our competitors or our inability to effectively communicate such distinctions;

▪ Our inability to successfully communicate the benefits of our services to businesses;

▪ The decision of businesses to host their Internet sites and web infrastructure internally or in colocation facilities as an alternative to the use of our hosting services;

▪ Our inability to penetrate international markets;

▪ Our inability to provide compelling services or effectively market them to existing customers;

▪ Our inability to strengthen awareness of our brand; and

▪ Reliability, quality or compatibility problems with our services.

A substantial amount of our past revenue growth was derived from purchases of service upgrades and additional services by existing customers. Our costs associated with increasing revenue from existing customers are generally lower than costs associated with generating revenue from new customers. Therefore, a reduction in the rate of revenue increase or a rate of revenue decrease from our existing customers, even if offset by an increase in revenue from new customers, could reduce our operating margins.

Any failure by us to continue attracting new customers or grow our revenue from existing customers for a prolonged period of time could have a material adverse effect on our operating results.

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If we overestimate or underestimate our data center capacity requirements, our operating margins and profitability could be adversely affected.

The costs of construction, leasing, and maintenance of our data centers constitute a significant portion of our capital and operating expenses. In order to manage growth and ensure adequate capacity for new and existing customers while minimizing unnecessary excess capacity costs, we continuously evaluate our short and long-term data center capacity requirements.

If we overestimate the demand for our services and therefore secure excess data center capacity, our operating margins could be materially reduced, which would materially impair our profitability. If we underestimate our data center capacity requirements, we may not be able to service the expanding needs of our existing customers and may be required to limit new customer acquisition, which may materially impair our revenue growth.

In the past, we have leased data center facilities and built or maintained the facilities ourselves. Due to the lead time in expanding existing data centers or building new data centers, if we build or expand data centers ourselves, we are required to estimate demand for our services as far as two years into the future. This requirement to make customer demand estimates so far in advance makes it difficult to accurately estimate our data center space needs. Building and maintaining data center facilities is also quite expensive. Early on in our operating history, we acquired most of our data center facilities relatively inexpensively as distressed assets of third parties. However, any such endeavor to build our own facilities would now likely require us to pay full market rates, which would make the penalty for inaccurate forecasting of our space needs even more detrimental.

More recently, we have leased data centers from data center operators who have built or maintained the facilities for us. If there are facilities available for lease that suit our needs, our lead time to make capacity decisions is decreased. However, there is still substantial lead time necessary in making sure that available space is adequate for our needs and maximizes our investment return. If we inaccurately forecast our space needs, we may be forced to enter into a lease that is not ideal for our needs and may potentially be required to pay more to secure the space if the current customer demand were to require immediate space expansion.

We currently intend to continue to lease from data center operators, but we could be forced to re-evaluate those plans depending on the availability and cost of data center facilities, the ability to impact and control certain design aspects of the data center and economic conditions affecting the data center operator's ability to add additional facilities.

We may not be able to renew the leases on our existing facilities on terms acceptable to us, if at all, which could adversely affect our operating results.

We do not own the facilities occupied by our current data centers but occupy them pursuant to commercial leasing arrangements. The initial terms of our main existing data center leases expire over a period ranging from 2012 to 2030, with each having at least one renewal period of no less than three years.  Upon the expiration or termination of our data center facility leases, we may not be able to renew these leases on terms acceptable to us, if at all. If we fail to renew any data center lease and are required or choose to move the data center to a new facility, we would face significant challenges due to the technical complexity, risk, and high costs of relocating the equipment. For example, if we are required to migrate customer servers to a new facility, such migration could result in significant downtime for our affected customers. This could damage our reputation and lead us to lose current and potential customers, which would harm our operating results and financial condition.

Even if we are able to renew the leases on our existing data centers, we expect that rental rates, which will be determined based on then-prevailing market rates with respect to the renewal option periods and which will be determined by negotiation with the landlord after the renewal option periods, will be higher than rates we currently pay under our existing lease agreements. If we fail to increase revenue in our existing data centers by amounts sufficient to offset any increases in rental rates for these facilities, our operating results may be materially and adversely affected.

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We rely on a number of third-party providers for data center space, equipment, maintenance and other services, and the loss of, or problems with, one or more of these providers may impede our growth or cause us to lose customers.

We rely on third-party providers to supply data center space, equipment and maintenance.  For example, we lease data center space from third-party landlords, lease or purchase equipment from equipment providers, and source equipment maintenance through third parties. While we have entered into various agreements for these products and services, any failure to obtain additional capacity or space, equipment, or maintenance, if required, would impede the growth of our business and cause our financial results to suffer. For example, if a data center landlord does not adequately maintain its facilities or provide services for which it is responsible, we may not be able to deliver services to our customers according to our standards or at all.  Further, the equipment that we purchase could be deficient in some way, thereby affecting our products and services. If, for any reason, these providers fail to provide the required services, fail to deliver their equipment, or suffer other failures, we may incur financial losses. Additionally, our customers may lose confidence in our company, and we may not be able to retain these customers.

We rely on third-party software that may be difficult to replace or which could cause errors or failures of our service that could lead to lost customers or harm to our reputation.

We rely on software licensed from third parties to offer our services. This software may not continue to be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained, and integrated, which could harm our business. Any errors or defects in third-party software or inadequate or delayed support by the third party could result in errors or a failure of our service, which could harm our operating results by adversely affecting our revenue or operating costs.

We engage and rely on third-party consultants who may fail to provide effective guidance or solutions, which could result in increased costs and loss of business opportunity.

We engage third-party consultants who provide us with guidance and solutions relating to everything from overall corporate strategy to data center design to employee engagement. We engage these parties based on our perception of their expertise and ability to provide valuable insight or solutions in the areas that we believe need to be addressed in our business. However, these consultants may provide us with ineffective or even harmful guidance or solutions, which, if followed or implemented, could result in a loss of resources, operational failures or a loss of critical business opportunities.

Increased energy costs, power outages, and limited availability of electrical resources may adversely affect our operating results.

Our data centers are susceptible to increased regional, national or international costs of power and to electrical power outages. Our customer contracts do not allow us to pass on any increased costs of energy to our customers, which could affect our operating margins. Further, power requirements at our data centers are increasing as a result of the increasing power demands of today’s servers. Increases in our power costs could impact our operating results and financial condition. Since we rely on third parties to provide our data centers with power sufficient to meet our needs, our data centers could have a limited or inadequate amount of electrical resources necessary to meet our customer requirements. We attempt to limit exposure to system downtime due to power outages by using backup generators and power supplies. However, these protections may not limit our exposure to power shortages or outages entirely. Any system downtime resulting from insufficient power resources or power outages could damage our reputation and lead us to lose current and potential customers, which would harm our operating results and financial condition.

Increased Internet bandwidth costs and network failures may adversely affect our operating results.

Our success depends in part upon the capacity, reliability, and performance of our network infrastructure, including the capacity leased from our Internet bandwidth suppliers. We depend on these companies to provide uninterrupted and error-free service through their telecommunications networks. Some of these providers are also our competitors. We exercise little control over these providers, which increases our vulnerability to problems with the services they provide. We have experienced and expect to continue to experience interruptions or delays in network service. Any failure on our part or the part of our third-party suppliers to achieve or maintain high data transmission capacity, reliability or performance could significantly reduce customer demand for our services and damage our business.

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As our customer base grows and their usage of telecommunications capacity increases, we will be required to make additional investments in our capacity to maintain adequate data transmission speeds, the availability of which may be limited or the cost of which may be on terms unacceptable to us. If adequate capacity is not available to us as our customers’ usage increases, our network may be unable to achieve or maintain sufficiently high data transmission capacity, reliability or performance. In addition, our business would suffer if our network suppliers increased the prices for their services and we were unable to pass along the increased costs to our customers.

Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below investor or analyst expectations.

Our operating results may fluctuate due to a variety of factors, including many of the risks described in this section, which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our operating results for any prior periods as an indication of our future operating performance. Fluctuations in our revenue can lead to even greater fluctuations in our operating results. Our budgeted expense levels depend in part on our expectations of long-term future revenue. Given relatively fixed operating costs related to our personnel and facilities, any substantial adjustment to our expenses to account for lower than expected levels of revenue will be difficult and time consuming. Consequently, if our revenue does not meet projected levels, our operating expenses would be high relative to our revenue, which would negatively affect our operating performance.

If our revenue or operating results do not meet or exceed the expectations of investors or securities analysts, the price of our common stock may decline.

We could be required to repay substantial amounts of money to certain state and local governments if we lose tax exemptions or grants previously awarded to us, which could adversely affect our operating results.

In August 2007, we entered into an agreement with the State of Texas (Texas Enterprise Fund Grant) under which we may receive up to $22.0 million in state enterprise fund grants on the condition that we meet certain employment levels in the State of Texas paying an average compensation of at least $56,000 per year (subject to increases). To the extent we fail to meet these requirements, we may be required to repay all or a portion of the grants plus interest.  In September 2007, we received the initial installment of $5.0 million from the State of Texas, which was recorded as a non-current liability. On July 27, 2009, the Texas Enterprise Fund Grant agreement was amended to modify the job creation requirements. Under the amendment, the grant has been divided into four separate tranches. The first tranche, called “Basic Fund” in the amendment, is $8.5 million with a Job Target of 1,225 new jobs by December 2012 (in addition to the 1,436 jobs in place as of August 1, 2007, for a total of 2,661 jobs in Texas). We already have drawn $5.0 million of this grant and, since we have achieved the Job Target as of December 31, 2011, we intend to request the additional $3.5 million that is available to us.  The remaining three tranches are at our option. We can draw an additional $13.5 million, based on the following amounts and milestones: $5.5 million if we create a total of 2,100 new jobs in Texas, another $5.25 million if we create a total of 3,000 new jobs in Texas, and $2.75 million more if we create a total of 4,000 new jobs in Texas. We are responsible for maintaining the jobs through January 2022. If we eliminate jobs for which we have drawn funds, we are subject to a clawback on the amounts we have drawn plus 3.4% interest on such amounts per year. 

On August 3, 2007, we entered into a lease for approximately 67 acres of land and a 1.2 million square foot facility in Windcrest, Texas, which is in the San Antonio, Texas area, to house our corporate headquarters. In connection with this lease, we also entered into a Master Economic Incentives Agreement (“MEIA”) with the Cities of Windcrest and San Antonio, Texas; Bexar County; and certain other parties, pursuant to which we agreed to locate existing and future employees at the new facility location. The agreement requires that we meet certain employment levels each year, with an ultimate job requirement of 4,500 jobs by December 31, 2012, provided that if the job requirement in any grant agreement with the State of Texas is lower, then the job requirement under the MEIA is automatically adjusted downward. Consequently, because the Texas Enterprise Fund Grant agreement has been amended to reduce the state job requirement, we believe the job requirement under the MEIA has been reduced to 1,774.  In addition, the MEIA requires that the median compensation of those employees be no less than $51,000 per year. In exchange for meeting these employment obligations, the parties agreed to enter into the lease structure, pursuant to which, as a lessee of the Windcrest Economic Development Corporation, we will not be subject to most of the property taxes associated with the property for a 14-year period. If we fail to meet these job creation requirements, we could lose a portion or all of the tax benefit being provided during the 14-year period by having to make payments in lieu of taxes (PILOT) to the City of Windcrest. The amount of the PILOT payment would be calculated based on the amount of taxes that would have been owed for that period if the property were not exempt, and then such amount would be adjusted pursuant to certain factors, such as the percentage of employment achieved compared to the stated requirements.

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We have debt obligations that include restrictive covenants limiting our flexibility to manage our business; failure to comply with these covenants could trigger an acceleration of our outstanding indebtedness and adversely affect our financial position and operating results.

As of December 31, 2011, there was no outstanding indebtedness under our credit facility other than an outstanding letter of credit in the amount of $0.4 million. Our credit facility requires compliance with a set of financial and non-financial covenants. Those covenants include financial leverage limitations and interest rate coverage requirements, as well as limitations on our ability to incur additional debt or liens, make restricted payments, sell assets, enter into affiliate transactions, merge or consolidate with other companies, make certain acquisitions and take other actions.  If we default on our credit agreement due to non-compliance with such covenants or any other contractual requirement of the agreement, we may be required to repay all amounts owed under this credit facility.

We also have substantial equipment lease obligations, the principal balance of which totaled approximately $138.2 million as of December 31, 2011. The payment obligations under these equipment leases are secured by a significant portion of the hardware used in our data centers. If we are unable to generate sufficient cash flow from our operations or cash from other sources in order to meet the payment obligations under these equipment leases, we may lose the right to possess and operate the equipment used in our data centers, which would substantially impair our ability to provide our services, which could have a material adverse effect on our liquidity or results of operations.

If we are unable to generate sufficient cash to repay our debt obligations when they become due and payable, either when they mature or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to continue as a going concern.

We may require additional capital and may not be able to secure additional financing on favorable terms to meet our future capital needs, which could adversely affect our financial position and result in stockholder dilution.

In order to fund future growth, we will be dependent on significant capital expenditures. We may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need such funding. If we are unable to raise additional funds, we may not be able to pursue our growth strategy, and our business could suffer. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock. In addition, any debt financing that we may obtain in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.

We are exposed to commodity and market price risks that have the potential to substantially influence our profitability and liquidity.

We are a large consumer of power. During 2011, we expensed approximately $22.4 million to utility companies to power our data centers. We anticipate an increase in our consumption of power in the future as our sales grow. Power costs vary by locality and are subject to substantial seasonal fluctuations and changes in energy prices. Our largest exposure to energy prices currently exists at our Grapevine, Texas facility in the Dallas-Fort Worth area, where the energy market is deregulated. Power costs have historically tracked the general costs of energy, and continued increases in electricity costs may negatively impact our gross margins or operating expenses. We periodically evaluate the advisability of entering into fixed-price utilities contracts and have entered into certain fixed-price utilities contracts for some of our power consumption.  If we choose not to enter into a fixed-price contract, we expose our cost structure to this commodity price risk. If we do choose to enter into a fixed-price contract, we lose the opportunity to reduce our power costs if the price for power falls below the fixed cost.

Our main credit facility is a revolving line of credit with a base rate determined by variable market rates, including the Prime Rate and the London Interbank Offered Rate (LIBOR). These market rates of interest are fluctuating and expose our interest expense to risk. At this point, our credit agreement does not obligate us to hedge any interest rate risk with any instruments, such as interest rate swaps or interest rate options, and we do not have any such instruments in place. As we borrow more, we may enter into swaps to continuously control our interest rate risk.  As a result, we are exposed to interest rate risk on our borrowings.  As an example of the impact of this interest rate risk, a 100 basis point increase in LIBOR would increase the interest expense on $10 million of borrowings that are not hedged by $0.1 million annually.  As of December 31, 2011, we did not have exposure to interest rate risk as there was no amount outstanding on our revolving credit facility.

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The majority of our customers are invoiced, and substantially all of our expenses are paid, by us or our subsidiaries in the functional currency of our company or our subsidiaries, respectively. However, some of our customers are currently invoiced in currencies other than the applicable functional currency. As a result, we may incur foreign currency losses based on changes in exchange rates between the date of the invoice and the date of collection. In addition, large changes in foreign exchange rates relative to our functional currencies could increase the costs of our services to non-U.S. customers relative to local competitors, thereby causing us to lose existing or potential customers to these local competitors. Thus, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Further, as we grow our international operations, our exposure to foreign currency risk could become more significant. To date, we have not entered into any foreign currency hedging contracts, although we may do so in the future.

We may be liable for the material that content providers distribute over our network, and we may have to terminate customers that provide content that is determined to be illegal, which could adversely affect our operating results.

The law relating to the liability of private network operators for information carried on, stored on, or disseminated through their networks is still unsettled in many jurisdictions. We have been and expect to continue to be subject to legal claims relating to the content disseminated on our network, including claims under the Digital Millennium Copyright Act, other similar legislation and common law. In addition, there are other potential customer activities, such as online gambling and pornography, where we, in our role as a hosting provider, may be held liable as an aider or abettor of our customers. If we need to take costly measures to reduce our exposure to these risks, terminate customer relationships and the associated revenue or defend ourselves against such claims, our financial results could be negatively affected.

Government regulation is continuously evolving and, depending on its evolution, may adversely affect our operating results.

We are subject to varying degrees of regulation in each of the jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, electronic contracts and other communications, consumer protection, web services, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, and the characteristics and quality of products and services. These laws can be costly to comply with, can be a significant diversion to management’s time and effort, and can subject us to claims or other remedies, as well as negative publicity. Many of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues that the Internet and related technologies produce. Some of the laws that do reference the Internet and related technologies have been and continue to be interpreted by the courts, but their applicability and scope remain largely uncertain.

In addition, future regulatory, judicial, and legislative changes may have a material adverse effect on our ability to deliver services within various jurisdictions. National regulatory frameworks have only recently been, or are still being, put in place in many countries. Accordingly, many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market. As a result, in these markets we may encounter more protracted and difficult procedures to obtain any necessary licenses or negotiate interconnection agreements, which could negatively impact our ability to expand in these markets or increase our operating costs in these markets.

Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and services.

Since our products and services are web-based, we store substantial amounts of data for our customers on our servers (including personal information). Any systems failure or compromise of our security that results in the release of our customers’ data could (i) subject us to substantial damage claims from our customers, (ii) expose us to costly regulatory remediation and (iii) harm our reputation and brand. We may also need to expend significant resources to protect against security breaches. The risk that these types of events could seriously harm our business is likely to increase as we expand our hosting footprint.

Regulatory authorities around the world are considering a number of legislative proposals concerning data protection. In addition, the interpretation and application of data protection laws in Europe and elsewhere are still uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

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Our ability to operate and expand our business is susceptible to risks associated with international sales and operations.

We anticipate that, for the foreseeable future, a significant portion of our revenue will continue to be derived from sources outside of the U.S. A key element of our growth strategy is to further expand our customer base internationally and successfully operate data centers in foreign markets. We have limited experience operating in foreign jurisdictions other than the U.K. and Hong Kong and expect to continue to grow our international operations. Managing a global organization is difficult, time consuming, and expensive. Our inexperience in operating our business globally increases the risk that international expansion efforts that we may undertake will not be successful. In addition, conducting international operations subjects us to new risks that we have not generally faced. These risks include:

▪ Localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements;

▪ Lack of familiarity with and unexpected changes in foreign regulatory requirements;

▪ Longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

▪ Difficulties in managing and staffing international operations;

▪ Fluctuations in currency exchange rates;

▪ Potentially adverse tax consequences, including the complexities of transfer pricing, foreign value added tax systems, and restrictions on the repatriation of earnings;

▪ Dependence on certain third parties, including channel partners with whom we do not have extensive experience;

▪ The burdens of complying with a wide variety of foreign laws and legal standards;

▪ Increased financial accounting and reporting burdens and complexities;

▪ Political, social, and economic instability abroad, terrorist attacks and security concerns in general; and

▪ Reduced or varied protection for intellectual property rights in some countries.

Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

We rely on our Channel Partner Program members for a significant portion of our revenues, and we benefit from our association with them. The loss of these members could adversely affect our business.

Our Channel Partner Program drives a significant amount of revenue to our business through referral and reseller arrangements. Most of our member partners offer services that are complementary to our services; however, some of the participants may actually compete with us in one or more of our product or service offerings. These network partners may decide in the future to terminate their agreements with us and/or to market and sell a competitor’s or their own services rather than ours, which could cause our revenue to decline.

Also, we derive tangible and intangible benefits from our association with some of our network partners, particularly high profile partners that reach a large number of companies through the Internet. If a substantial number of these partners terminate their relationship with us, our business could be adversely affected.

Our acquisitions may divert our management’s attention, result in dilution to our stockholders and consume resources that are necessary to sustain our business.

We have made acquisitions, and, if appropriate opportunities present themselves, we may make additional acquisitions or investments or enter into joint ventures or strategic alliances with other companies. Risks commonly encountered in such transactions include:

▪ The difficulty of assimilating the operations and personnel of the combined companies;

▪ The risk that we may not be able to integrate the acquired services or technologies with our current services, products, and technologies;

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▪ The potential disruption of our ongoing business;

▪ The diversion of management attention from our existing business;

▪ The inability of management to maximize our financial and strategic position through the successful integration of the acquired businesses;

▪ Difficulty in maintaining controls, procedures, and policies;

▪ The impairment of relationships with employees, suppliers, and customers as a result of any integration;

▪ The loss of an acquired base of customers and accompanying revenue; and

▪ The assumption of leased facilities, other long-term commitments or liabilities that could have a material adverse impact on our profitability and cash flow.

As a result of these potential problems and risks, businesses that we may acquire or invest in may not produce the revenue, earnings, or business synergies that we anticipated. In addition, there can be no assurance that any potential transaction will be successfully identified and completed or that, if completed, the acquired business or investment will generate sufficient revenue to offset the associated costs or other potential harmful effects on our business.

Concerns about greenhouse gas emissions and the global climate change may result in environmental taxes, charges, assessments or penalties.

The effects of human activity on the global climate change have attracted considerable public and scientific attention, as well as the attention of the United States government. Efforts are being made to reduce greenhouse emissions, particularly those from coal combustion by power plants, some of which we may rely upon for power. The added cost of any environmental taxes, charges, assessments or penalties levied on these power plants could be passed on to us, increasing the cost to run our data centers. Additionally, environmental taxes, charges, assessments or penalties could be levied directly on us in proportion to our carbon footprint. Any enactment of laws or passage of regulations regarding greenhouse gas emissions by the United States, or any domestic or foreign jurisdiction we perform business in, could adversely affect our operations and financial results.

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Risks Related to the Ownership of Our Common Stock

The trading price of our common stock may be volatile.

The market price of our common stock has been highly volatile and could be subject to wide fluctuations in response to, among other things, the risk factors described in this periodic report and other factors beyond our control, such as stock market volatility and fluctuations in the valuation of companies perceived by investors to be comparable to us.

Further, the stock markets have experienced price and volume fluctuations that have affected our stock price and the market prices of equity securities of many other companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock. We may experience additional volatility as a result of the limited number of our shares available for trading in the market.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Our common stock has only been publicly traded since our initial public offering on August 7, 2008, and the price of our common stock has fluctuated substantially since then and may fluctuate substantially in the future.

Our common stock has only been publicly traded since our initial public offering on August 7, 2008. The trading price of our common stock has fluctuated significantly since then. For example, between December 31, 2010 and December 31, 2011, the closing trading price of our common stock was very volatile, ranging between $29.78 and $46.19 per share, including single-day increases of up to 12.4% and declines up to 12.4%. Our trading price could fluctuate substantially in the future due to the factors discussed in this Risk Factors section and elsewhere in this Annual Report on Form 10-K.

We do not intend to pay dividends on our common stock.

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.

The issuance of additional stock in connection with acquisitions, our equity incentive and stock purchase plans, or otherwise will dilute all other stockholdings.

We have a large number of shares of common stock authorized but unissued and not reserved for issuance under our stock option plans or otherwise. We may issue all of these shares without any action or approval by our stockholders. We intend to continue to actively pursue strategic acquisitions. We may pay for such acquisitions, partly or in full, through the issuance of additional equity. In addition, our Amended and Restated 2007 Long-Term Incentive Plan and our Employee Stock Purchase Plan contain evergreen provisions, which annually increase the number of shares issuable under the applicable plan. Any issuance of shares in connection with our acquisitions, our Amended and Restated 2007 Long-Term Incentive Plan or otherwise would dilute the percentage ownership held by our then-existing stockholders.

Your ability to influence corporate matters may be limited because a small number of stockholders beneficially own a substantial amount of our common stock.

Our directors and executive officers and their affiliates beneficially own a significant portion of our outstanding common stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. Although our directors and executive officers are not currently party to any agreements or understandings to act together on matters submitted for stockholder approval, this concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

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Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.

Our restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors deemed undesirable by our board of directors that our stockholders might consider favorable. Some of these provisions:

• Authorize the issuance of blank check preferred stock which can be created and issued by our board of directors without prior stockholder approval, with voting, liquidation, dividend, and other rights senior to those of our common stock;

• Provide for a classified board of directors, with each director serving a staggered three-year term;

• Prohibit our stockholders from filling board vacancies or increasing the size of our board, calling special stockholder meetings or taking action by written consent;

• Provide for the removal of a director only with cause and by the affirmative vote of the holders of a majority of the shares then entitled to vote at an election of our directors; and

• Require advance written notice of stockholder proposals and director nominations.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our restated certificate of incorporation, amended and restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including a merger, tender offer or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

Office Space

Our corporate headquarter facility is located in San Antonio, Texas and consists of a 1.2 million square foot facility located on approximately 67 acres of land. We have remodeled and are currently using approximately 574,000 square feet of office space and will continue to remodel the formerly vacant facility as needed to facilitate our future growth and office requirements. Besides our corporate headquarters, we have additional U.S. office locations in Texas, Virginia, Missouri, Illinois, California and Georgia and additional office space located in the U.K., the Netherlands, Hong Kong and Australia. As of December 31, 2011, we utilized approximately 913,000 square feet of our leased office space and used it for customer service, operations, sales, corporate and administrative functions.

Data Centers

As of December 31, 2011, we leased eight main data centers located in the U.S., the U.K., and in Hong Kong with approximately 262,000 available technical square feet, of which 233,000 were utilized. At December 31, 2011, we were utilizing 20.9 Megawatts of power at our data centers. The five data centers in the U.S. are located in Texas, Virginia and Illinois.

We are continuously looking for additional data center space to accommodate future growth or that would present an attractive business opportunity for us. However, we believe that our existing office space and data center facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future to meet our anticipated needs.

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ITEM 3 – LEGAL PROCEEDINGS

We are party to various legal and administrative proceedings, which we consider routine and incidental to our business. In addition, on October 22, 2008, Benjamin E. Rodriguez D/B/A Management and Business Advisors vs. Rackspace Hosting, Inc. and Graham Weston was filed in the 37^th District Court in Bexar County, Texas by a former consultant to the company, Benjamin E. Rodriguez. The suit alleges breach of an oral agreement to issue Mr. Rodriguez a 1% interest in our stock in the form of options or warrants for compensation for services he was engaged to perform for us. We believe that the plaintiff’s position is without merit and intend to vigorously defend this lawsuit. We do not expect the results of this claim or any other current proceeding to have a material adverse effect on our business, results of operations or financial condition.

ITEM 4 – RESERVED

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PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock

Our common stock began trading on the New York Stock Exchange under the symbol "RAX" beginning on August 8, 2008. Prior to that time, there was no public market for our common stock.

The following table sets forth for the indicated periods the high and low closing prices for our common stock for the periods indicated, as reported by the New York Stock Exchange.

Fiscal Year 2011 Quarters:	High		Low
First Quarter	$	43.01	$	29.78
Second Quarter	46.19		38.24
Third Quarter	45.78		31.49
Fourth Quarter	45.16		31.49

Fiscal Year 2010 Quarters:	High		Low
First Quarter	$	23.09	$	17.11
Second Quarter	20.80		15.51
Third Quarter	26.11		16.46
Fourth Quarter	31.74		22.45

The last reported sale price for our common stock on the New York Stock Exchange was $31.41, $43.01 and $55.45 per share on December 31, 2010, December 31, 2011, and February 14, 2012, respectively.

Dividend Policy

We have never paid any cash dividends on our common stock. Our board of directors currently intends to retain any future earnings to support operations and to finance the growth and development of our business and does not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board.

Stockholders

As of February 14, 2012, there were 226 registered stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these stockholders of record.

Securities Authorized for Issuance Under Equity Compensation Plans

For information regarding securities authorized for issuance under equity compensation plans, see Part III "Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

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Stock Performance Graph

The graph set forth below compares the cumulative total stockholder return on our common stock between August 7, 2008 (the date of our initial public offering, or IPO) and December 31, 2011, with the cumulative total return of (i) the Russell 2000 Index, (ii) the Russell 1000 Index, and (iii) the Nasdaq Internet Total Return Index over the same period. This graph assumes the investment of $100 on August 7, 2008 in our common stock at our IPO offering price of $12.50 per share, the Russell 2000 Index, the Russell 1000 Index and the Nasdaq Internet Total Return Index, and assumes the reinvestment of dividends, if any. The Russell 2000 Index measures the performance of the small-cap segment of U.S. equities. As our revenue and total market capitalization have both increased over the last year, we will no longer use the Russell 2000 Index and will instead use the Russell 1000 Index, which measures the performance of the large-cap segment of U.S. equities. We are currently included in the Russell 1000 Index. The Nasdaq Internet Total Return Index consists of U.S. listed companies engaged in Internet-related businesses.

The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.

Recent Sales of Unregistered Securities

None

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ITEM 6 - SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this document. The selected consolidated financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the consolidated financial statements and related notes thereto, included elsewhere in this document.

The statements of income data for the fiscal years ended December 31, 2009, 2010 and 2011 and the balance sheet data as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements, which have been audited by KPMG LLP, independent registered public accounting firm, and included elsewhere in this document. The statements of income data for the years ended December 31, 2007 and 2008 and the balance sheet data as of December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements, which have been audited by KPMG LLP, independent registered public accounting firm, but are not included in this document. Historical results are not necessarily indicative of future results. See Note 2 to the financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net income per common share.

	Year Ended December 31,
(In thousands, except per share data)	2007			2008			2009			2010			2011
Net revenue	$	362,017		$	531,933		$	628,987		$	780,555		$	1,025,064
Costs and expenses:
Cost of revenue	118,225			172,583			200,943			249,840			309,095
Sales and marketing	53,930			80,323			79,458			96,207			126,505
General and administrative	102,777			148,706			168,116			199,011			270,581
Depreciation and amortization	56,476			90,172			125,229			155,895			195,412
Total costs and expenses	331,408			491,784			573,746			700,953			901,593
Income from operations	30,609			40,149			55,241			79,602			123,471
Other income (expense):
Interest expense	(3,643		)	(8,229		)	(8,950		)	(7,984		)	(5,848		)
Interest and other income (expense)	828			768			255			(207		)	(1,194		)
Total other income (expense)	(2,815		)	(7,461		)	(8,695		)	(8,191		)	(7,042		)
Income before income taxes	27,794			32,688			46,546			71,411			116,429
Income taxes	9,965			10,985			16,328			25,053			40,018
Net income	$	17,829		$	21,703		$	30,218		$	46,358		$	76,411
Net income per share
Basic	$	0.18		$	0.20		$	0.25		$	0.37		$	0.59
Diluted	$	0.17		$	0.19		$	0.24		$	0.35		$	0.55
Balance sheet data
Cash and cash equivalents	$	24,937		$	238,407		$	125,425		$	104,941		$	159,856
Total assets	301,813			685,261			668,645			761,577			1,026,482
Long-term obligations	96,213			283,053			161,024			133,572			189,310
Total stockholders’ equity	96,873			269,684			349,427			438,863			599,423

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ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this document.

Overview of our Business

We are the service leader in cloud computing. Our growth is the result of our commitment to serving our customers, known as Fanatical Support, and our exclusive focus on cloud computing. We have been successful in attracting and retaining thousands of customers and in growing our business. We are a pioneer in an emerging category, Hybrid Hosting, which combines the benefits of hosted computing on dedicated hardware and on pools of shared resources. We are committed to maintaining our service-centric focus, and we will follow our vision to be considered one of the world’s great service companies.

We offer a portfolio of cloud computing services, including Dedicated Cloud hosting and Public Cloud hosting. The equipment required (servers, routers, switches, firewalls, load balancers, cabinets, software, wiring, etc.) to deliver services is typically purchased and managed by us.

We sell our services to small and medium-sized businesses as well as large enterprises. During 2011, 25% of our net revenue was generated by our operations outside of the U.S., mainly from the U.K. Additionally, we operate a Hong Kong data center and sales office. Our growth strategy includes, among other strategies, targeting international customers as we plan to expand our activities in continental Europe and Asia. During 2011, no individual customer accounted for more than 2% of our net revenue.

How We Earn Revenue and Measure Growth

Our subscription-based business model generates approximately 98% of our revenue on a recurring basis. Our customers pay us a recurring fee based on the size and complexity of the IT systems we manage and the level of service intensity we provide, pursuant to service agreements that typically provide for monthly payments. Our Public Cloud service offers pay-as-you go services that are earned and recognized as recurring revenue as the services are provided. Revenue is reduced by credits issued to customers, primarily for service interruptions, and also includes revenue related to customers who have canceled their service. Net revenue for the years ended December 31, 2009, 2010 and 2011 was $629.0 million, $780.6 million and $1,025.1 million, respectively, representing year-over-year increases of 24.1% in 2010 and 31.3% in 2011.

Our revenue growth is primarily due to the increased volume of services provided, both because of an increasing number of new customers and incremental services rendered to existing customers, as well as a broader suite of cloud computing services acquired through acquisitions and research and development activities. “Installed base growth” is a metric we use to measure the growth of revenue derived only from our existing customer base.

Our net revenue is denominated in U.S. dollars as well as other foreign currencies, including the pound sterling, the euro, and the Hong Kong dollar. Changes in related currency exchange rates may affect our net revenue. The increase in net revenue due to foreign currency fluctuations was approximately $8.6 million, or 0.8%, in 2011.

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Nature of Our Operating Expenses

Our operating expense categories include cost of revenue, sales and marketing, general and administrative, and depreciation and amortization.

Employee-related costs have historically been the primary driver of our operating expenses, and we expect this to continue. Employee-related costs include items such as wages, commissions, non-equity incentive compensation, vacation, benefits, and share-based compensation. Employee non-equity incentive compensation through our current non-equity incentive plan, in effect since January 1, 2009, is dependent upon the financial results of the company in relation to a pre-set target level that is set at the beginning of each quarter. Thus, favorable financial performance in comparison to the pre-set target level is partially offset by increased non-equity incentive compensation expense. If company achievement of the pre-set target results in a 10.0% increase in the non-equity incentive compensation percentage payout in a quarter, this would increase total non-equity incentive compensation by approximately $0.6 million on an after-tax basis and increase net income by $0.6 million in that quarter. Company achievement resulting in a 10.0% decrease in the non-equity incentive compensation percentage payout in a quarter would decrease total non-equity incentive compensation by approximately $0.6 million on an after-tax basis and decrease net income by $0.6 million in that quarter. Additionally, the Compensation Committee has the discretion to increase or decrease a payout under the plan at any time in the event that it determines that circumstances warrant adjustment or to pay bonuses outside of the plan.

We had 3,262 and 4,040 employees as of December 31, 2010 and 2011, respectively. The year-over-year increase was primarily attributable to increases in our customer and data center support teams, as well as increases in general and administrative positions. To maintain our service focus, our support teams have continued to grow with the growth of our business. Our headcount is expected to increase in 2012 as we continue to grow our business.

Cost of revenue primarily consists of employee-related costs of our customer support teams and data center employees, as well as the costs to operate our data centers. The majority of our data center costs vary with the volume of services sold and include: power, bandwidth, and rent; costs associated with licenses; and costs related to maintenance and the replacement of IT equipment components. Our contracts with network operators for bandwidth capacity generally commit us to pay a monthly fee based on usage. Our data centers rely on local and regional utility companies as their primary source of power. We have fixed-price power arrangements with the electricity providers of our Grapevine, Texas and Slough, U.K. data centers that expire in September 2013. We enter into contracts with software providers that allow us to provide licenses to our customers. Our arrangements with these software vendors are typically one to three years in length and we generally pay a fixed fee per license.

Sales and marketing activities are directed toward both the acquisition of new customers and increasing our business with existing customers. We pay commissions to our sales representatives generally upon execution of a service agreement. Sales and marketing expense also includes compensation to our channel partners. Marketing expenditures are intended to communicate the advantages of our services and to generate customer demand. The majority of our marketing expenditures relate to lead generation through pay-per-click placements on major Internet search engines.

General and administrative activities are comprised of employee-related costs, professional fees, general corporate costs and overhead. While we continue to invest in our administrative infrastructure and personnel to support our growth, our focus has been and continues to be on scaling these administrative costs.

Depreciation and amortization expense includes amortization of leasehold improvements associated with our data centers and corporate facilities, as well as depreciation of our data center infrastructure and equipment. Amortization expense is also comprised of the amortization of our customer-based intangible assets related to acquisitions, internally developed technology, and software licenses purchased from third-party vendors.

Our operating expenses are denominated in U.S. dollars as well as other foreign currencies, including the pound sterling, the euro, and Hong Kong dollar. Changes in related currency exchange rates may affect our operating results. The increase in operating expenses, due to foreign currency fluctuations, was approximately $6.4 million, or less than 1%, in 2011.

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Capital Expenditures

Our capital expenditures primarily relate to customer gear, data center infrastructure, corporate office build-outs, and internally developed software and other projects. Each category is defined below:

Customer gear - Includes servers, firewalls, load balancers, cabinets, switches, backup libraries, storage arrays and drives and network cabling.

Data center infrastructure - Includes generators, uninterruptible power supplies or UPS, power distribution units, mechanical and electrical plants, chillers, raised floor and other building improvements.

Corporate office build-outs - Includes demolition, raised floor, furniture and general building improvements.

Internally developed software and other - Includes salaries and payroll-related costs of employees and consultants who devote time to the development of certain internal-use software projects, and other projects that meet the criteria for capitalization.

In 2011, we expended cash or entered into lease arrangements for the purchase of customer gear of $196.1 million and incurred data center infrastructure costs of $49.9 million, corporate office build-out costs of $35.8 million and $63.1 million of costs related to internally developed software and other capitalized projects.

Our data center infrastructure is built to accommodate future revenue growth. While we try to minimize the amount of excess capacity, we consider appropriate lead times for these build-outs, which requires us to build capacity ahead of actual revenue growth. We also strive to align our investment in data center infrastructure with our revenue growth to keep utilization rates high. We measure our utilization rate as the power being consumed by all electrical equipment relative to the total available capacity in our data centers excluding portions of the data center that have not been placed on line. We pursue a modular build-out strategy within our data centers that expands the operational footprint when needed. From time to time, we will be required to make significant investments in new data centers or enter into long-term facility leases to support expected growth beyond our ability to build out additional modules in existing facilities.

While many factors may influence our margins, in periods when we make large investments, margins may decrease. Such investments may be made in connection with data center and office expansion, as well as significant product and market development initiatives.

During 2011, we continued to add to our existing data center footprint both in the U.S. and internationally to support our growth. We added more than 100 thousand technical square feet of data center space. In February and August 2011, we modified our operating lease agreement with a subsidiary of DuPont Fabros Technology to lease additional space at our Chicago area data center. In December 2011, we entered into an operating lease agreement with Digital Realty Trust to lease approximately 58,200 technical square feet of data center space in Richardson, Texas. This current strategy of entering into operating lease agreements for data center space reduces the capital investments required to increase our data center square footage.

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Disciplined Use of Capital and Management of Profitability

We have achieved net income profitability since the first quarter of 2004 through focused management of capital and profitability. We use the Economic Value Added model (EVA), which was developed by Stern Stewart & Co., as a tool to help ensure our growth and capital investments create stockholder value. Virtually all capital expenditures are evaluated against this metric using a standard cost of capital. EVA is calculated for our product offerings to evaluate our profitability.

We are also very careful with our facility and data center expansion practices. Currently, we sell to businesses in more than 120 countries. Unlike a colocation provider, we do not need to be located near our customers, allowing us to build or lease centralized, cost-optimized facilities with teams of highly-trained staff. We strive to locate our regional facilities and data centers in lower-cost locations, which reduces rent, power and labor costs. We also focus on either leasing or building sections of data centers in increments so that capital expenditures are more closely matched to revenue growth.

We have made significant investments in cloud computing. Over the last several years, we have made acquisitions that have expanded our product set into new areas of cloud computing, including private cloud, OpenStack and Rackspace Cloud Builders. We will continue to identify and pursue strategic investments that have the potential to generate savings, enhance our competitive advantage, and increase our capabilities to serve customers.

We have achieved a critical mass that generates long-term cost advantages. Like any service that moves from distributed to centralized production, scale is a factor in ensuring costs are low enough to drive mass adoption. We are able to generate significant cost advantages based on our large installed customer base and growth profile. We purchase large quantities of computing and data center assets, which allows us to negotiate higher volume pricing savings.

Key Metrics

We carefully track several financial and operational metrics to monitor and manage our growth, financial performance, and capacity. Our key metrics are structured around growth, profitability, capital efficiency, infrastructure capacity, and utilization. The following data should be read in conjunction with the consolidated financial statements, the notes to the financial statements and other financial information included in this Annual Report on Form 10-K.

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	Year Ended December 31,
(Dollar amounts in thousands, except average monthly revenue per server and annualized net revenue per average technical square foot)	2009			2010			2011
Growth
Dedicated Cloud, net revenue	$	572,606		$	679,888		$	835,877
Public Cloud, net revenue	$	56,381		$	100,667		$	189,187
Net revenue	$	628,987		$	780,555		$	1,025,064
Revenue growth (year over year)	18.2		%	24.1		%	31.3		%
Net upgrades (monthly average)	1.2		%	1.5		%	1.9		%
Churn (monthly average)	-1.0		%	-1.0		%	-0.9		%
Growth in installed base (monthly average) (2)	0.2		%	0.5		%	1.0		%
Number of customers at period end (3)	90,925			130,291			172,510
Number of employees (Rackers) at period end	2,774			3,262			4,040
Number of servers deployed at period end	56,671			66,015			79,805
Average monthly revenue per server	$	1,004		$	1,054		$	1,157
Profitability
Income from operations	$	55,241		$	79,602		$	123,471
Depreciation and amortization	$	125,229		$	155,895		$	195,412
Share-based compensation expense
Cost of revenue	$	2,850		$	4,660		$	4,220
Sales and marketing	$	2,884		$	4,241		$	2,313
General and administrative	$	14,390		$	17,723		$	22,240
Total share-based compensation expense	$	20,124		$	26,624		$	28,773
Adjusted EBITDA (1)	$	200,594		$	262,121		$	347,656
Adjusted EBITDA margin	31.9		%	33.6		%	33.9		%
Operating income margin	8.8		%	10.2		%	12.0		%
Income from operations	$	55,241		$	79,602		$	123,471
Effective tax rate	35.1		%	35.1		%	34.4		%
Net operating profit after tax (NOPAT) (1)	$	35,851		$	51,662		$	80,997
NOPAT margin	5.7		%	6.6		%	7.9		%
Capital efficiency and returns
Interest bearing debt	$	167,386		$	131,727		$	139,126
Stockholders' equity	$	349,427		$	438,863		$	599,423
Less: Excess cash	$	(105,083	)	$	(79,174	)	$	(125,865	)
Capital base	$	411,730		$	491,416		$	612,684
Average capital base	$	390,472		$	445,179		$	552,328
Capital turnover	1.61			1.75			1.86
Return on capital (1)	9.2		%	11.6		%	14.7		%
Capital expenditures
Purchases of property and equipment, net	$	117,292		$	144,778		$	269,804
Vendor-financed equipment purchases	$	68,382		$	71,363		$	75,090
Total capital expenditures	$	185,674		$	216,141		$	344,894
Customer gear	$	108,829		$	136,348		$	196,096
Data center build outs	$	37,208		$	38,515		$	49,947
Office build outs	$	14,672		$	8,942		$	35,752
Capitalized software and other projects	$	24,965		$	32,336		$	63,099
Total capital expenditures	$	185,674		$	216,141		$	344,894
Infrastructure capacity and utilization
Technical square feet of data center space at period end (4)	162,848			180,173			233,960
Annualized net revenue per average technical square foot	$	3,929		$	4,477		$	4,866
Utilization rate at period end	65.3		%	72.0		%	68.1		%

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(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.

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.

	Year Ended December 31,
(Dollar amounts in thousands)	2009		2010		2011
Megawatts under contract at period end	28.4		32.7		48.1
Megawatts available for use at period end	20.8		23.2		30.7
Megawatts utilized at period end	13.3		16.7		20.9
Net revenue per average Megawatt of power utilized	$	53,304	$	52,037	$	54,065

Executive Overview

To aid in understanding our operating results for the periods covered by this report, we have provided an executive overview and a summary of the significant events that affected the most recent fiscal year. These sections should be read in conjunction with the more detailed discussion and analysis of our financial condition and results of operations in Item 7, our “Risk Factors” section included in Item 1A of Part I, and our audited consolidated financial statements and notes included in Item 8 of Part II of this report.

In 2011 we focused on accelerating the growth of our business while maintaining our profits and returns and focusing on the minimal use of cash to achieve our growth.

Growth of Our Business. Our business grew in 2011 with net revenue growth year over year of $244.5 million, or 31.3%, to $1,025.1 million compared to $780.6 million in 2010. Our increase in net revenue was primarily due to increased volume of services provided, due to both an increasing number of new customers and incremental services rendered to existing customers. Year-over-year revenue increases were 22.9% for our Dedicated Cloud hosting service and 87.9% for our Public Cloud hosting service. Also contributing to the revenue increase was the positive impact of a weaker U.S. dollar relative to the pound sterling. Net revenue in 2011 would have been approximately $8.6 millionlower had the U.S. dollar to the pound sterling exchange rate remained constant from the prior year.

Our 2011 performance was the result of a combination of continued market demand for our services as well as our focused execution on our growth strategy. As of December 31, 2011, we served over 172,000 customers running on over 79,000 servers within our data centers in the U.S., the U.K., and Hong Kong, which represented incremental increases in each category as compared to 2010. During 2011, our monthly average churn rate was 0.9%, compared to 1.0% in 2010. Overall, our installed base continued to provide a portion of our growth in 2011, growing at a monthly average rate of 1.0% in 2011, compared to 0.5% in 2010 and 0.2% in 2009, respectively. In the fourth quarter of 2011, our churn rate was 0.8% and installed base growth was 1.2%. The increase in net upgrades is primarily due to an increasing number of larger customers within our customer base, as well as increasing spend by these customers. These larger customers generally have higher net upgrades.

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Our revenue growth has moved us into a new competitive landscape where our direct competitors are much larger and stronger financially. We will continue to compete more directly with Amazon, Microsoft, IBM and Google as cloud computing services become increasingly more virtualized. Accordingly, we have been making increased infrastructure investments to complement and leverage Fanatical Support, our principal differentiation from our competitors across our multiple service offerings. Our cloud computing services provide customers with a mission-critical service and world class support, and we believe this provides us with substantial growth opportunities. We believe that by offering a higher service level agreement and extending our support to new technology platforms, our business becomes more capital efficient and our competitive advantage widens as our service capability increases.

Scaling Profits and Returns. While accelerating our revenue growth rate in 2011, profit margins increased as well, particularly during the second half of the year.

Income from operations increased$43.9 million, or 55.2%, to $123.5 million in 2011, compared to $79.6 million in 2010. Operating income margin was 12.0% in 2011 as compared to 10.2% in 2010. Adjusted EBITDA increased$85.6 million, or 32.7%, to $347.7 million in 2011, compared to $262.1 million in 2010. In addition, Adjusted EBITDA as a percentage of revenue was 33.9% in 2011 compared to 33.6% in 2010. See the following section on non-GAAP financial measures for a discussion of Adjusted EBITDA. Net income was $76.4 million or $0.55 per share on a diluted basis in 2011, compared to net income of $46.4 million, or $0.35 per share on a diluted basis in 2010. Net income margin was 7.5% in 2011 as compared to 5.9% in 2010.

Use of Cash. For the year ended December 31, 2011, we had negative adjusted free cash flow of $7.4 million. See below for our discussion of non-GAAP financial measures.

During 2011, we were able to maintain a consistent level of cash and cash equivalents while growing our business by maintaining our disciplined use of capital. Our capital expenditures for 2011 were $344.9 million, of which $75.1 million was vendor-financed, while our cash provided by operating activities was $343.0 million. In 2011, we deployed an additional 13,790 servers, bringing our total servers to 79,805, an increase of 20.9%. As of December 31, 2011, we had $119.1 million in cash deposits and $40.7 million in money market funds.

Company Highlights and Developments

Product and Service Offerings

We continue to invest in our Public Cloud service and believe it is a critical part of our future success. Public cloud continues to emerge as a new technology with high adoption rates and investment, which is reflected in its high revenue growth rate. The primary benefit of Public Cloud is the value proposition that it provides for businesses. It enables them to match costs directly to revenue and to scale up and down on a real-time basis as necessary. We do not believe that Public Cloud will replace traditional Dedicated Cloud hosting offerings. We believe the two complement one another, allowing customers to choose from a portfolio of offerings to meet their business needs.

A focus in our growth strategy is to build our product portfolio to include higher service levels and additional capabilities. We are investing heavily in this strategy and creating new technologies to help businesses leverage the benefits of Public Cloud hosting. Hosted virtual desktop, our managed Cloud service, the U.K. Cloud, and Cloud Load Balancers are a few of the recent examples of new capabilities we have developed that are available in the market today that make us more competitive, drive revenue growth, and improve returns.

Our product road-map includes a variety of new capabilities and features including Cloud Block Storage, enhancements to RackConnect, and building a support business around the OpenStack cloud computing platform. Based on our experience working with customers running OpenStack, we are ready to move into the next phase of our OpenStack strategy with the introduction of a new service we call Rackspace Cloud: Private Edition. This new offering will enable Rackspace to extend Fanatical Support beyond the bounds of our data centers by remotely supporting and managing OpenStack environments that run in almost any data center. While this initiative is still in its early stages of development, Rackspace Cloud: Private Edition is an opportunity to drive incremental demand.

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Results of Operations

The following tables set forth our results of operations for the specified periods and as a percentage of our revenue for those same periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

Consolidated Statements of Income:

	Year Ended December 31,
(In thousands)	2009			2010			2011
Net revenue	$	628,987		$	780,555		$	1,025,064
Costs and expenses:
Cost of revenue	200,943			249,840			309,095
Sales and marketing	79,458			96,207			126,505
General and administrative	168,116			199,011			270,581
Depreciation and amortization	125,229			155,895			195,412
Total costs and expenses	573,746			700,953			901,593
Income from operations	55,241			79,602			123,471
Other income (expense):
Interest expense	(8,950		)	(7,984		)	(5,848		)
Interest and other income (expense)	255			(207		)	(1,194		)
Total other income (expense)	(8,695		)	(8,191		)	(7,042		)
Income before income taxes	46,546			71,411			116,429
Income taxes	16,328			25,053			40,018
Net income	$	30,218		$	46,358		$	76,411

Consolidated Statements of Income, as a Percentage of Net Revenue:

	Year Ended December 31,
(Percent of net revenue)	2009		2010		2011
Net revenue	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of revenue	31.9	%	32.0	%	30.2	%
Sales and marketing	12.6	%	12.3	%	12.3	%
General and administrative	26.7	%	25.5	%	26.4	%
Depreciation and amortization	19.9	%	20.0	%	19.1	%
Total costs and expenses	91.2	%	89.8	%	88.0	%
Income from operations	8.8	%	10.2	%	12.0	%
Other income (expense):
Interest expense	-1.4	%	-1.0	%	-0.6	%
Interest and other income (expense)	0.0	%	0.0	%	-0.1	%
Total other income (expense)	-1.4	%	-1.0	%	-0.7	%
Income before income taxes	7.4	%	9.1	%	11.4	%
Income taxes	2.6	%	3.2	%	3.9	%
Net income	4.8	%	5.9	%	7.5	%

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

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Years ended December 31, 2010 and December 31, 2011

Net Revenue

Our net revenue was $780.6 million during 2010 and $1,025.1 million during 2011, an increase of $244.5 million, or 31.3%. The increase in net revenue was primarily due to increased volume of services provided, due to both an increasing number of new customers and incremental services rendered to existing customers. Also contributing to the the revenue increase was the positive impact of a weaker U.S. dollar relative to the pound sterling in 2011 compared to 2010. Net revenue for 2011 would have been approximately $8.6 millionlower had the U.S. dollar to the pound sterling exchange rate remained constant from the prior year, with a minimal impact to our margins as the majority of these customers are invoiced, and substantially all of our expenses associated with these customers are paid, by us or our subsidiaries in the functional currency of our company or our subsidiaries, respectively.

Cost of Revenue

Our cost of revenue was $249.8 million during 2010 and $309.1 million during 2011, an increase of $59.3 million, or 23.7%. Of this increase, $31.1 million was attributable to an increase in employee-related expenses due to increases in salaries and benefits of $27.1 million and non-equity incentive compensation of $4.4 million, partially offset by a $0.4 million decrease in share-based compensation expense. These increases were the result of the hiring of data center and support personnel to support our growth and higher percentage attainment against the preset target for non-equity incentive compensation. The cost increase was further attributable to an increase in data center costs of $13.5 million related to bandwidth, power and rent, and an increase in license costs of $11.9 million. The remaining increase was due to small variances in other cost of revenue expenses.

Sales and Marketing Expenses

Our sales and marketing expenses were $96.2 million during 2010 and $126.5 million during 2011, an increase of $30.3 million, or 31.5%. Of this increase, $17.5 million was attributable to an increase in employee-related expenses due to increases in salaries and benefits of $16.1 million and commissions of $3.3 million, partially offset by a $1.9 million decrease in share-based compensation expense. Total compensation increased as a result of the hiring of additional sales and marketing personnel and the impact of commissions associated with increased sales. Additionally, advertising and Internet-related marketing expenditures increased $11.5 million. The remaining increase was due to small variances in other sales and marketing expenses.

General and Administrative Expenses

Our general and administrative expenses were $199.0 million during 2010 and $270.6 million during 2011, an increase of $71.6 million, or 36.0%. Of this increase, $48.8 million was attributable to employee-related expenses due to increases in salaries and benefits of $36.9 million, non-equity incentive compensation of $7.4 million, and share-based compensation expense of $4.5 million. These increases are primarily due to additional headcount, higher percentage attainment against the preset target for non-equity incentive compensation and equity awards granted in 2011. Professional fees and legal expenses increased $11.4 million primarily as a result of increased consulting expenses related to accounting and tax services, corporate strategy and internal system maintenance and improvements and various infrastructure projects that were not capitalized. Travel and other employee related expenses such as recruiting fees and relocation increased $4.7 million primarily due to a general increase in hiring during 2011. Additionally, office expenses including rent and maintenance increased $2.0 million, and merchant credit card fees and bad debt increased $2.7 million and $0.6 million, respectively, due to a higher volume of sales. The remaining variance was due to small changes in other general and administrative expenses.

Depreciation and Amortization Expense

Our depreciation and amortization expense was $155.9 million during 2010 and $195.4 million during 2011, an increase of $39.5 million, or 25.3%. This increase in depreciation and amortization expense was a direct result of an increase in property and equipment related to depreciable assets to support the growth of our business, including increases in data center equipment and leasehold improvements due to data center build-outs and internally developed and purchased software.

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Other Income (Expense)

Our interest expense was $8.0 million during 2010 and $5.8 million during 2011, a decrease of $2.2 million, or 27.5%. This decrease was primarily due to the decreased level of indebtedness. Interest expense was partially offset by capitalized interest of $0.6 million during 2010. There was no interest capitalized in 2011.

Interest and other income (expense) was $(0.2) million during 2010 and $(1.2) million during 2011. 2010 included foreign currency losses of $0.7 million compared to foreign currency losses of $0.3 million in 2011 and accretion expense of acquisition-related liabilities of $1.3 million.

Income Taxes

Our effective tax rate was 35.1% and 34.4% in 2010 and 2011, respectively. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income, research and development credits, contingency reserves for uncertain tax positions and permanent differences between the book and tax treatment of certain items. Our foreign earnings are generally taxed at lower rates than in the United States.

For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Item 8 of Part II, “Financial Statements and Supplementary Data – Note 14 – Taxes.”

Years ended December 31, 2009 and 2010

Net Revenue

Our net revenue was $629.0 million during 2009 and $780.6 million during 2010, an increase of $151.6 million, or 24.1%. The increase in net revenue was primarily due to increased volume of services provided, due to both an increasing number of new customers and incremental services rendered to existing customers. Partially offsetting the revenue increase was the negative impact of a stronger U.S. dollar relative to the pound sterling in 2010 compared to 2009. Net revenue for 2010 would have been approximately $2.7 million higher had the U.S. dollar to the pound sterling exchange rate remained constant from the prior year, with a minimal impact to our margins as the majority of these customers are invoiced, and substantially all of our expenses associated with these customers are paid, by us or our subsidiaries in the functional currency of our company or our subsidiaries, respectively. Net revenue in 2009 was negatively impacted by two service interruptions, which resulted in a total of $3.7 million in service credits. There were no significant service interruptions in 2010.

Cost of Revenue

Our cost of revenue was $200.9 million during 2009 and $249.8 million during 2010, an increase of $48.9 million, or 24.3%. Of this increase, $24.0 million was attributable to an increase in employee-related expenses due to increases in salaries and benefits of $20.9 million, share-based compensation expense of $1.8 million and non-equity incentive compensation of $1.3 million. These increases were the result of the hiring of data center and support personnel to support our growth, equity awards granted in 2010 and higher percentage attainment against the preset target for non-equity incentive compensation. The cost increase was further attributable to an increase in data center costs of $6.2 million related to bandwidth, power and rent, an increase in license costs of approximately $8.3 million and an increase in consulting fees related to data center assessments and improvements of $10.0 million. Impacting the $8.3 million increase in license costs was a $2.1 million reduction in 2009 related to the reversal of a previously recorded obligation relating to an unresolved contractual issue with a vendor. During the fourth quarter of 2009, we concluded that the obligation was no longer probable, and accordingly, we reversed the liability, which reduced cost of revenue. The remaining increase was due to small increase in other cost of revenue expenses.

Sales and Marketing Expenses

Our sales and marketing expenses were $79.5 million during 2009 and $96.2 million during 2010, an increase of $16.7 million, or 21.0%. Of this increase, $11.4 million was attributable to an increase in employee-related expenses due to increases in salaries and benefits of $5.3 million, commissions of $4.1 million, share-based compensation expense of $1.4 million and non-equity incentive compensation of $0.6 million. Total compensation increased as a result of the hiring of additional sales and marketing personnel and the impact of commissions associated with increased sales. Additionally, advertising and Internet-related marketing expenditures increased $3.3 million, and travel and other employee-related expenses increased $2.0 million.

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General and Administrative Expenses

Our general and administrative expenses were $168.1 million during 2009 and $199.0 million during 2010, an increase of $30.9 million, or 18.4%. Of this increase, $19.0 million was attributable to employee-related expenses due to increases in salaries and benefits of $13.4 million, non-equity incentive compensation of $2.3 million, and share-based compensation expense of $3.3 million. These increases are primarily due to additional headcount, higher percentage attainment against the preset target for non-equity incentive compensation and equity awards granted in 2010. Professional fees increased $3.6 million primarily as a result of increased consulting expenses related to accounting and tax services, corporate strategy and internal system maintenance and improvements, and incremental software and maintenance costs of $1.6 million. Travel and other employee-related expenses such as recruiting fees and relocation increased $5.4 million primarily due to the addition of several executive level positions and a general increase in hiring during 2010. Additionally, property tax increased $2.0 million due to the addition of data center facilities. We also experienced an increase in merchant credit card fees of $1.8 million due to higher volume of sales in 2010. The overall increase was partially offset by a decrease in bad debt expense of $2.0 million due to a positive change in customer payment patterns and increased cash collections. The remaining variance was due to small changes in other general and administrative expenses.

Depreciation and Amortization Expense

Our depreciation and amortization expense was $125.2 million during 2009 and $155.9 million during 2010, an increase of $30.7 million, or 24.5%. This increase in depreciation and amortization expense was a direct result of an increase in property and equipment related to depreciable assets, including increases in data center equipment and leasehold improvements due to data center build outs and internally developed and purchased software, as well as intangible assets acquired through acquisitions.

Income Taxes

Our effective tax rate remained constant with a rate of 35.1% for 2009 and 2010. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income, research and development credits, contingency reserves for uncertain tax positions and permanent differences between the book and tax treatment of certain items. Our foreign earnings are generally taxed at lower rates than in the United States.

Quarterly Key Metrics and Results of Operations

The following tables set forth our unaudited quarterly key metrics and condensed consolidated statement of operations data in dollars and as a percentage of revenue for each of our most recent five quarters as of the period ended December 31, 2011. The quarterly data presented below has been prepared on a basis consistent with the audited consolidated financial statements included elsewhere in this document and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information. You should read this information together with our consolidated financial statements and related notes included elsewhere in this document. Our quarterly results of operations may fluctuate in the future due to a variety of factors. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our results for these quarterly periods are not necessarily indicative of the results of operations for a full year or any period.

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	Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server and annualized net revenue per average technical square foot)	December 31, 2010			March 31, 2011			June 30, 2011			September 30, 2011			December 31, 2011
Growth
Dedicated Cloud, net revenue	$	183,311		$	192,895		$	204,275		$	213,899		$	224,808
Public Cloud, net revenue	$	31,415		$	37,107		$	42,954		$	50,673		$	58,453
Net revenue	$	214,726		$	230,002		$	247,229		$	264,572		$	283,261
Revenue growth (year over year)	26.7		%	28.6		%	32.0		%	32.5		%	31.9		%
Net upgrades (monthly average)	1.6		%	1.8		%	1.8		%	1.8		%	2.0		%
Churn (monthly average)	-1.0		%	-0.9		%	-0.9		%	-0.9		%	-0.8		%
Growth in installed base (monthly average) (2)	0.6		%	0.9		%	0.9		%	0.9		%	1.2		%
Number of customers at period end (3)	130,291			142,441			152,578			161,422			172,510
Number of employees (Rackers) at period end	3,262			3,492			3,712			3,799			4,040
Number of servers deployed at period end	66,015			70,473			74,028			78,717			79,805
Average monthly revenue per server	$	1,101		$	1,123		$	1,141		$	1,155		$	1,191
Profitability
Income from operations	$	23,408		$	23,983		$	28,653		$	31,070		$	39,765
Depreciation and amortization	$	41,529		$	44,098		$	46,952		$	49,518		$	54,844
Share-based compensation expense
Cost of revenue	$	1,223		$	1,412		$	756		$	1,005		$	1,047
Sales and marketing (4)	$	1,052		$	1		$	609		$	864		$	839
General and administrative	$	4,812		$	6,397		$	4,618		$	5,526		$	5,699
Total share-based compensation expense	$	7,087		$	7,810		$	5,983		$	7,395		$	7,585
Adjusted EBITDA (1)	$	72,024		$	75,891		$	81,588		$	87,983		$	102,194
Adjusted EBITDA margin	33.5		%	33.0		%	33.0		%	33.3		%	36.1		%
Operating income margin	10.9		%	10.4		%	11.6		%	11.7		%	14.0		%
Income from operations	$	23,408		$	23,983		$	28,653		$	31,070		$	39,765
Effective tax rate	37.2		%	38.3		%	33.8		%	31.7		%	34.5		%
Net operating profit after tax (NOPAT) (1)	$	14,700		$	14,798		$	18,968		$	21,221		$	26,046
NOPAT margin	6.8		%	6.4		%	7.7		%	8.0		%	9.2		%
Capital efficiency and returns
Interest bearing debt	$	131,727		$	134,905		$	138,841		$	144,152		$	139,126
Stockholders' equity	$	438,863		$	478,307		$	511,843		$	551,049		$	599,423
Less: Excess cash	$	(79,174	)	$	(106,268	)	$	(102,358	)	$	(92,931	)	$	(125,865	)
Capital base	$	491,416		$	506,944		$	548,326		$	602,270		$	612,684
Average capital base	$	471,119		$	499,180		$	527,635		$	575,298		$	607,477
Capital turnover (annualized)	1.82			1.84			1.87			1.84			1.87
Return on capital (annualized) (1)	12.5		%	11.9		%	14.4		%	14.8		%	17.2		%
Capital expenditures
Purchases of property and equipment, net	$	46,884		$	57,651		$	74,754		$	70,379		$	67,020
Vendor-financed equipment purchases	$	16,596		$	19,009		$	20,567		$	23,179		$	12,335
Total capital expenditures	$	63,480		$	76,660		$	95,321		$	93,558		$	79,355
Customer gear	$	38,052		$	46,300		$	48,777		$	53,643		$	47,376
Data center build outs	$	9,754		$	9,173		$	17,491		$	16,715		$	6,568
Office build outs	$	5,145		$	2,957		$	14,074		$	8,806		$	9,915
Capitalized software and other projects	$	10,529		$	18,230		$	14,979		$	14,394		$	15,496
Total capital expenditures	$	63,480		$	76,660		$	95,321		$	93,558		$	79,355
Infrastructure capacity and utilization
Technical square feet of data center space at period end (5)	180,173			181,848			198,868			227,988			233,960
Annualized net revenue per average technical square foot	$	4,807		$	5,083		$	5,195		$	4,959		$	4,906
Utilization rate at period end	72.0		%	76.7		%	72.9		%	69.0		%	68.1		%

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(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.

As noted above in the annual 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 quarterly 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 at period end	32.7		35.7		38.0		41.9		48.1
Megawatts available for use at period end	23.2		24.7		27.0		29.7		30.7
Megawatts utilized at period end	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

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Consolidated Statements of Income by Quarter

	Three Months Ended
(In thousands)	December 31, 2010			March 31, 2011			June 30, 2011			September 30, 2011			December 31, 2011
	(Unaudited)
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

Consolidated Statements of Income by Quarter, as a Percentage of Net Revenue

	Three Months Ended
(Percent of net revenue)	December 31, 2010		March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
	(Unaudited)
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.

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Liquidity and Capital Resources

At December 31, 2011, we held $159.9 million in cash and cash equivalents. We use our cash and cash equivalents, cash flow from operations, capital leases, and existing amounts available under our revolving credit facility as our primary sources of liquidity.  We currently believe that cash generated by operations, current cash and cash equivalents, and available borrowings through vendor-financing arrangements and our credit facility will be sufficient to meet our operating and capital needs in the foreseeable future.

We do not have a significant amount of cash holdings in foreign countries. If these funds are repatriated, we will need to accrue and pay taxes; however, we do not currently intend to repatriate these funds because we believe cash available in the U.S. is sufficient to meet our domestic operating and capital needs.

On September 26, 2011, we entered into a revolving credit facility with a syndicate of seven banks led by JPMorgan Chase. This facility replaces our previous credit facility, which was due to expire in August 2012. The new credit facility has a total commitment in the amount of $200 million and matures in September 2016.  The facility is unsecured and governed by customary financial and non-financial covenants, including a leverage ratio of not greater than 3.00 to 1.00, an interest coverage ratio of not less than 3.00 to 1.00 and a requirement to maintain a certain level of tangible assets in our U.S. entities. As of December 31, 2011, we were in compliance with all of the covenants under our facility.

We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), and our overall cost of capital. As of December 31, 2011 there was no amount outstanding under the new facility except for an outstanding letter of credit of $0.4 million, resulting in an additional $199.6 million being available for future borrowings.

We have vendor finance arrangements in the form of leases and notes payable with our major vendors that permit us to finance our purchases of data center equipment.  As of December 31, 2010 and 2011, we had $131.7 million and $139.1 million outstanding with respect to these arrangements.  We believe our borrowings from these arrangements will continue to be available, and as long as they are competitive, we expect to continue to finance at least some of our equipment purchases through these arrangements.

Capital Expenditure Requirements

In 2012, we expect to have capital expenditures between $335 million and $405 million in the aggregate, consisting of $210 million to $250 million for customer gear, $25 million to $35 million for data center infrastructure costs, $25 million to $35 million for office build-outs, and $75 million to $85 million for capitalized software and other projects.

Our available cash and cash equivalents are held in bank deposits, overnight sweep accounts, and money market funds. Our money market mutual funds invest exclusively in high-quality, short-term securities that are issued or guaranteed by the U.S. government or by U.S. government agencies. We actively monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal while secondarily maximizing yield on those funds. The balances may exceed the Federal Deposit Insurance Corporation or “FDIC” insurance limits or may not be insured by the FDIC. While we monitor the balances in our accounts and adjust the balances as appropriate, these balances could be impacted if the underlying depository institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to our invested cash and cash equivalents; however, we can provide no assurances that access to our funds will not be impacted by adverse conditions in the financial markets.

We currently believe that current cash and cash equivalents, cash generated by operations and available borrowings through vendor financing arrangements and our credit facility will be sufficient to meet our operating and capital needs in the foreseeable future. Our long-term future capital requirements will depend on many factors, most importantly our revenue growth and our investments in new technologies and services. Our ability to generate cash depends on our financial performance, general economic conditions, technology trends and developments, and other factors. As our business continues to grow, our need for data center capacity will also grow.  Most recently we have financed data center growth through leasing activities, and we will continue to evaluate all opportunities to secure further data center capacity in the future.  We could be required, or could elect, to seek additional funding in the form of debt or equity.

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The following table sets forth a summary of our cash flows for the periods indicated: 

	Year Ended December 31,
(In thousands)	2009			2010			2011
Cash provided by operating activities	$	196,868		$	244,235		$	342,985
Cash used in investing activities	$	(124,114	)	$	(175,197	)	$	(270,588	)
Cash used in financing activities	$	(187,287	)	$	(89,402	)	$	(17,190	)
Acquisition of property and equipment by capital leases and equipment notes payable	$	68,382		$	71,363		$	75,090

Operating Activities

Net cash provided by operating activities is primarily a function of our profitability, the amount of non-cash charges included in our profitability, and our working capital management.  Net cash provided by operating activities was $244.2 million in 2010 compared to $343.0 million in 2011, an increase of $98.8 million, or 40.5%.  Net income increased from $46.4 million in 2010 to $76.4 million in 2011.  A summary of the significant changes in non-cash adjustments affecting net income is as follows:

• Depreciation and amortization expense was $155.9 million in 2010 compared to $195.4 million in 2011.  The increase in depreciation and amortization was due to purchases of servers, networking gear, computer software (internally developed technology), electrical equipment, and leasehold improvements primarily for data center expansion, as well as the amortization of intangibles related to acquisitions.

• Our provision for bad debts and customer credits increased from $4.3 million in 2010 to $5.9 million in 2011 due to the increases in net revenue and accounts receivable.

• The change in deferred income taxes created a $6.8 millionincrease to cash flow from operating activities in 2010 compared to a $14.0 millionincrease in 2011. The change in deferred income taxes is due to the utilization of existing net operating losses as part of the intellectual property transfer to an offshore subsidiary. See Item 8 of Part II, “Financial Statements and Supplementary Data – Note 14 – Taxes.”

• The change in deferred rent created a $7.1 million non-cash increase to cash flow from operating activities in 2010 compared to a $9.5 millionincrease in 2011.  The change resulted from data center lease arrangements that were entered into in 2009, 2010 and 2011 with terms that included escalating rental payments.  As total rent expense for each of these lease arrangements is recorded on a straight-line basis for the term of the lease, there is a difference between rent expense and cash paid for rent during the period.

• Share-based compensation expense was $26.6 million in 2010 compared to $28.8 million in 2011.  The increase in expense was due to incremental stock options and restricted stock units granted in 2010 and 2011.

A summary of changes in assets and liabilities impacting operating cash flows is as follows:

• The change in accounts receivable was a cash outflow of $12.9 million in 2010 compared to a cash outflow of $26.8 million in 2011. Accounts receivable increased due to the increase in sales.

• The change in income taxes receivable was a cash inflow of $2.6 million in 2010 compared to a cash inflow of $4.4 million in 2011.  We received federal income tax refunds totaling $4.5 million in 2011 compared to federal income tax refunds of $8.4 million received in 2010 related to a carryback claim for our loss.

• The change in prepaid expenses and other current assets was a cash outflow of $10.1 million in 2010 compared to a cash outflow of $2.6 million in 2011. The change in cash outflow is the result of making increased license prepayments beginning in 2010 that continued into 2011.

• The change in accounts payable and accrued expenses created a $16.8 million cash inflow in 2010 compared to a $57.5 million cash inflow in 2011.  The changes resulted from the timing of payments for trade payables and payroll-related expenses.

Net cash provided by operating activities was $196.9 million in 2009 compared to $244.2 million in 2010, an increase of $47.3 million or 24.0%. Net income increased from $30.2 million in 2009 to $46.4 million in 2010.

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During 2009 and 2010, we incurred depreciation and amortization charges in the amount of $125.2 million and $155.9 million, respectively. The increase in depreciation and amortization was due to the purchases of servers, networking gear and computer software (internally developed technology), electrical equipment, and leasehold improvements primarily for data center expansion, as well as amortization of intangibles related to acquisitions. We further incurred non-cash compensation expense in the amount of $20.1 million and $26.6 million in 2009 and 2010, respectively. The increase was due to stock options and restricted stock units granted in 2009 and 2010.

The changes in certain assets and liabilities in 2010 was a cash outflow of $1.2 million compared to a cash outflow of $3.8 million in 2009. The cash outflows in each year primarily consisted of increases in accounts receivable due to the increase in sales each year.

Investing Activities

Net cash used in investing activities was primarily capital expenditures to meet the demands of our growing customer base. Historically our main investing activities have consisted of purchases of IT equipment for our data center infrastructure, furniture, equipment and leasehold improvements to support our operations.

Our net cash used in investing activities was $175.2 million during 2010 compared to $270.6 million during 2011, an increase of $95.4 million, or 54.5%.  The increase was primarily due to an increase in the purchase of property and equipment of $125.0 million, partially offset by a $28.9 milliondecrease related to acquisitions.

The combined total of capital expenditures for property and equipment, net, increased from $216.1 million during 2010 to $344.9 million in 2011. Of the 2011 amount, $196.1 million was used to purchase dedicated customer equipment, $49.9 million for data center build-outs, $35.8 million related to build-out of office space and $63.1 million was invested in capitalized software, including internally developed software that is focused on improving our service offerings, and other purchases.

We purchase equipment through capital lease arrangements and other types of vendor financing that do not require an initial outlay of cash.  Purchases through these arrangements increased from $71.4 million during 2010 to $75.1 million during 2011.

Our net cash used in investing activities was $124.1 million during 2009 compared to $175.2 million during 2010, an increase of $51.1 million, or 41.2%. This increase was primarily due to an increase in the purchase of property and equipment of $27.5 million and a $29.9 millionincrease related to acquisitions.

The combined total of capital expenditures for property and equipment, net, increased from $185.7 million during 2009 to $216.1 million in 2010. Of the 2010 amount, $136.3 million was used to purchase dedicated customer equipment, $38.5 million for data center build-outs, $9.0 million related to build-out of office space and $32.3 million was invested in capitalized software, including internally developed software that is focused on improving our service offerings, and other purchases.

We purchase equipment through capital lease arrangements and other types of vendor financing that do not require an initial outlay of cash.  Purchases through these arrangements increased from $68.4 million during 2009 to $71.4 million during 2010.

Financing Activities

Net cash used in financing activities was $89.4 million during 2010 compared to $17.2 million during 2011, a decrease of $72.2 million, or 80.8%. Principal payments on capital leases and notes payable were $57.0 million in 2010 compared to $67.7 million in 2011.  Cash proceeds from employee stock plans increased from $15.3 million in 2010 to $36.3 million in 2011 due to increased stock option exercise activity. Additionally, in 2011, there were cash outflows of $1.1 million for payments of debt issuance costs related to our new revolving credit agreement and $5.3 million for payments of earn-out provisions related to our December 2010 acquisition. Our net leverage as of December 31, 2011 was 0.1 times.  See below for our discussion of non-GAAP financial measures.

Net cash used in financing activities was $187.3 million during 2009 compared to $89.4 million during 2010, a change of $97.9 million, or 52.3%. This change was due primarily to a decrease in net payments to our revolving line of credit from $150 million in 2009 to $50 million in 2010.

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Contractual Obligations, Commitments and Contingencies

The following table summarizes our contractual obligations as of December 31, 2011: 

(In thousands)	Total		2012		2013-2014		2015-2016		2017 and Beyond
	(Unaudited)
Capital leases (1)	$	144,284	$	69,840	$	71,907	$	2,537	$	—
Operating leases	742,722		35,426		89,395		98,505		519,396
Purchase obligations	52,927		47,574		5,295		58		—
Software and equipment notes (1)	885		885		—		—		—
Total contractual obligations	$	940,818	$	153,725	$	166,597	$	101,100	$	519,396

(1) Represents principal and interest.

Leases

Capital leases are primarily related to expenditures for IT equipment. Our operating leases are primarily for data center facilities and office space.

In February 2011, we modified our Chicago area data center lease in order to lease additional space at the data center.  The additional leased space (accounted for as an operating lease) has a term of 15 years from the commencement date with a total estimated financial obligation of approximately $88 million over the 15-year term, inclusive of base lease payments and Rackspace’s pro-rata share of operating expenses.  Rackspace has a one-time option to terminate the lease after ten years subject to a penalty, as well as upon expiration of the lease, the option to renew the lease for two successive five year periods.

In August 2011, we further modified our Chicago area data center lease in order to lease additional space at the data center. This amendment provides for three separate commencement dates, each for approximately one-third of the total additional leased space. The additional leased space (accounted for as an operating lease) has a term of 15 years from each respective commencement date with a total estimated financial obligation of approximately $125 million to $130 million over the term, inclusive of base lease payments and Rackspace’s pro-rata share of operating expenses.  Upon the expiration of any of the 15-year terms, Rackspace has the option to renew the lease for the additional space for two successive five year periods. In addition, until December 1, 2012, Rackspace has an ongoing option and right of first refusal to lease additional space at the data center.

In December 2011, we entered into a lease for a new data center in Richardson, Texas for approximately 58,200 square feet of raised floor space. The lease provides for two separate commencement dates, anticipated as August 1, 2012 and August 1, 2015, with each commencement date applicable for one-half of the total leased space. The initial term is 15 years from the respective commencement date, and upon the expiration of each of these terms, Rackspace has the option to renew the lease for the applicable space for one additional 10-year period. At any time during the lease, Rackspace has the right to terminate the lease with respect to up to half of the total leased space, subject to a penalty. Rackspace's total estimated financial obligation for the leased space over the 15-year terms is approximately $134 million.

Purchase obligations

Our purchase obligations are primarily related to costs associated with our data centers including bandwidth, electricity, and consulting services, as well as commitments to purchase hardware and to prepay for certain software licenses.  

Software and Equipment Notes

We finance certain software and equipment from third-party vendors. The terms of these arrangements are generally one to five years. The interest rates on the arrangements range from 0.0% to 6.0%.

Uncertain Tax Positions

We have excluded $2.3 million of uncertain tax positions from the table above as we are uncertain as to if or when such amounts will be recognized.

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Non-GAAP Financial Measures

Return on Capital (ROC) (Non-GAAP financial measure)

We define Return on Capital 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 accounting principles generally accepted in the United States (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.

ROC increased from 9.2% in 2009 to 11.6% in 2010 and increased to 14.7% in 2011.  The increase in the current year is due to income from operations increasing at a faster pace than our average capital base over that time period. Return on assets increased from 4.7% in 2009 to 6.4% in 2010 and 8.5% in 2011. The increases are due to net income increasing at a faster pace than our average asset balance.

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See our reconciliation of the calculation of annual return on assets to ROC in the following table: 

	Year Ended December 31,
(In thousands)	2009			2010			2011
Income from operations	$	55,241		$	79,602		$	123,471
Effective tax rate	35.1		%	35.1		%	34.4		%
Net operating profit after tax (NOPAT)	$	35,851		$	51,662		$	80,997
Net income	$	30,218		$	46,358		$	76,411
Total assets at period end	$	668,645		$	761,577		$	1,026,482
Less: Excess cash	(105,083		)	(79,174		)	(125,865		)
Less: Accounts payable and accrued expenses	(89,773		)	(111,645		)	(156,004		)
Less: Deferred revenue (current and non-current)	(19,444		)	(18,749		)	(18,281		)
Less: Other non-current liabilities, deferred income taxes, and deferred rent	(42,615		)	(60,593		)	(113,648		)
Capital base	$	411,730		$	491,416		$	612,684
Average total assets	$	647,493		$	720,521		$	895,545
Average capital base	$	390,472		$	445,179		$	552,328
Return on assets (Net income/Average total assets)	4.7		%	6.4		%	8.5		%
Return on capital (NOPAT/Average capital base)	9.2		%	11.6		%	14.7		%

See our reconciliation of the calculation of quarterly return on assets to ROC in the following table:

	Three Months Ended
(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		%

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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 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.

Adjusted EBITDA increased$85.6 million, or 32.7%, from $262.1 million in 2010 to $347.7 million in 2011.  Adjusted EBITDA as a percentage of revenue increased from 33.6% in 2010 to 33.9% in 2011.  The primary driver of the increase in Adjusted EBITDA percentage was a decrease in Cost of Revenue expenses as a percentage of revenue, partially offset by an increase in General and Administrative expenses as a percentage of revenue.  Also impacting our results were changes in non-cash deferred rent and non-equity incentive compensation. Non-cash rent increased from $7.1 million in 2010 to $9.5 million in 2011.  Overall, non-equity incentive compensation increased $11.8 million due to an increase in the payout percentage and increased headcount.

See our annual Adjusted EBITDA reconciliation below. 

	Year Ended December 31,
(Dollars in thousands)	2009			2010			2011
Net revenue	$	628,987		$	780,555		$	1,025,064
Income from operations	$	55,241		$	79,602		$	123,471
Net income	$	30,218		$	46,358		$	76,411
Plus: Income taxes	16,328			25,053			40,018
Plus: Total other (income) expense	8,695			8,191			7,042
Plus: Depreciation and amortization	125,229			155,895			195,412
Plus: Share-based compensation expense	20,124			26,624			28,773
Adjusted EBITDA	$	200,594		$	262,121		$	347,656
Operating income margin	8.8		%	10.2		%	12.0		%
Adjusted EBITDA margin	31.9		%	33.6		%	33.9		%

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See our quarterly Adjusted EBITDA reconciliation below.

	Three Months Ended
(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		%

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. 

	Year Ended
(In thousands)	December 31, 2011
Adjusted EBITDA	$	347,656
Non-cash deferred rent	9,471
Total capital expenditures	(344,894		)
Cash payments for interest, net	(5,445		)
Cash payments for income taxes, net	(14,192		)
Adjusted free cash flow	$	(7,404	)

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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. 

(Dollars in thousands)	As of
	December 31, 2011
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

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. These entities are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We have entered into various indemnification arrangements with third parties, including vendors, customers, landlords, our officers and directors, stockholders of acquired companies, and third parties to whom and from whom we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by third parties due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. Certain of these agreements require us to indemnify the other party against certain claims relating to property damage, personal injury or the acts or omissions by us, our employees, agents or representatives. To date, there have been no claims against us or our customers pertaining to such indemnification provisions, and no amounts have been recorded.

These indemnification obligations are considered off-balance sheet arrangements. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnification obligations in our financial statements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, significant judgment is required in making estimates and selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. These judgments and estimates affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We consider these policies requiring significant management judgment and estimates used in the preparation of our financial statements to be critical accounting policies.

We review our estimates and judgments on an ongoing basis, including those related to revenue recognition, service credits, allowance for doubtful accounts, property and equipment, goodwill and intangibles, contingencies, the fair valuation of stock related to share-based compensation, software development, and income taxes.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to determine the carrying values of assets and liabilities. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

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Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, service has been provided to the customer, the amount of fees to be paid by the customer is fixed or determinable, and collectibility is reasonably assured. Because we provide our cloud computing services to our customers and do not sell individual hardware and software products, we generally recognize cloud computing revenue, including implementation and set-up fees, on a monthly basis, beginning on the date the customer commences use of our services. For services that are billed according to customer usage, revenue is recognized in the month in which the usage is provided. Implementation fees are amortized over the estimated average customer life. If a customer terminates its relationship with us before the expiration of the estimated average customer life, any unamortized installation fees are recognized as revenue at that time. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Therefore, deferred revenue primarily consists of prepaid service fees and set-up fees. Professional services are recognized in the period services are provided.

Our customers generally have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term. In the event that a customer cancels their contract, they are not entitled to a refund for services already rendered.

Valuation of Accounts Receivable and Service Credits

Estimates that further impact revenue recognition relate primarily to the allowance for doubtful accounts and customer service credits. Both estimates are relatively predictable based on historical experience.

We make judgments as to our ability to collect outstanding receivables and provide allowances when collection becomes doubtful. Judgment is required to assess the likelihood of ultimate realization of recorded accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of either their ability or willingness to make payments, an increase in the allowance for doubtful accounts would be required. Similarly, a change in the payment behavior of customers generally may require an adjustment in the calculation of the appropriate allowance. Each month, management reviews customer payment patterns, historical data and anticipated customer default rates of the various aging categories of accounts receivables in order to determine the appropriate allowance for doubtful accounts. We write off customer accounts receivable balances to the allowance for doubtful accounts when it becomes likely that we will not collect from the customer.

All of our customer agreements provide that we will achieve certain service levels. To the extent that such service levels are not achieved, we record service credits, which are a reduction to revenue, and a corresponding increase in the allowance for customer credits to provide for estimated adjustments to receivables. We base these provisions on historical experience and evaluate the estimate of service credits on a regular basis and adjust the amount reserved accordingly.

Property, Equipment and Other Long-Lived Assets

In providing services to our customers, we utilize significant amounts of property and equipment, which we depreciate on a straight-line basis over their estimated useful lives. Changes in technology or changes in the intended use of property and equipment may cause the estimated useful life or the value of these assets to change, so we periodically review the appropriateness of the estimated economic useful lives for each category of property and equipment.

Periodically we assess potential impairment of our property and equipment. Whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, we perform an impairment review by comparing the carrying amount of the asset or asset group to the net future undiscounted cash flows that the asset is expected to generate. If necessary, we recognize an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset. There were no impairment charges recorded in 2009, 2010 or 2011.

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Goodwill

Goodwill, which consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired, is evaluated for impairment on an annual basis on October 1st, or whenever events or circumstances indicate that impairment may have occurred. The goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We evaluate our reporting units annually and, if necessary, reassign goodwill using a relative fair value allocation approach. We estimate the fair value of our reporting units using a discounted cash flow methodology, which requires significant judgments, including estimation of future cash flows, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

We did not identify any triggering events in 2011 that would require an update to our annual impairment test. Additionally, upon conclusion of our 2011 annual test, we noted that the fair value of each of our reporting units with goodwill was substantially in excess of the carrying value of the respective reporting unit’s net assets.

Contingencies

We accrue for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, we reassess our position and make appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters, changes in the interpretation and enforcement of international laws, and the impact of local economic conditions and practices, which are all subject to change as events evolve and as additional information becomes available during the administrative and litigation process.

Share-Based Compensation

Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be impacted.

Software Development

We capitalize the salaries and payroll-related costs of employees and consultants who devote time to the development of certain internal-use software projects. If a project constitutes an enhancement to previously developed software, we assess whether the enhancement is significant and creates additional functionality to the software, thus resulting in capitalization. All other software development costs are expensed as incurred. We generally amortize capitalized software development costs over periods ranging from 12 to 36 months, which represents the estimated useful lives of the software.

Income Taxes

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.

Historically, our effective tax rates have not differed significantly from the statutory rate, and any differences are primarily due to the tax impact of foreign operations, research and development tax credits, state taxes, contingency reserves for uncertain tax positions and certain benefits realized related to stock option activity. Our effective tax rates were 35.1%, 35.1% and 34.4% for 2009, 2010 and 2011, respectively. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

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Recent Accounting Pronouncements

See Item 8 of Part II, “Financial Statements and Supplementary Data – Note 1. Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies.”

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Power Prices. We are a large consumer of power. During 2011, we expensed approximately $22.4 million that was paid to utility companies to power our data centers, representing 2.2% of our net revenue. Because we anticipate further revenue growth for the foreseeable future, we expect to consume more power in the future. Power costs vary by geography, the source of power generation, and seasonal fluctuations and are subject to certain proposed legislation that may increase our exposure to increased power costs. Our largest exposure to energy prices based on consumption currently exists at our Grapevine, Texas data center in the Dallas-Fort Worth area, a deregulated energy market. We currently have a fixed-price power contract with the provider of electricity for our Grapevine data center that expires in September 2013. The contract allows the company to periodically convert the price to a floating market price during the arrangement. We also have a power contract for our facility in Slough U.K. that allows us to procure power either on a fixed price or on a variable price basis, which also expires in September 2013. We have fixed the price of the majority of the load through September 2012. These contracts have been designated as meeting the normal purchases and normal sales exception and thus are not accounted for as derivatives.

In 2010, the U.K.’s carbon emission trading scheme (CRC Energy Efficiency Scheme) came into operation. Based on certain criteria, we are required to register under the CRC’s second phase, which begins in April 2012. Under the scheme’s second phase, the period commencing April 2012 to March 2013 is a qualification period during which we will be required to officially measure our carbon dioxide emissions. The period from April 2013 to March 2014 is then considered the footprint year under which participant companies are required to track and report their carbon dioxide emissions to the regulatory body. Beginning June 2014, participants will be required to purchase allowances to offset their carbon dioxide emissions. The purchase of these allowances will increase the cost of power; however, the full financial impact of this scheme will not be determined until April 2013 when we will need to register in the scheme's second phase. No legislation has been enacted to date that would impact our U.S. or Hong Kong data centers.

Interest Rates. Our main credit facility is a revolving line of credit with a base rate determined by variable market rates, including the Prime Rate and the London Interbank Offered Rate (LIBOR). These market rates of interest are fluctuating and expose our interest expense to risk. As of December 31, 2011, the outstanding balance of credit facility was $0, and therefore we have limited interest rate risk.

Leases. The majority of our purchases of customer gear are vendor-financed through capital leases with fixed payment terms generally over three to five years, coinciding with the depreciation period of the equipment. As of December 31, 2011, we have a principal liability for these leases of $138.2 million on our consolidated balance sheet, of which $66.0 million is classified as current. Although we believe our borrowings from these arrangements will continue to be available, we have exposure that vendor financing may no longer be available or the borrowing rates, which are fixed rates, may increase.

Foreign Currencies. The majority of our customers are invoiced, and substantially all of our expenses are paid, by us or our subsidiaries in the functional currency of our company or our subsidiaries, respectively. A relatively insignificant amount of customers are invoiced in currencies other than the applicable functional currency. Therefore, our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. We also have exposure to foreign currency transaction gains and losses as the result of certain receivables due from our foreign subsidiaries, which are denominated in both U.S. dollars and the pound sterling. During 2011, we recognized foreign currency losses of $0.3 million within other income (expense). We have not entered into any currency hedging contracts, although we may do so in the future. As we grow our international operations, our exposure to foreign currency risk could become more significant.

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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

RACKSPACE HOSTING, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firm	57
Financial Statements:
Consolidated Balance Sheets	59
Consolidated Statements of Income	60
Consolidated Statements of Cash Flows	61
Consolidated Statements of Stockholders' Equity and Comprehensive Income	62
Notes to Consolidated Financial Statements	63
Supplementary Financial Data	88

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Rackspace Hosting, Inc.:

We have audited the accompanying consolidated balance sheets of Rackspace Hosting, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2011, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rackspace Hosting, Inc. and subsidiaries as of December 31, 2010 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Rackspace Hosting, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 17, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

San Antonio, Texas

February 17, 2012

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Rackspace Hosting, Inc.:

We have audited Rackspace Hosting, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Rackspace Hosting, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Rackspace Hosting, Inc. and subsidiaries as of December 31, 2010 and 2011, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 17, 2012 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Antonio, Texas

February 17, 2012

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)	December 31, 2010			December 31, 2011
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, $0.001 par value per share: 300,000,000 shares authorized; 126,950,468 shares issued and outstanding as of December 31, 2010; 131,912,829 shares issued and outstanding as of December 31, 2011	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

See accompanying notes to the consolidated financial statements.

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
(In thousands, except per share data)	2009			2010			2011
Net revenue	$	628,987		$	780,555		$	1,025,064
Costs and expenses:
Cost of revenue	200,943			249,840			309,095
Sales and marketing	79,458			96,207			126,505
General and administrative	168,116			199,011			270,581
Depreciation and amortization	125,229			155,895			195,412
Total costs and expenses	573,746			700,953			901,593
Income from operations	55,241			79,602			123,471
Other income (expense):
Interest expense	(8,950		)	(7,984		)	(5,848		)
Interest and other income (expense)	255			(207		)	(1,194		)
Total other income (expense)	(8,695		)	(8,191		)	(7,042		)
Income before income taxes	46,546			71,411			116,429
Income taxes	16,328			25,053			40,018
Net income	$	30,218		$	46,358		$	76,411
Net income per share
Basic	$	0.25		$	0.37		$	0.59
Diluted	$	0.24		$	0.35		$	0.55
Weighted average number of shares outstanding
Basic	120,570			125,097			129,922
Diluted	127,420			133,429			138,064

See accompanying notes to the consolidated financial statements.

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
(In thousands)	2009			2010			2011
Cash Flows From Operating Activities
Net income	$	30,218		$	46,358		$	76,411
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	125,229			155,895			195,412
Loss on disposal of equipment, net	1,027			758			247
Provision for bad debts and customer credits	10,347			4,330			5,913
Deferred income taxes	9,379			6,788			13,991
Deferred rent	4,378			7,064			9,471
Share-based compensation expense	20,124			26,624			28,773
Excess tax benefits from share-based compensation arrangements	—			(2,370		)	(20,627		)
Changes in certain assets and liabilities
Accounts receivable	(17,075		)	(12,864		)	(26,805		)
Income taxes receivable	4,809			2,606			4,397
Prepaid expenses and other current assets	(2,313		)	(10,125		)	(2,597		)
Accounts payable and accrued expenses	15,168			16,765			57,476
Deferred revenue	(1,163		)	(488		)	(482		)
All other operating activities	(3,260		)	2,894			1,405
Net cash provided by operating activities	196,868			244,235			342,985
Cash Flows From Investing Activities
Purchases of property and equipment, net	(117,292		)	(144,778		)	(269,804		)
Acquisitions, net of cash acquired	—			(29,854		)	(952		)
Earn-out payments for acquisitions	(6,822		)	(490		)	—
All other investing activities	—			(75		)	168
Net cash used in investing activities	(124,114		)	(175,197		)	(270,588		)
Cash Flows From Financing Activities
Principal payments of capital leases	(44,680		)	(52,129		)	(65,778		)
Principal payments of notes payable	(6,729		)	(4,893		)	(1,913		)
Payments on line of credit	(150,000		)	(50,000		)	—
Payments for debt issuance costs	(367		)	—			(1,114		)
Payments of earn-out provisions for acquisitions	—			—			(5,299		)
Proceeds from employee stock plans	14,489			15,250			36,287
Excess tax benefits from share-based compensation arrangements	—			2,370			20,627
Net cash used in financing activities	(187,287		)	(89,402		)	(17,190		)
Effect of exchange rate changes on cash and cash equivalents	1,551			(120		)	(292		)
Increase (decrease) in cash and cash equivalents	(112,982		)	(20,484		)	54,915
Cash and cash equivalents, beginning of period	238,407			125,425			104,941
Cash and cash equivalents, end of period	$	125,425		$	104,941		$	159,856
Supplemental cash flow information:
Acquisition of property and equipment by capital leases	$	64,692		$	71,363		$	75,090
Acquisition of property and equipment by notes payable	3,690			—			—
Vendor financed equipment purchases	$	68,382		$	71,363		$	75,090
Shares issued in business combinations	$	8,680		$	510		$	—
Cash payments for interest, net of amount capitalized	$	8,213		$	7,743		$	5,577
Cash payments for income taxes	$	8,651		$	20,112		$	19,088

See accompanying notes to the consolidated financial statements.

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

	Years Ended December 31, 2009, 2010, and 2011
	Common Stock			Additional Paid-In Capital		Accumulated other comprehensive income (loss)			Retained Earnings		Total stockholders' equity
(in thousands except share data)	Shares	Amount
Balance at December 31, 2008	117,154,094	$	117	$	207,589	$	(16,027	)	$	78,005	$	269,684
Issuance of common stock
Exercise of stock options and release of stock awards (including excess tax benefit of $0)	5,723,772	6		14,023							14,029
Issuance of common stock to board of directors	50,376	—		462							462
Issuance of common stock (earn-out)	818,899	1		8,679							8,680
Issuance of shares from Employee Stock Purchase Plan	26,836	—		460							460
Total issuance of common stock	6,619,883	7		23,624							23,631
Share-based compensation expense				20,124							20,124
Comprehensive income:
Net income									30,218		30,218
Unrealized gain on derivative instrument, net of tax effect						704					704
Cumulative translation adjustment						5,066					5,066
Total comprehensive income											35,988
Balance at December 31, 2009	123,773,977	$	124	$	251,337	$	(10,257	)	$	108,223	$	349,427
Issuance of common stock
Exercise of stock options and release of stock awards (including excess tax benefit of $2,370)	3,101,687	3		17,017							17,020
Stock-based activity and issuance of common stock to board of directors	21,021	—		484							484
Issuance of common stock (earn-out)	27,080	—		510							510
Issuance of shares from Employee Stock Purchase Plan	26,703	—		599							599
Total issuance of common stock	3,176,491	3		18,610							18,613
Share-based compensation expense				26,624							26,624
Comprehensive income:
Net income									46,358		46,358
Unrealized gain on derivative instrument, net of tax effect						1,182					1,182
Cumulative translation adjustment						(3,341		)			(3,341		)
Total comprehensive income											44,199
Balance at December 31, 2010	126,950,468	$	127	$	296,571	$	(12,416	)	$	154,581	$	438,863
Issuance of common stock
Exercise of stock options and release of stock awards (including excess tax benefit of $20,627)	4,913,504	5		55,858							55,863
Stock-based activity and issuance of common stock to board of directors	23,102	—		779							779
Issuance of shares from Employee Stock Purchase Plan	25,755	—		1,050							1,050
Total issuance of common stock	4,962,361	5		57,687							57,692
Share-based compensation expense				28,773							28,773
Comprehensive income:
Net income									76,411		76,411
Cumulative translation adjustment						(2,316		)			(2,316		)
Total comprehensive income											74,095
Balance at December 31, 2011	131,912,829	$	132	$	383,031	$	(14,732	)	$	230,992	$	599,423

See accompanying notes to the consolidated financial statements.

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies

Nature of Operations

As used in this report, the terms “Rackspace,” “Rackspace Hosting,” “we,” “our company,” “the company,” “us,” or “our” refer to Rackspace Hosting, Inc. and its subsidiaries.  Rackspace Hosting, Inc., through its operating subsidiaries, is a provider of cloud computing services, managing web-based IT systems for small and medium-sized businesses as well as large enterprises.  We focus on providing a service experience for our customers, which we call Fanatical Support^®.

Rackspace Hosting, Inc. was incorporated in Delaware on March 7, 2000. However, our operations began in 1998 as a limited partnership which became our subsidiary through a corporate reorganization completed on August 21, 2001.

We operate consolidated subsidiaries which include, among others, Rackspace US, Inc., our domestic operating entity, and Rackspace Limited, our United Kingdom operating entity.

Basis of Consolidation

The consolidated financial statements include the accounts of Rackspace Hosting and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Certain reclassifications have been made to prior year balances in order to conform to the current year's presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and customer credits, property and equipment, fair values of intangible assets and goodwill, useful lives of intangible assets, fair value of stock options, contingencies, and income taxes, among others. We base our estimates on historical experience and on other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We engaged third-party valuation consultants to assist management in the purchase price allocation of significant acquisitions.

Concentrations of Risk

Our revenue is primarily derived from cloud computing, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying behavior could adversely impact our operating results. See the Segment Information footnote for information concerning operations located outside of the U.S.

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents in money market accounts with high credit quality financial institutions; however, the balance may exceed Federal Deposit Insurance Corporation “FDIC” insurance limits or may not be insured. While we monitor the balances in our accounts and adjust these balances as appropriate, they could be impacted if the underlying depository institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no material loss or lack of access to our invested cash and cash equivalents; however, we can provide no assurances that access to our funds will not be impacted by adverse conditions in the financial markets.

We perform ongoing credit evaluations, and collateral is generally not required for trade receivables. At December 31, 2010 and 2011, no customer, reseller or strategic partner comprised more than 5% of total accounts receivable.

We rely on equipment and software purchased from third parties to provide our services. This equipment and software may not continue to be available on commercially reasonable terms, and equipment may not be available in quantities sufficient to meet our business needs. Any errors or defects in third-party equipment and software could result in errors or a failure of our service, which could harm our business. Indemnification from equipment and software providers, if any, would likely be insufficient to cover any damage to our business or our customers resulting from such failures.

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Significant Accounting Policies

The accompanying financial statements reflect the application of certain significant accounting policies. There have been no material changes to our significant accounting policies that are disclosed in our audited consolidated financial statements and notes thereof during 2011.

Cash and Cash Equivalents

For the purposes of the consolidated financial statements, we consider all highly liquid investments with original maturities of three months or less when acquired to be cash equivalents. Our available cash and cash equivalents are held in bank deposits, overnight sweep accounts, and money market funds. Gains and losses are included in interest and other income in our accompanying consolidated statements of income.

Accounts Receivable, Net

We classify as trade accounts receivable amounts due within twelve months, arising from the provision of services in the normal course of business. We assess collectability based on a number of factors, including customer payment history and creditworthiness. We generally do not request collateral from our customers, although in certain cases we may require the customer to prepay for services. When evaluating the adequacy of allowances, we analyze accounts receivable, current economic conditions and trends, historical bad debt write-offs, customer creditworthiness, and changes in customer payment terms. We write off customer accounts receivable balances to the allowance for doubtful accounts when it becomes likely that we will not collect from the customer.

In addition, at the end of a given period, we estimate customer service level credits based on historical data and known credits yet to be issued to our customers. Customer credits reduce revenue and accounts receivable in the period the estimate is recorded.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist primarily of software and equipment maintenance contracts and prepaid operating expenses. Software maintenance contracts are amortized over the agreement period, generally one to three years. Prepaid operating expenses are expensed in the period in which services are received.

Property and Equipment, Net

Property and equipment is stated at cost, net of accumulated depreciation. Property and equipment is depreciated on a straight-line basis over the estimated useful life of the asset. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Goodwill and Intangible Assets

Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is evaluated for impairment at a reporting unit level on an annual basis at the beginning of the fourth quarter or whenever events or circumstances indicate that impairment may have occurred.

Intangible assets, including purchased technology, customer contracts and relationships, certain tradenames, license agreements, and non-compete agreements arising principally from acquisitions are recorded at cost less accumulated amortization, and the definite-lived intangibles are amortized using a method that reflects the pattern in which the economic benefits of the related intangible asset are consumed or utilized.

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Leases

We lease certain property and equipment under capital lease agreements. The assets held under capital lease and related obligations are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets held under capital lease. Such assets and the related leasehold improvements are amortized over the shorter of the terms of the leases or the estimated useful lives of the assets, which typically range from three to five years for software and equipment and 30 years for property. For assets for which the lease agreement includes a bargain purchase option or transfer of ownership at the completion of the lease and the lease term is shorter than the estimated useful life of the asset, the asset is amortized over its estimated useful life.

We also lease property and equipment under operating lease agreements. The lease terms typically range from two to five years for equipment and one to twenty years for property, including office space and data center facilities. Rent increases, rent holidays, leasehold incentives or any other unusual provisions or conditions are considered with total rent payments and are expensed on a straight-line basis over the lease period.

Impairment of Long-Lived Assets

Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset in conjunction with its asset group compared to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the assets.

Revenue and Deferred Revenue

We provide cloud computing services to our customers and generally do not sell individual hardware and software products. Our customers pay us a monthly recurring charge based upon the size and complexity of the IT systems we manage, the type of technology used and the level of support we provide. Some customers also pay a non-refundable installation fee. We recognize revenue when persuasive evidence of an arrangement exists, service has been provided to the customer, the amount of fees to be paid by the customer is fixed or determinable, and collectibility is reasonably assured.

We recognize cloud computing revenue, including installation fees, on a monthly basis, beginning on the date the customer commences use of our services. Cloud computing revenue is recognized over the contractual term of the customer contract. For cloud computing services that are billed according to customer usage, revenue is recognized in the month in which the usage is recorded. Our customers generally continue to utilize our services beyond the initial contract term, which typically ranges from several months to three years. As a result, installation fees are recognized ratably over the estimated average life of a customer relationship. Amounts that have been invoiced are recorded in accounts receivable and either deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Therefore, deferred revenue primarily consists of amounts that have been prepaid or deferred installation fees. As of December 31, 2011, of the total $18.3 million in deferred revenue recorded on our balance sheet (the majority of which related to prepaid amounts), $14.8 million, $2.8 million, and $0.7 million will be amortized to revenue in 2012, 2013 and 2014, respectively.

Revenue is recorded net of sales and use tax.

Our hosting arrangements contain service level commitments with our customers. To the extent that such service levels are not achieved or are otherwise disputed due to third-party power or service issues, unfavorable weather, or other service interruptions or conditions, we are required to issue service credits for a portion of the hosting service fees paid by our customers. At each reporting period, we estimate the amount of credits to be issued and record a reduction to revenue. To estimate service credits, we utilize historical data and known credits yet to be issued to our customers.

Cost of Revenue

Cost of revenue consists primarily of expenses related to our data center facilities and personnel costs. These costs typically include uncapitalized infrastructure costs, including software licenses, rental fees, replacement components, bandwidth, and power costs. Personnel expenses include the salaries, share-based compensation and related expenses of our support teams and data center employees.

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Installation Costs

Setup and other direct installation activities are performed at the inception of a specific arrangement with each customer to enable us to perform under the terms of the arrangement. These setup or installation costs are expensed as incurred.

Advertising Costs

We charge advertising costs to expense in the period incurred. Advertising expenses for the years ended December 31, 2009, 2010 and 2011 were approximately $23.5 million, $26.3 million and $37.8 million, respectively.

Research and Development Costs

Our research and development efforts are focused on the deployment of new technologies to address emerging trends, development and evolution of proprietary tools, and enhancement of systems and processes for sales and support. We expense costs related to preliminary project assessment, research and development, re-engineering, training, and application maintenance as incurred in general and administrative expenses or cost of revenue. These costs primarily include compensation costs for employees and consultants dedicated to research and development efforts. Administrative and other infrastructure expenses attributable to research and development are reported in general and administrative expense. For the years ended December 31, 2009, 2010 and 2011, we recognized $12.6 million, $18.8 million and $25.0 million of research and development expense, respectively.

Internally Developed Software

We capitalize certain costs of computer software developed or obtained for internal use. Capitalized computer software costs consist of purchased software licenses, implementation costs, and salaries and related compensation costs of employees and consultants for certain projects that qualify for capitalization. The capitalized software costs are being amortized on a straight-line basis, which is generally over periods ranging from 12 to 60 months.

Share-Based Compensation

The Black-Scholes valuation model that we use to determine the fair value of share-based compensation requires us to make assumptions and judgments about variables related to our common stock and the related awards. These variables and assumptions include the fair value of our common stock, expected term, the expected volatility, the risk-free interest rate, expected dividends, and the estimated rate of forfeitures of unvested stock options.

We used the following assumptions when determining the fair value of our stock options:

• Fair Value of our Common Stock—For valuations prior to our IPO on August 7, 2008, the fair value of our common stock was determined using both a market and discounted cash flow approach. The aggregate equity valuation was allocated between our various securities using the treasury stock method. Subsequent to the IPO, the end of day market price on the grant date was used to determine fair value.

• Expected Term—The expected term represents the period that our share-based awards are expected to be outstanding. In order to compute the expected term, we have elected to use the simplified method because we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time our equity shares have been publicly traded. We have been a public company since August 2008 and our options generally vest over four years and expire seven to ten years from the grant date.

• Expected Volatility—Management estimates volatility for option grants by evaluating the average historical volatility of a peer group, as well as the volatility of the company’s stock since the IPO. Management believes historical volatility of the identified peer group (while incorporating the company’s historical volatility) to be the best estimate of future volatility.

• Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation model is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.

• Expected Dividend—We have not issued dividends to date and do not anticipate issuing dividends.

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• Estimated Rate of Forfeitures—We estimate expected forfeitures based on our historical experience. If actual forfeitures differ from our estimates, we will record the difference as an adjustment in the period we revise our estimates.

We also grant restricted stock units (RSUs), a portion of which have vesting conditions dependent upon the performance of the company’s total shareholder return (TSR) on its common stock compared to certain market indices. Additionally, the company’s TSR must be positive for vesting to occur. We use a Monte Carlo simulation to estimate the fair value of these awards. For all other RSUs granted that vest ratably over the requisite service period, we measure fair value based on the closing fair market value of the company’s common stock on the date of grant, and we recognize expense straight-line over the vesting period.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences in recognizing certain income, expense, and credit items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences.

We are not currently under income tax audit in any jurisdiction in which we operate. However, due to the complexity involved with certain tax matters, there is the possibility that the various taxing authorities may disagree with certain tax positions filed on our income tax returns. We have considered all relevant facts and circumstances believe that we have made adequate provision for all income tax uncertainties. For a further discussion of the impact of uncertain tax positions, see Note 14, "Taxes."

We do not provide for a U.S. income tax liability on undistributed earnings of our foreign subsidiaries. The earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are currently indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax.

Derivative Financial Instruments

In order to limit our exposure to interest rate risk, we entered into an interest rate swap contract in 2007 that expired in 2010. We recognize derivative instruments as either assets or liabilities on the balance sheet at fair value. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of “other comprehensive income” and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred.

Fair Value of Financial Instruments

The fair values of certain financial instruments, including cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. The fair value of our debt approximates the carrying value as of December 31, 2010 and 2011.

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Foreign Currency

We have assessed the functional currency of each of our international subsidiaries and have generally designated the local currency to be their respective functional currencies. The financial statements of these foreign subsidiaries are translated into the U.S. dollar. All assets and liabilities are translated to the U.S. dollar at the end-of-period exchange rates. Capital accounts are determined to be of a permanent nature and are therefore translated using historical exchange rates. Revenue and expenses are translated using average exchange rates. Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated comprehensive income (loss) of stockholders’ equity. Transaction gains or losses in currencies other than the functional currency are included as a component of other income (expense) in the consolidated statements of income.

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We had previously adopted the guidance in 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which became effective for us at the beginning of this year. This new guidance did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued guidance on revenue recognition that eliminates the requirement that all undelivered elements in a multiple-element revenue arrangement have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered.  In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements.  The overall arrangement fee should be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price.  Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements is no longer be permitted.  The guidance became effective for us at the beginning of this year. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued guidance to amend the requirements related to fair value measurement that changes the wording used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB's intent about the application of existing fair value measurement requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied prospectively. The company will adopt this guidance at the beginning of its first quarter of 2012. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In June 2011, the FASB issued guidance that eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements.  The guidance is effective for fiscal years, including interim periods, beginning after December 15, 2011.  We will adopt this standard in the first quarter of 2012.

In September 2011, the FASB issued guidance that is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for annual periods beginning after December 15, 2011, with early adoption permitted.  We will adopt this standard in the first quarter of 2012, and we do not expect adoption to have a material impact on our financial statements.

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2. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

	Year Ended December 31,
(In thousands except per share data)	2009		2010		2011
Basic net income per share:
Net income	$	30,218	$	46,358	$	76,411
Weighted average shares outstanding:
Common stock	120,570		125,097		129,922
Number of shares used in per share computations	120,570		125,097		129,922
Earnings per share	$	0.25	$	0.37	$	0.59
Diluted net income per share:
Net income	$	30,218	$	46,358	$	76,411
Weighted average shares outstanding:
Common stock	120,570		125,097		129,922
Stock options, awards and employee share purchase plan	6,850		8,332		8,142
Number of shares used in per share computations	127,420		133,429		138,064
Earnings per share	$	0.24	$	0.35	$	0.55

We excluded 3.8 million, 3.0 million and 1.2 million potential common shares from the computation of dilutive earnings per share for the periods ended December 31, 2009, 2010 and 2011, respectively, because the effect would have been anti-dilutive.

3. Cash and Cash Equivalents

Cash and cash equivalents consisted of:

(In thousands)	December 31, 2010		December 31, 2011
Cash deposits	$	64,201	$	119,115
Money market funds	40,740		40,741
Cash and cash equivalents	$	104,941	$	159,856

Our available cash and cash equivalents are held in bank deposits, overnight sweep accounts, and money market funds. We actively monitor the third-party depository institutions that hold our deposits. Our emphasis is primarily on safety of principal while secondarily maximizing yield on those funds.

Our money market mutual funds invest exclusively in high-quality, short-term securities that are issued or guaranteed by the U.S. government or by U.S. government agencies.

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4.  Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 – Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.

We measure our financial instruments at fair value. Our money market funds are classified within Level 1 because these funds are valued using quoted market prices.

The carrying values of cash deposits and accounts receivable are reasonable estimates of their fair values due to the short maturity of these financial instruments.

Assets and liabilities measured at fair value on a recurring basis are summarized by level below.  The table does not include assets and liabilities that are measured at historical costs or any other basis other than fair value.

	December 31, 2010
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Assets/Liabilities at Fair Value
Assets:
Money market funds (1)	$	40,740	$	—	$	—	$	40,740
Rabbi trust (2)	795		—		—		795
Total	$	41,535	$	—	$	—	$	41,535
Liabilities:
Deferred compensation (3)	$	754	$	—	$	—	$	754
Total	$	754	$	—	$	—	$	754

	December 31, 2011
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Assets/Liabilities at Fair Value
Assets:
Money market funds (1)	$	40,741	$	—	$	—	$	40,741
Rabbi trust (2)	293		—		—		293
Total	$	41,034	$	—	$	—	$	41,034
Liabilities:
Deferred compensation (3)	$	187	$	—	$	—	$	187
Total	$	187	$	—	$	—	$	187

(1) Money market funds are classified in cash and cash equivalents.

(2) Investments in marketable securities held in a Rabbi Trust associated with a non-qualified deferred compensation plan are classified in other non-current assets.

(3) Obligations to pay benefits under a non-qualified deferred compensation plan are classified in other non-current liabilities.

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Our Rabbi Trust was established in 2009, and we elected the fair value option, which allows for the recognition of gains and losses to be recorded in the statement of income in the same period as the gains and losses are incurred as part of the non-qualified deferred compensation plan. During 2009, 2010, and 2011, we recognized minimal net gains as interest and other income.

5. Property and Equipment, net

Property and equipment consisted of: 

(In thousands)	Estimated Useful Lives				December 31, 2010			December 31, 2011
Computers, software and equipment	1	-	5	years	$	668,691		$	898,045
Furniture and fixtures	7	years			25,140			34,000
Buildings and leasehold improvements	2	-	30	years	141,506			201,639
Land					13,860			13,860
Property and equipment, at cost					849,197			1,147,544
Less accumulated depreciation and amortization					(422,716		)	(582,794		)
Work in process					68,747			62,740
Property and equipment, net					$	495,228		$	627,490

Depreciation and leasehold amortization expense, not including amortization expense for intangible assets, was $118.8 million, $149.9 million and $189.8 million for the years ended December 31, 2009, 2010 and 2011, respectively.

At December 31, 2010, the work in process balance consisted of build-outs of $35.7 million for office facilities, $21.3 million for data centers (of which $13.3 million related to a vendor fee for data center design services), and $11.7 million for capitalized software and other projects.  At December 31, 2011, the work in process balance consisted of build-outs of $28.0 million for office facilities, $3.6 million for data centers, and $31.2 million for capitalized software and other projects.

Capitalized interest was $0.8 million and $0.6 million for the years ended December 31, 2009 and 2010, respectively. There has been no interest capitalized in 2011. 

The unamortized balance of computer software costs on our balance sheets was $31.7 million and $39.9 million as of December 31, 2010 and 2011, respectively. Amortization expense for capitalized computer software costs was $12.7 million, $17.9 million and $26.2 million for the years ended December 31, 2009, 2010 and 2011, respectively.

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6. Business Combinations and Goodwill

In January 2011, we acquired a company to bolster our service delivery capabilities around OpenStack. The acquisition, which was accounted for using the acquisition method, included an initial cash payment, additional cash payments due on the first and second anniversaries of the closing date and cash or stock to be paid upon the achievement of certain earn-out provisions. The composition of the payment of the earn-out provisions between cash and stock is at our discretion. The purchase price was allocated based on the estimated fair values of the individual assets acquired and liabilities assumed at the date of acquisition, and after the completion of our final tax review during the three months ended September 30, 2011, we determined the allocation of the purchase price was final. The fair value of the contingent consideration of $2.1 million was recorded as a liability as of the date of acquisition. The first two earn-out provisions were met in 2011, resulting in a cash payment of $1.0 million. The fair value of the remaining contingent consideration as of December 31, 2011 was $1.2 million, all of which is classified as short-term within accounts payable and accrued expenses. The consolidated statements of income include the results of operations for the acquired company commencing on January 26, 2011.

In December 2010, we acquired a company and accounted for the transaction using the acquisition method. During the three months ended March 31, 2011, we recorded a measurement period adjustment to reflect changes in the estimated fair value of deferred tax assets related to the acquisition. This adjustment resulted from our final review of certain tax matters relating to the transaction and did not result from intervening events subsequent to the acquisition date. Upon the final completion of an independent appraisal and all other evaluations during the three months ended March 31, 2011, we determined the allocation of the purchase price was final. Beginning in the second quarter of 2011, the associated earn-out payments were no longer contingent upon achievement of certain provisions, and the full amount was scheduled to be paid in six equal installments, with the composition of the payout between cash and stock at our discretion. We made the the first three payments in cash totaling $5.0 million, in 2011. As of December 31, 2011, the amount of the liability recorded was $4.9 million.

In April 2010, the final $1.0 million earn-out in connection with an acquisition made in 2008 was paid in a combination of cash and stock. The earn-out was accounted for as additional goodwill.

The following table provides a roll forward of our goodwill balance.

(In thousands)
December 31, 2009	$	22,329
Earn-out payment for acquisition	1,000
Acquisition	33,818
December 31, 2010	$	57,147
Measurement period adjustments	149
Acquisition	2,697
December 31, 2011	$	59,993

The $2.7 million of goodwill recorded for the acquisition in January 2011 is deductible for tax purposes.

We test goodwill at the reporting unit level using a fair value approach. Our annual testing did not result in an impairment of goodwill for the year ended December 31, 2011 as the fair value of each reporting unit with goodwill was determined to be in excess of its carrying value. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests. There were no such changes during the year ended December 31, 2011, and as of December 31, 2011, there were no indicators that our goodwill was impaired.

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7. Intangible Assets

The following tables provide information regarding our intangible assets, other than goodwill:

	December 31, 2010
(In thousands)	Gross carrying amount		Accumulated amortization			Net carrying amount
Intangible assets:
Licenses	$	11,571	$	(10,356	)	$	1,215
Purchased technologies	7,145		(2,970		)	4,175
Domain name purchases	459		(440		)	19
Non-compete agreements	1,534		(382		)	1,152
Customer relationships	5,240		(2,389		)	2,851
Trademarks, tradenames and patents	887		(657		)	230
Other	631		(598		)	33
Total	$	27,467	$	(17,792	)	$	9,675

	December 31, 2011
(In thousands)	Gross carrying amount		Accumulated amortization			Net carrying amount
Intangible assets:
Licenses	$	12,582	$	(11,676	)	$	906
Purchased technologies	7,145		(4,277		)	2,868
Domain name purchases	468		(453		)	15
Non-compete agreements	1,734		(786		)	948
Customer relationships	6,540		(3,561		)	2,979
Trademarks, tradenames and patents	2,789		(1,176		)	1,613
Other	18,108		(1,403		)	16,705
Total	$	49,366	$	(23,332	)	$	26,034

The increase in Other is primarily due to a transfer from work in process and represents a vendor fee for data center design services. The useful life of this asset is five years.

Amortization expense on intangibles was $6.5 million, $6.0 million and $5.6 million in 2009, 2010 and 2011, respectively. Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives, which range from one to six years. The only intangible assets amortized over six years are related to business acquisitions. As of December 31, 2011, amortization expense on intangible assets for the next five years was expected to be as follows:

(In thousands)
Year ending:	Amount
2012	$	6,744
2013	6,124
2014	4,995
2015	4,305
2016	3,331
Thereafter	535
Total	$	26,034

As of December 31, 2011, there were no indicators that our intangible assets were impaired.

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8. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of: 

(In thousands)	December 31, 2010		December 31, 2011
Trade payables	$	30,603	$	51,097
Accrued compensation and benefits	26,855		41,767
Income and other taxes payable	19,814		16,778
Vendor accruals	22,503		32,458
Other liabilities	11,870		13,904
Accounts payable and accrued expenses	$	111,645	$	156,004

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9. Debt

Debt outstanding consisted of:

(In thousands)	December 31, 2010			December 31, 2011
Notes payable	$	2,791		$	879
Total debt	2,791			879
Less current portion of debt	(1,912		)	(879		)
Total non-current debt	$	879		$	—

Revolving Credit Facility

On September 26, 2011, we entered into a revolving credit facility with a syndicate of seven banks led by JPMorgan Chase. This facility replaces our previous credit facility, which was due to expire in August 2012.  The new credit facility has a total commitment of $200 million and matures in September 2016.  The facility is governed by financial and non-financial covenants, including a leverage ratio of not greater than 3.00 to 1.00, an interest coverage ratio of not less than 3.00 to 1.00, and a requirement to maintain a certain level of tangible assets in our U.S. entities. Our marginal borrowing costs on this facility are based on a floating base rate (LIBOR) plus a spread, which ranges from 1.25% to 2.00%, depending on our degree of financial leverage. We also pay an unused fee on the committed, but unused amount of the facility, which ranges from 0.25% to 0.40%, also depending on our degree of financial leverage. The agreement further includes an accordion feature, which allows for an increase in the commitments to a total of $400 million under the same terms and conditions, subject to credit approval of the banking syndicate.

In entering into the new facility, we incurred loan origination fees of $1.1 million, which were included in other assets and will be amortized as a component of interest expense over the five-year term of the agreement.

In December 2010, we repaid the entire outstanding balance of our previous credit facility and have not had any borrowings under either the old or new facility since that time. Therefore, as of December 31, 2011, there was no amount outstanding under the facility except for an outstanding letter of credit of $0.4 million, resulting in $199.6 million being available for future borrowings. As of the same date, we were in compliance with all of the covenants under our facility.

Interest Rate Swap

Historically, we have used cash flow hedges to limit our exposure that may result from the variability of floating interest rates. Our previous interest rate swap, which had a notional amount of $50.0 million to hedge a portion of our outstanding floating-rate debt, expired in December 2010. Prior to its expiration, this swap converted floating-rate interest based on LIBOR into fixed-rate interest as part of the arrangement with our primary lender.

We were required to pay the counterparty a stream of fixed interest payments at a rate of 4.135%, and in turn, received variable interest payments based on 1-month LIBOR. The net receipts or payments from the swap were recorded as interest expense, and the swap was designated and qualified as a cash flow hedge. The swap was deemed to be highly effective, and there was no hedge ineffectiveness recognized in earnings during the years ended December 31, 2009 and 2010.

The following table presents the impact of the interest rate swap on the consolidated balance sheets:

	Year Ended December 31,
(In thousands)	2009		2010		2011
Effective gain recognized in accumulated other comprehensive income, net of tax	$	704	$	1,182	$	—

Notes Payable

We have entered into various financing arrangements with multiple equipment and software vendors. As of December 31, 2011 the total amount financed under these relationships was $0.9 million with various terms extending to June 2012 and stated rates ranging from 0.0% to 6.0%. For arrangements with below market interest rates, we impute an interest charge based on our average borrowing rate. The weighted average effective interest rate of the various arrangements with third-party vendors was 3.91% and 4.03% as of December 31, 2010 and 2011, respectively.

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10. Leases

Capital Leases

We have master lease agreements with our primary vendors that supply us with servers and computer equipment. Currently, we finance most equipment purchases through their respective finance companies. The terms vary with each vendor but typically include a term of two to four years and interest rates ranging from 1.7% to 6.0%. A majority of these agreements allow us to purchase the equipment at the end of the lease for a nominal amount.

Amounts in property and equipment under capital leases consisted of:

(In thousands)	December 31, 2010			December 31, 2011
Computers, software and equipment	$	253,687		$	330,256
Less: accumulated depreciation and amortization	(132,795		)	(201,109		)
	$	120,892		$	129,147

Future capital lease payments under non-cancelable leases as of December 31, 2011 were as follows:

(In thousands)
Year ending:	Amount
2012	$	69,840
2013	48,638
2014	23,269
2015	2,537
Total minimum capital lease payments	144,284
Less amount representing interest	(6,037		)
Present value of net minimum lease payments	138,247
Less current portion of obligations under capital leases	(66,031		)
Non-current obligations under capital leases	$	72,216

Lease obligations for our foreign subsidiaries are denominated in foreign currencies, which have been converted to U.S. dollars at the exchange rate on December 31, 2011.

Operating Leases

We lease our data center facilities, certain office space and equipment under non-cancelable operating lease agreements. Facility leases generally include renewal options and may require us to pay a portion of the related operating expenses. Certain of these lease agreements have escalating rental payment provisions. We recognize rent expense for such arrangements on a straight-line basis.

Future operating lease payments under non-cancelable leases with an initial term in excess of one year as of December 31, 2011 were as follows:

(In thousands)
Year ending:	Amount
2012	$	35,426
2013	42,549
2014	46,846
2015	48,262
2016	50,243
Thereafter	519,396
Total minimum operating lease payments	$	742,722

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Rent expense for the years ended December 31, 2009, 2010 and 2011 was $22.1 million, $26.6 million and $34.1 million, respectively.

11. Commitments and Contingencies

Purchase Commitments

Non-cancelable purchase commitments primarily relate to costs associated with our data centers, including bandwidth, electricity and consulting services, as well as commitments to purchase hardware and to prepay for certain software licenses. The agreements vary from one to three years and provide for either penalties for early termination or may require minimum commitments for the remaining term. The minimum commitments for all of these agreements as of December 31, 2011 approximated $47.6 million, $4.4 million, $0.9 million and $0.1 million for the years ended December 31, 2012, 2013, 2014 and 2015, respectively.

We also have purchase orders and construction contracts primarily related to data center equipment and facility build-outs. We generally have the right to cancel these open purchase orders prior to delivery or terminate the contracts without cause.

Legal Proceedings

We are party to various legal and administrative proceedings, which we consider routine and incidental to our business. In addition, on October 22, 2008, Benjamin E. Rodriguez D/B/A Management and Business Advisors vs. Rackspace Hosting, Inc. and Graham Weston was filed in the 37th District Court in Bexar County Texas by a former consultant to the company, Benjamin E. Rodriguez. The suit alleges breach of an oral agreement to issue Mr. Rodriguez a 1% interest in our stock in the form of options or warrants for compensation for services he was engaged to perform for us. We believe that the plaintiff’s position is without merit and intend to vigorously defend this lawsuit. We do not expect the results of this claim or any other current proceeding to have a material adverse effect on our business, results of operations or financial condition.

We are subject to other legal proceedings, claims and litigation arising in the ordinary course of business, and we defend ourselves vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are incurred as a result of these matters, which are in excess of amounts already accrued in its consolidated balance sheet, would not be material to the financial statements as a whole.

Contingent Liability

As of December 31, 2011, the fair value of the contingent consideration related to our January 2011 acquisition was $1.2 million. The earn-out can be paid in cash or our common stock at our discretion.

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Guarantees

We have identified certain guarantees. When evaluating estimated losses for guarantees, we consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such guarantees in our financial statements.

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of the insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. We have no significant liabilities recorded for these agreements as of December 31, 2010 or 2011.

We have service level commitment obligations with most of our customers. As a result, service interruptions or significant equipment damage in our data centers, whether or not within our control, could result in us not achieving service level commitments to these customers, resulting in an obligation to pay a service level credit. Our liability insurance does not cover ordinary service interruptions. In addition, any loss of services, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenue and our operating results. We generally have the ability to determine such service level credits prior to the associated revenue being recognized and record an estimate for potential unrecorded amounts. The balance for credits resulting from our service level agreements within allowances for doubtful accounts and customer credits as of December 31, 2010 and 2011 was $0.5 million and $0.6 million, respectively.

Indemnifications

In the normal course of business, we indemnify certain parties, including customers, vendors and lessors, with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. We have no significant liabilities recorded for these agreements as of December 31, 2010 or 2011.

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Incentive Arrangements

In August 2007, we entered into a lease for our corporate headquarters. In connection with this lease, we also entered into a Master Economic Incentives Agreement ("MEIA") with the Cities of Windcrest and San Antonio, Texas; Bexar County; and certain other parties, pursuant to which we agreed to locate existing and future employees at the new facility location. The agreement requires that we meet certain employment levels each year, with an ultimate employee base requirement of 4,500 jobs in Windcrest by December 31, 2012; however, if the job requirement in any grant agreement with the State of Texas is lower, then the job requirement under the MEIA is automatically adjusted downward. Consequently, because the Texas Enterprise Fund Grant agreement discussed below has been amended to reduce the state job requirement, we believe the job requirement under the MEIA has been reduced to 1,774. In addition, the agreement requires that the median payroll of those employees be no less than $51 thousand per year. In exchange for meeting these employment obligations, we will receive a 14-year exemption from most of the property taxes associated with the property. If we fail to meet these job creation requirements, we could lose a portion or all of the tax exemption provided during the 14-year period and would then be obligated to repay the exemption amount. We have met the requirements for the employment level and median payroll for the year ended December 31, 2011, and we believe that it is probable that we will meet the requirements throughout the exemption period. We elected to begin the exemption period in 2009.

Further, we entered into an agreement with the State of Texas, under which we received $5.0 million in 2007 and may receive up to an additional $17.0 million from the Texas Enterprise Fund in multiple installments, provided that we meet certain new job levels in the State of Texas paying an average of at least $56 thousand per year (subject to a 2.0% per year increase commencing in 2012), beginning December 31, 2008, and sustain these jobs through December 31, 2021. On July 27, 2009, the Texas Enterprise Fund Grant agreement was amended to modify the job creation requirements. Under the amendment, the grant has been divided into four separate tranches. The first tranche, called “Basic Fund” in the amendment, is $8.5 million with a Job Target of 1,225 new jobs by December 2012 (in addition to the 1,436 jobs in place as of August 1, 2007 for a total of 2,661 jobs in Texas, two thirds of which must be located in Windcrest, Texas). We already have drawn $5.0 million of this grant and, since we have achieved the Job Target as of December 31, 2011, we intend to request the additional $3.5 million that is available to us. The remaining three tranches are at our option. We can draw an additional $13.5 million based on the following amounts and milestones: $5.5 million if we create a total of 2,100 new jobs in Texas, another $5.25 million if we create a total of 3,000 new jobs in Texas, and $2.75 million more if we create a total of 4,000 new jobs in Texas. We are responsible for maintaining the jobs until January 2022. If we eliminate jobs for which we have drawn funds, we are subject to a clawback on the amounts we have drawn plus 3.4% interest on such amounts per year. As of December 31, 2011, the $5.0 million received was deferred and recorded as other non-current liabilities. Amounts will be recognized into income upon the achievement of the performance criteria and the determination that the cash is no longer refundable to the State of Texas.

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12. Stockholders' Equity

Common Stock

At December 31, 2010 and 2011, we had 126,950,468 and 131,912,829 shares of our common stock legally issued and outstanding, respectively.

We have one class of authorized common stock. The rights and privileges provided to our common stockholders are as follows:

•Dividend Rights—Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of our common stock are entitled to receive dividends, at the discretion of our board of directors.

•Voting Rights—All holders of common stock are entitled to one vote per share on all matters to be voted on by Rackspace Hosting's stockholders.

•Right to Receive Liquidation Distributions—Upon liquidation, dissolution or winding-up, the holders of our common stock are entitled to share equally in all of our assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock.

Common Stock Issuances

In 2009, per the terms of the merger agreements with Jungle Disk and Slicehost and product integration milestones, we issued 140,935 shares of our common stock at a price of $5.428 per share as the first earn-out for Jungle Disk in March 2009, resulting in an aggregate recorded amount of $765 thousand. In April 2009, we issued 200,000 shares of our common stock at a price of $5.574 per share as the first earn-out for Slicehost, resulting in an aggregate recorded amount of $1.1 million. In August 2009, we issued 477,964 shares of our common stock at a price of $14.227 per share as the second earn-out for Slicehost, resulting in an aggregate recorded amount of $6.8 million. In April 2010, we issued 27,080 shares of our common stock at a price of $18.833 per share as the second earn-out for Jungle Disk, resulting in an aggregate recorded amount of $510 thousand.

In each of the years 2009, 2010 and 2011, we had two employee stock purchases under the 2008 Employee Stock Purchase Plan (ESPP), under which we issued a total of 26,836, 26,703 and 25,755 shares of common stock, respectively. No expense associated with these shares issued was recorded, and the shares were fully vested and unrestricted as of year-end.

In 2009, 2010 and 2011, we issued 5,723,772, 3,101,687 and 4,913,504 shares, respectively, related to employee stock options and restricted stock units. See Note 13 for additional disclosures related to the share-based compensation.

In 2009, 2010 and 2011, each of our non-employee board of directors was compensated with shares of common stock. We granted a total of 50,376, 21,021 and 23,102 shares of common stock as a portion of director’s fees to non-employee members of our board of directors in 2009, 2010 and 2011, respectively. The shares are fully vested and unrestricted as of December 31, 2011. Additionally, in 2010, we issued restricted stock units (RSUs) to certain members of our board of directors. We recorded total expense of $462 thousand, $484 thousand, and $779 thousand related to these shares and RSUs in 2009, 2010 and 2011, respectively. These amounts have been recorded as a component of general and administrative expense.

Preferred Stock

As of December 31, 2010 and 2011, there were 50 million authorized shares of preferred stock, of which none was issued or outstanding.

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13. Share-Based Compensation

In December 2007, we adopted our 2007 Long Term Incentive Plan, or the 2007 Stock Plan. Under the 2007 Stock Plan, incentive and non-qualified stock options or rights to purchase common stock may be granted to eligible participants. In addition to stock options, we may grant other equity awards such as stock appreciation rights, restricted stock awards, restricted stock units, performance awards, cash-based awards, and dividend equivalents. All awards, excluding incentive stock options, may be granted under the plan to employees, officers, directors, or any other non-employee service provider to the company. Incentive stock options may be granted only to employees of the company or a subsidiary. The exercise price of a stock option granted under the 2007 Stock Plan will be determined by the Compensation Committee at the time the option is granted and generally may not be less than 100% of the fair market value of a share of common stock as of the date of grant. The 2007 Stock Plan has an automatic share reserve increase effective the first day of each fiscal year beginning in 2009 with an amount equal to the lesser of (i) 10,000,000 shares, (ii) four percent of the number of shares on the last day of the immediately preceding fiscal year that are (a) outstanding and (b) issuable pursuant to outstanding awards and awards under prior plans, or (iii) such lesser number of shares determined by our board of directors. For fiscal years 2009, 2010 and 2011, this resulted in an increase of approximately 5.5 million, 5.7 million and 5.8 million shares, respectively, available under our Stock Plans.

In addition to the 2007 Stock Plan, we also maintain the 2003 Stock Plan, the 2005 Stock Plan and plans assumed through acquisitions, collectively referred to as the Stock Plans. Options are priced to be at least 100% of our common stock’s fair market value at the date of grant. Options have generally been granted for terms of either seven or ten years. Options granted under the Stock Plans generally vest ratably over a four-year period, or at the end of three years. Stock options assumed through acquisitions have had seven to ten-year terms and vest 25% the first year and ratably over the remaining periods.

As of December 31, 2011, the total number of shares authorized, outstanding and available for future grants under the Stock Plans was as follows:

Plan Name	Shares Authorized	Shares Outstanding	Shares Available for Future Grants
2003 Stock Option Plan	2,511,255	154,856	—
Non-Qualified 2005 Stock Option Plan	11,639,580	3,651,475	—
Webmail.us, Inc. 2004 Stock Incentive Plan	101,180	5,734	—
Amended and Restated 2007 Long-Term Incentive Plan	28,761,165	11,678,318	12,856,424
Total	43,013,180	15,490,383	12,856,424

The composition of the shares outstanding as of December 31, 2010 and 2011 was as follows: 

	December 31, 2010	December 31, 2011
Restricted stock units	2,869,832	3,446,970
Stock options	15,551,009	12,043,413
Total outstanding awards	18,420,841	15,490,383

The following table summarizes our restricted stock unit activity for the year ended December 31, 2011:

	Number of Units	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2010	2,869,832	$	9.23
Granted	873,185	$	36.22
Released (1)	(203,141)	$	18.39
Cancelled	(92,906)	$	25.36
Outstanding at December 31, 2011	3,446,970	$	14.87
Expected to vest after December 31, 2011*	3,240,268	$	14.12

 (1) Includes 5,358 shares of restricted stock units issued to certain members of our board of directors.

*Includes reduction of shares outstanding due to estimated forfeitures

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The weighted average grant date fair value of restricted stock units granted during fiscal years 2009 and 2010 was $5.45 and $19.06, respectively. The total pre-tax intrinsic value of the restricted stock units released during fiscal years 2009, 2010 and 2011 was $0.2 million, $0.8 million and $7.7 million, respectively.

In February 2009, our board approved grants of restricted stock units (RSUs) to our chief executive officer and another member of the executive team. A total of 2,000,000 RSUs were granted. The vesting of the RSUs is dependent on the company’s total shareholder return (TSR) on its common stock compared to other companies in the Russell 2000 Index. In addition, the company’s TSR must be positive for vesting to occur. Of the total RSUs granted, 1,050,000 have a measurement period at the end of three years, and the remainder have a measurement period at the end of five years. The grant date fair value of these awards was $7.0 million and is being amortized over the awards’ service periods. The fair value was calculated using a Monte Carlo pricing model.

The remaining RSUs that have been granted fall into the following two general categories:

• Service-based RSUs that vest, so long as the employee continues to be employed with us, in four equal installments, on each of the first, second, third and fourth anniversaries of the grant date. Stock-based compensation expense for these service-vesting RSUs is measured based on the closing fair market value of the company's common stock on the date of grant and is recognized ratably over the service period.

• Performance-based RSUs (accounted for as market condition awards) are granted to members of our executive team. The vesting of these RSUs is dependent on the company's TSR on its common stock for a 3-year performance period as compared to the components of the NASDAQ Internet Index over this same period. In addition, the company's TSR must be positive for vesting to occur. Stock-based compensation expense for this type of RSU is measured using a Monte Carlo pricing method and is recognized ratably over the vesting period. 

As of December 31, 2011, there was $37.0 million of total unrecognized compensation cost related to non-vested RSUs that we have granted, which will be amortized using the straight-line method over a remaining weighted average period of 1.8 years.

The following table summarizes the stock option activity for the year ended December 31, 2011: 

	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2010	15,551,009	$	8.45	6.84	$	356,993
Granted	2,006,619	$	37.57
Exercised	(4,715,721)	$	7.47
Cancelled	(798,494)	$	15.67
Outstanding at December 31, 2011	12,043,413	$	13.22	5.93	$	358,754
Vested and exercisable at December 31, 2011	6,613,338	$	6.25	5.23	$	242,936
Vested and exercisable at December 31, 2011 and expected to vest thereafter*	11,330,648	$	12.37	5.89	$	347,191

*Includes reduction of shares outstanding due to estimated forfeitures

The stock options granted in 2009, 2010 and 2011 vest as the employee continues to be employed with us, in four equal installments, on each of the first, second, third and fourth anniversaries of the grant date and have a term of 7 or 10 years.

The total pre-tax intrinsic value of the stock options exercised during fiscal 2009, 2010 and 2011 was $54.2 million, $53.0 million and $149.2 million, respectively.

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The following table presents the assumptions used to estimate the fair values of the stock options granted in the periods presented:

	Years Ended December 31,
	2009	2010	2011
Expected stock volatility	57% - 61%	55% - 56%	56% - 57%
Expected dividend yield	0.0%	0.0%	0.0%
Risk-free interest rate	2.24% - 3.03%	1.35% - 2.79%	0.85% - 2.35%
Expected life	6.25 years	4.75 - 6.25 years	4.75 years
Weighted average grant date fair value of options granted during the year	$3.71	$10.55	$18.09

As of December 31, 2011, there was $48.2 million of total unrecognized compensation cost related to non-vested stock options that we have granted, which will be amortized using the straight line method over a weighted average period of 2.3 years.

Share-based compensation expense was recognized as follows: 

	Year Ended December 31,
(in thousands)	2009			2010			2011
Cost of revenue	$	2,850		$	4,660		$	4,220
Sales and marketing	2,884			4,241			2,313
General and administrative	14,390			17,723			22,240
Pre-tax share-based compensation	20,124			26,624			28,773
Less: Income tax benefit	(7,059		)	(9,340		)	(9,890		)
Total share-based compensation expense, net of tax	$	13,065		$	17,284		$	18,883

14. Taxes

The provision for income taxes consisted of:

	Year Ended December 31,
(In thousands)	2009			2010			2011
Current:
Federal	$	(5,911	)	$	691		$	18,372
Foreign	10,243			16,994			14,976
State	2,509			3,658			4,011
Total current	6,841			21,343			37,359
Deferred:
Federal	10,497			6,933			4,345
Foreign	(826		)	(2,908		)	(877		)
State	(184		)	(315		)	(809		)
Total deferred	9,487			3,710			2,659
Total provision for income taxes	$	16,328		$	25,053		$	40,018

Income before income taxes included income from foreign operations of approximately $31.2 million, $47.9 million and $51.7 million for the years ended December 31, 2009, 2010 and 2011, respectively.

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A reconciliation of the statutory federal tax rate to the effective tax rate is as follows:

	Year Ended December 31,
	2009		2010		2011
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	3.3	%	3.0	%	1.9	%
Tax rate differentials for international jurisdictions	-3.2	%	-4.0	%	-4.1	%
Permanent differences	0.3	%	0.8	%	1.8	%
Other, net	-0.3	%	0.3	%	-0.2	%
Effective tax rate	35.1	%	35.1	%	34.4	%

Deferred Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Significant components of our deferred tax assets and liabilities are as follows:

(In thousands)	December 31, 2010			December 31, 2011
Deferred tax assets:
Share-based compensation	$	16,096		$	15,927
Accounts receivable	948			1,079
State income taxes	901			455
Vacation accruals	1,493			2,159
Deferred revenue	2,650			2,591
Deferred rent	4,277			7,188
Accruals not currently deductible	4,476			6,508
Net operating loss carryforwards	9,321			2,843
Charitable contribution carryforward	284			560
Foreign tax credit	72			955
Research and development credits	1,369			3,142
Other	521			14
Total gross deferred tax assets	42,408			43,421
Deferred tax liabilities:
Depreciation	64,072			96,758
Share-based compensation	—			476
Prepaids	1,488			824
Total gross deferred tax liabilities	65,560			98,058
Net deferred tax assets (liabilities)	$	(23,152	)	$	(54,637	)

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. A valuation allowance was not established or deemed necessary based upon the determination that future profits are anticipated.

The company has not recognized a deferred tax liability for undistributed earnings of its foreign subsidiaries because such earnings are considered indefinitely invested in a foreign country. As of December 31, 2011, undistributed earnings of the company’s foreign subsidiaries considered indefinitely invested were approximately $124.1 million. We intend to reinvest these earnings in active non-U.S. business operations and do not currently intend to repatriate these earnings to fund U.S. operations.

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We have $147.6 million of federal net operating loss carryforwards and $4.1 million of federal tax credit carryforwards expiring at various dates through 2031. The federal net operating loss carryforwards include approximately $147.6 million of gross windfall tax benefits from stock option exercises that have not been recorded as of December 31, 2011. We have $17.5 million of foreign net operating loss carryforwards with an indefinite expiration date.

Uncertain Tax Positions

We file income tax returns in each jurisdiction in which we operate, both domestically and internationally. Due to the complexity involved with certain tax matters, we have considered all relevant facts and circumstances for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. We believe that there are no other jurisdictions in which the outcome of uncertain tax matters is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.

A reconciliation of our unrecognized tax benefits, excluding accrued interest, for 2010 and 2011 is as follows:

(In thousands)	2010		2011
Balance, beginning of year	$	356	$	2,456
Additions based on tax positions related to the current year	199		13,045
Additions for tax positions of prior years	1,901		1,228
Reductions for tax positions of prior years	—		—
Settlements	—		—
Balance, end of year	$	2,456	$	16,729

Unrecognized tax benefits of $2.5 million and $16.7 million for 2010 and 2011, respectively, are included in other non-current liabilities on the balance sheet. At December 31, 2010 and 2011, respectively, approximately $1.0 million and $2.3 million of these unrecognized tax benefits, if recognized, would favorably impact our effective tax rate in any future period. Also included in the balance of unrecognized tax benefits at December 31, 2011 are liabilities of $12.6 million that, if recognized, would be recorded as an adjustment to other current and non-current assets. We do not expect the amount of unrecognized tax benefits disclosed above to change significantly over the next 12 months.

We recognize interest expense and penalties related to income tax matters in interest and penalties expense within other income (expense) on our consolidated statements of income and not as income tax expense. As of December 31, 2010 and 2011, we had no accrued interest or penalties on the consolidated balance sheets. For the years ended December 31, 2009, 2010 and 2011, no amount for interest or penalties related to unrecognized tax benefits was recorded in the consolidated statements of income.

We are subject to U.S. federal income tax and various state, local, and international income taxes in numerous jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. As such, our effective tax rate is impacted by the geographical distribution of income and mix of profits in the various jurisdictions.  Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file.

We currently file income tax returns in the U.S. and all foreign jurisdictions in which we have entities, which are periodically under audit by federal, state, and international tax authorities. These audits can involve complex matters that may require an extended period of time for resolution. We remain subject to U.S. federal and state income tax examinations for the tax years 2007 through 2011, U.K. income tax examinations for the years 2009 through 2011, Netherlands income tax examinations for the years 2007 through 2011, and Hong Kong income tax examinations for the years 2008 through 2011. There are no income tax examinations currently in process. Although the outcome of open tax audits is uncertain, in management’s opinion, adequate provisions for income taxes have been made. If actual outcomes differ materially from these estimates, they could have a material impact on our financial condition and results of operations. Differences between actual results and assumptions or changes in assumptions in future periods are recorded in the period they become known. To the extent additional information becomes available prior to resolution, such accruals are adjusted to reflect probable outcomes.

During 2011 we received federal income tax refunds totaling $4.5 million related to the 2007 and 2010 tax periods. We experienced a taxable profit in the U.S. and U.K. in 2011, and therefore we anticipate utilizing benefits of tax deductions related to stock compensation As a result, we have recognized an excess tax benefit in the U.S. and U.K.

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During 2011, Rackspace US, Inc. sold certain intellectual property to a wholly-owned offshore subsidiary in a taxable transaction.  As a result of the transaction, there is an asset on the consolidated balance sheet as of December 31, 2011 of $38.3 million (of which $37.2 million was recorded in Other non-current assets) that will be amortized through income tax expense over the lives of the applicable intellectual property. Although the transaction was taxable, the resulting gain was entirely offset against existing net operating losses, including excess stock compensation deductions. Thus, there was no cash tax impact from the sale of the intellectual property.

Rackspace takes certain non-income tax positions in the jurisdictions in which it operates and may be subject to audit from these jurisdictions. Rackspace is also involved in related non-income tax matters. We believe our positions are supportable, and we have accrued for known exposure; however, significant judgment is required in determining the ultimate outcome of such matters. In the normal course of business, our position and conclusion related to these non-income taxes may be challenged and assessments may be made. To the extent new information is obtained and changes our views on our positions, probable outcome of assessments, or litigation, changes in estimates to accrued liabilities would be recorded in the period the determination is made.

15. Comprehensive Income

Total comprehensive income was as follows: 

	Year Ended December 31,
(In thousands)	2009		2010			2011
Net income	$	30,218	$	46,358		$	76,411
Derivative instrument, net of deferred taxes of $(379), $(636) and $0 for the years ended December 31, 2009, 2010 and 2011	704		1,182			—
Foreign currency cumulative translation adjustment, net of taxes of $(1,393), $266 and $51 for the years ended December 31, 2009, 2010 and 2011	5,066		(3,341		)	(2,316		)
Total other comprehensive income (loss)	5,770		(2,159		)	(2,316		)
Total comprehensive income	$	35,988	$	44,199		$	74,095

The changes in accumulated other comprehensive income (loss) for the years ended December 31, 2010 and 2011 were as follows:

(In thousands)	Derivative Instrument			Translation Adjustment			Accumulated other comprehensive income (loss)
Balance at December 31, 2009	$	(1,182	)	$	(9,075	)	$	(10,257	)
2010 changes in fair value	1,182			—			1,182
2010 translation adjustment	—			(3,341		)	(3,341		)
Balance at December 31, 2010	$	—		$	(12,416	)	$	(12,416	)
2011 translation adjustment	—			(2,316		)	(2,316		)
Balance at December 31, 2011	$	—		$	(14,732	)	$	(14,732	)

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16. Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker is our chief executive officer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information by reporting unit and geographic region for purposes of evaluating financial performance and allocating resources.  We are organized as and operate two operating segments based around our products and services.  The company's service offerings all provide computing power to similar types of customers. Furthermore, the service offerings have similar production processes, deliver their services in a similar manner and use the same data centers and similar technologies. As a result of our evaluation of the criteria for aggregation by products and services, we determined we have one reportable segment, which we describe as Cloud Computing.

Revenue is attributed to geographic location based on the Rackspace operating location that enters into the contractual relationship with the customer, either the U.S. or International, primarily the U.K. Total net revenue by geographic region was as follows: 

	Year Ended December 31,
(In thousands)	2009		2010		2011
United States	$	467,901	$	583,546	$	767,752
International	161,086		197,009		257,312
Total net revenue	$	628,987	$	780,555	$	1,025,064

Our long-lived assets are primarily located in the U.S. and the U.K., and to a lesser extent Hong Kong.  Property and equipment, net by geographic region was as follows: 

(In thousands)	December 31, 2010		December 31, 2011
United States	$	395,318	$	485,608
International	99,910		141,882
Total property and equipment, net	$	495,228	$	627,490

17. Employee Benefit Plans

We sponsor a defined contribution retirement plan ("the Plan"), which has been determined by the IRS to be qualified as a 401(k) plan. The Plan covers substantially all employees located in the U.S. and provides for voluntary tax-deferred contributions of up to 100% of gross compensation, subject to certain IRS limitations. Based on approval by the board of directors, we began making matching contributions in 2011. During 2011, $3.9 million of contribution expense was recognized. The Company matches $340 for every 1% of earnings that the employee contributes, up to a maximum of 6%, or $2,040 per employee. The matching contributions vest when the employee has been employed by Rackspace for three years.

We also sponsor a non-mandatory defined contribution plan for our employees located in the U.K. Pursuant to this plan, we contribute on a monthly basis a certain percentage of the employee’s salary. The plan is non-contributory; thus, the employee is not obligated to make any contribution to the plan, and contributions vest immediately. During 2009, 2010 and 2011, expense recognized was $1.2 million, $1.5 million and $1.9 million, respectively.

18. Risks and Uncertainties

Our future results of operations involve a number of risks and uncertainties. Factors that could affect our future operating results and cause actual results to vary materially from expectations include, but are not limited to: current economic conditions, uncertainty in the potential market for our services, increasing competition, dependence on our existing management and key personnel, and protection of our intellectual property rights.

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SUPPLEMENTARY FINANCIAL DATA

	Quarters Ended
(In thousands, except per share amounts)	March 31, 2010		June 30, 2010		September 30, 2010		December 31, 2010
	(Unaudited)
Net revenue	$	178,805	$	187,314	$	199,710	$	214,726
Cost of revenue	$	57,007	$	61,470	$	64,616	$	66,747
Gross margin	$	121,798	$	125,844	$	135,094	$	147,979
Net income	$	9,812	$	11,198	$	11,809	$	13,539
Earnings per share - basic	$	0.08	$	0.09	$	0.09	$	0.11
Earnings per share - diluted	$	0.07	$	0.08	$	0.09	$	0.10
Cash and cash equivalents	$	131,297	$	148,496	$	166,557	$	104,941

	Quarters Ended
(In thousands, except per share amounts)	March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
	(Unaudited)
Net revenue	$	230,002	$	247,229	$	264,572	$	283,261
Cost of revenue	$	69,742	$	74,057	$	82,445	$	82,851
Gross margin	$	160,260	$	173,172	$	182,127	$	200,410
Net income	$	13,821	$	17,561	$	19,982	$	25,047
Earnings per share - basic	$	0.11	$	0.14	$	0.15	$	0.19
Earnings per share - diluted	$	0.10	$	0.13	$	0.14	$	0.18
Cash and cash equivalents	$	133,868	$	132,025	$	124,680	$	159,856

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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A - CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, as of the end of the period covered by this annual report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There were no changes in our internal controls over financial reporting during our most recent fiscal quarter reporting period identified in connection with management’s evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2011. Management reviewed the results of its assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its attestation report, which is included in Item 8 of this Annual Report on Form 10-K.

ITEM 9B - OTHER INFORMATION

None.

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PART III

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to Rackspace Hosting’s Proxy Statement for its 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2011.

We have adopted the Rackspace Hosting, Inc. Code of Business Conduct and Ethics (the “code of conduct”) that applies to all of our employees, officers and directors, including without limitation, our Chief Executive Officer, Chief Financial Officer, and Corporate Controller, and other finance organization employees. The code of conduct, as well as any waiver of a provision of the code of conduct granted to any senior officer or director or material amendment to the code of conduct, if any, may be found in the “Investors” section of our website at www.rackspace.com.

ITEM 11 - EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to Rackspace Hosting's Proxy Statement for its 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2011.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED PARTY STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to Rackspace Hosting's Proxy Statement for its 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2011.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to Rackspace Hosting's Proxy Statement for its 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2011.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to Rackspace Hosting's Proxy Statement for its 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2011.

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PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements

(1) The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

(2) Any financial statement schedules required to be filed as part of this report are set forth in section (c) below.

(b) Exhibits - See Index to Exhibits at the end of this report, which is incorporated by reference.

(c) Financial Statement Schedules

The following financial statement schedule is filed as a part of this Annual Report:

Schedule II - Valuation and Qualifying Accounts

All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.

(In thousands)	Beginning Balance		Additions Charged to Net Revenues, and Costs and Expenses		Write-offs of Accounts Receivable and Credit Memos Paid			Ending Balance
Allowance for doubtful accounts and customer credits for the years ending December 31:
2009	$	3,295	$	13,364	$	(12,361	)	$	4,298
2010	$	4,298	$	7,223	$	(8,675	)	$	2,846
2011	$	2,846	$	9,063	$	(8,489	)	$	3,420

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 17, 2012.

		Rackspace Hosting, Inc.
Date:	February 17, 2012	By:	/s/ A. LANHAM NAPIER
			A. Lanham Napier
			Chief Executive Officer and Director
			(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ A. LANHAM NAPIER	Chief Executive Officer and Director	February 17, 2012
A. Lanham Napier	(Principal Executive Officer)
/s/ KARL PICHLER	Chief Financial Officer and Treasurer	February 17, 2012
Karl Pichler	(Principal Financial Officer)
/s/ GRAHAM WESTON	Chairman	February 17, 2012
Graham Weston
/s/ S. JAMES BISHKIN	Director	February 17, 2012
S. James Bishkin
/s/ SAM GILLILAND	Director	February 17, 2012
Sam Gilliland
/s/ MARK P. MELLIN	Director	February 17, 2012
Mark P. Mellin
/s/ PALMER L. MOE	Director	February 17, 2012
Palmer L. Moe
/s/ LEW MOORMAN	President and Director	February 17, 2012
Lew Moorman
/s/ FRED REICHHELD	Director	February 17, 2012
Fred Reichheld
/s/ GEORGE J. STILL, JR.	Director	February 17, 2012
George J. Still, Jr.

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INDEX TO EXHIBITS

Exhibits	Description
3.1	Certificate of Incorporation of the Registrant (2)
3.3	Amended and Restated Bylaws of the Registrant (3)
4.1	Form of Common Stock Certificate of the Registrant (3)
4.2	Founder's Registration Rights Agreement, dated October 1, 2002, among the Registrant and certain stockholders (1)
4.3	Investor's Registration Rights Agreement, dated October 1, 2002, among the Registrant and certain stockholders (1)
10.1	Form of Indemnification Agreement for directors and officers (2)
10.2	2003 Stock Option Plan and form of agreement thereunder (1)
10.3	2005 Non-Qualified Stock Option Plan and form of agreement thereunder (1)
10.4	Form of Share Option Agreement (U.K.) (4)
10.5(A)	Amended and Restated 2007 Long-Term Incentive Plan and form of agreement thereunder (2)
10.5(B)	Certificate of Amendment to Amended and Restated 2007 Long-Term Incentive Plan (2)
10.5(C)	Form of RSU Agreement Under 2007 Long Term Incentive Plan (Time-Based) (5)
10.5(D)	Form of RSU Agreement Under 2007 Long Term Incentive Plan (Performance-Based) (5)
10.5(E)	Form of RSU Agreement Under 2007 Long Term Incentive Plan (SLT Performance-Based) (14)
10.5(F)	Rules of the Rackspace Hosting, Inc. 2010 HM Revenue & Customs U.K. Approved Sub-plan (12)
10.5(G)	Form of the 2010 HM Revenue & Customs U.K. Approved Sub-plan, Notice of Grant of Stock Options (12)
10.6	Webmail.us., Inc. 2004 Stock Incentive Plan, as amended in 2006 (1)
10.7	2008 Employee Stock Purchase Plan and form of agreement thereunder (2)
10.8	Rackspace US, Inc. Deferred Compensation Plan (3)
10.9	Office Building Lease, dated March 16, 2004, between Data Rose Limited Partnership and Rackspace Headquarters, LLC, as amended on April 26, 2004, June 1, 2006, and April 17, 2008 (1)
10.10	Ground Lease Agreement, dated August 2, 2007, between Windcrest Economic Development Corporation and Rackspace US, Inc., as amended on April 24, 2008 (1)
10.11	Walzem Road Redevelopment Project Master Economic Incentives Agreement among the City of Windcrest, Texas, the City of San Antonio, Texas, the County of Bexar, Texas, the Windcrest Economic Development Corporation, the Windcrest Economic Development Company, LLC, and Rackspace US, Inc., dated August 2, 2007 (1)
10.12	City Economic Development Grant Agreement between the City of Windcrest, Texas and Rackspace US, Inc., dated August 2, 2007 (1)
10.13	County Economic Development Grant Agreement between Bexar County, Texas and Rackspace US, Inc., dated August 2, 2007 (1)
10.14	Developer Economic Development Grant Agreement among the City of Windcrest, Texas, the Windcrest Economic Development Corporation, and Windcrest Economic Development Company, LLC, dated August 2, 2007 (1)
10.15(A)	Economic Development Agreement between the State of Texas and Rackspace US, Inc., dated August 1, 2007 (1)
10.15(B)	Amendment Number One to the Economic Development Agreement between the State of Texas and Rackspace US, Inc. (8)
10.16	Office Building Lease Agreement, dated February 22, 2000, between Santa Clara Land Company, Ltd. and the Registrant, as amended on March 30, 2000, December 9, 2004, and March 1, 2007 (1)
10.17	Storage Lease, effective March 1, 2004, between Santa Clara Land Company, Ltd. and the Registrant (2)
10.18(A)	Lease Agreement, dated January 28, 2008, between Santa Clara Land Company, Ltd. and Rackspace US, Inc. (1)
10.18(B)	First Amendment to Office Building Lease Agreement between Santa Clara and Company, Ltd. and Rackspace US, Inc., dated July 10, 2008 (3)

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Exhibits	Description
10.19	Assignment of Lease, effective December 1, 2006, between Qwest Communications Corporation and Rackspace DAL1DC Management, LLC with attached Lease dated January 26, 2000 between CSI Industrial Development L.P. and Qwest Communication Corporation, as amended January 23, 2011 (1)
10.20	Third Amendment to Lease Agreement, dated January 8, 2008, between CLPF-Heritage Four, L.P. and Rackspace DAL1DC Management LLC (1)
10.21	Consent to Assignment and Other Agreements, dated November 30, 2006, by and among CLPF Heritage Four L.P., Macro Holding, Inc., Qwest Communications Corporation, and Rackspace DAL1DC, Ltd. (1)
10.22	Agreement for Lease, dated April 2, 2007, between Slough Trading Estate Limited and Rackspace Managed Hosting Limited (1)
10.23(A)	Amended and Restated Revolving Credit Agreement dated August 31, 2007 between Comerica Bank and Rackspace US, Inc., as amended October 11, 2007, December 7, 2007, February 25, 2008, and April 23, 2008 (1)
10.23(B)	Fifth Amendment to Amended and Restated Revolving Credit Agreement (7)
10.24	Global Amendment to the Registrant's 1999 Assumed Stock Option Plan, 2003 Stock Option Plan, 2005 Non-Qualified Stock Option Plan, Webmail.us, Inc. 2004 Stock Incentive Plan and Amended and Restated 2007 Long-Term Incentive Plan (2)
10.25	Offer letter from the Registrant to James Lewandowski, dated September 9, 2008 (5)
10.26	Rackspace Standard Form of Employment Agreement (5)
10.27(A)†	Lease Agreement by and between Grizzly Ventures LLC and Rackspace US, Inc. (6)
10.27(B)	First Amendment to Lease Agreement by and between Grizzly Ventures LLC and Rackspace US, Inc. (10)
10.28(A)†	Lease Agreement by and between Tarantula Ventures LLC and Rackspace US, Inc., dated July 31, 2009 (9)
10.28(B)†	First Amendment to Lease Agreement by and between Tarantula Ventures LLC and Rackspace US, Inc., dated May 4, 2010 (13)
10.28(C)†	Second Amendment to Lease Agreement by and between Tarantula Ventures LLC and Rackspace US, Inc., dated February 24, 2011 (16)
10.28(D)†	Fourth Amendment to Lease Agreement by and between Tarantula Ventures LLC and Rackspace US, Inc., dated August 19, 2011 (18)
10.29	Employment Agreement between Rackspace US, Inc. and Mark Roenigk, dated December 14, 2009 (11)
10.30	Non-employee Director Compensation Schedule (13)
10.31	Property Lease for HPH1 Hyde Park Hayes Millington Road Hayes Middlesex UB3 4AY (15)
10.32	Service Agreement by and Between Rackspace Limited and David Kelly, dated June 1, 2010 (15)
10.33	Bruce Knooihuizen Transition Employment Agreement (16)
10.34(A)	Revolving Credit Agreement, dated September 26, 2011, by and between Rackspace Hosting, Inc. and JPMorgan Chase Bank, N.A., Barclays Bank PLC, Regions Bank, and Wells Fargo Bank, N.A. (17)
10.34(B)	Guarantee Agreement, dated September 26, 2011, by Guarantors of Rackspace Hosting, Inc., in favor of JPMorgan Chase Bank, N.A. as Administrative Agent for the benefit of the Lenders pursuant to the Revolving Credit Agreement dated September 26, 2011 (17)
10.35*	Compensation Agreement between Rackspace US, Inc. and Karl Pichler, dated January 27, 2012
10.36*	Fifth Amendment to Lease Agreement by and between Tarantula Ventures LLC and Rackspace US, Inc., dated January 6, 2012
10.38*†	Lease Agreement by and between Collins Technology Park Partners, LLC, and Rackspace US, Inc., dated December 29, 2011
21.1*	List of subsidiaries of the Registrant
23.1*	Consent of KPMG LLP, Independent Registered Public Accounting Firm.
31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema

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Exhibits	Description
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase
101.DEF**	XBRL Taxonomy Extension Definition Linkbase
101.LAB**	XBRL Taxonomy Extension Label Linkbase
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase

* Filed herewith.

** Furnished herewith.

† Confidential treatment has been requested for portions of these exhibits. These portions have been omitted from this Annual Report on Form 10-K and submitted separately to the Securities and Exchange Commission.

(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-150469), filed April 25, 2008.

(2) Incorporated by reference to the Company's Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-150469), filed June 18, 2008.

(3) Incorporated by reference to the Company's Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-150469), filed July 15, 2008.

(4) Incorporated by reference to the Company's Amendment No. 1 to the Registration Statement on Form S-8 (File No. 333-153009), filed February 4, 2009.

(5) Incorporated by reference to the Company's Annual Report on Form 10-K for the Year ended December 31, 2008 (File No. 001-34143), filed March 2, 2009.

(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2009 (File No. 001-34143), filed May 12, 2009.

(7) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-34143), filed June 23, 2009.

(8) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-34143), filed July 30, 2009.

(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2009 (File No. 001-34143), filed August 13, 2009.

(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009 (File No. 001-34143), filed November 12, 2009.

(11) Incorporated by reference to the Company's Annual Report on Form 10-K for the Year ended December 31, 2009 (File No. 001-34143), filed February 26, 2010.

(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2010 (File No. 001-34143), filed May 6, 2010.

(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2010 (File No. 001-34143), filed August 9, 2010.

(14) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-34143), filed August 27, 2010.

(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2010 (File No. 001-34143), filed November 9, 2010.

(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2011 (File No. 001-34143), filed May 10, 2011.

(17) Incorporated by reference to the Company's Current Report on Form 8-K/A (File No. 001-34143), filed September 29, 2011.

(18) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-34143), filed November 8, 2011.

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EX-10.35

January 27, 2012

Karl Pichler

Rackspace Ltd.

Dear Karl,

Following our recent discussions, I am pleased to confirm the terms of your employment with Rackspace US, Inc (the Company). Your employment with Rackspace Ltd. will cease with effect from the date of commencement of your employment with the Company. You will be employed by the Company initially in the position of Chief Financial Officer with an effective start date of January 9, 2012, reporting regionally to the CEO of the Company.

The details of our agreement are as follows:

1.Work Location

Your primary work location will be at 5000 Walzem Rd., San Antonio, TX 78218, USA or such other place as directed by the Company.

2.Remuneration

Your pay will be based on a US salary of $350,000 per annum. This will be paid biweekly at a rate of $13,462.00. In addition to your annual pay, you will have an opportunity to earn up to 60% (although not capped) of your salary pursuant to the terms of the Semi-Annual Rackspace Profit Sharing Plan.

3.Holiday / Earned Time off

You will be entitled to paid holidays in accordance with the Company policy. You will not be entitled to any UK statutory holidays.

In addition, based on your current tenure with Rackspace, you will be entitled to four weeks of Earned Time Off (ETO) per year, with accruals and carry-overs subject to the terms of the Company's ETO policy set forth in the US Employee Guide.

4.Visa

The Company will assist you and your family in obtaining any necessary permits or visas. The Company will reimburse all reasonable costs of obtaining such documents. The Company will also meet the cost of obtaining residence visas for your dependents. We will assist with all matters related to your immigration status, but ultimate authority lies with the USCIS.

Once your work authorization documents are complete, you and your spouse will need to apply for a social security number with the US Social Security Administration. We will provide you with instruction on how to apply for this number.

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5.Relocation

Once you return this signed letter, you will receive a point of contact at our relocation assistance vendor. They will assist you with the logistics of each portion of your relocation from the UK to the US.

The company will arrange for the packing and shipping of your personal effects to the US from London within the guidelines and limits specified in our relocation policy. The Global Mobility Coordinator will take charge of transporting your personal possessions by air or sea.

Air: One “LDN” container

Surface/Sea Shipment:  One 40ft Container up to 12,000 lbs.

We will not pay to ship goods of an unusual nature or which require special handling.  In addition, you will not be reimbursed for the expense of moving, insuring or duties associated with the following items:

• Animals    

• Perishable items

• Wine and alcohol collections

• Automobiles, motorcycles, recreational motor vehicles, boats

• Pool tables and pianos

• Aerosol packed items, paint or other combustible, flammable or dangerous materials

• Currency, securities, coin, stamp or other collections, legal documents and similar items

• Objects physically attached to property including TV antennas.

• Firearms and ammunition

• Items legally prohibited by host country.

You will be provided a one-time lump sum net payment of $30,000 USD to assist with all other out of pocket expenses that may be associated with your move. This $30,000 USD amount is the net amount to you after required US tax and payroll deductions; the gross lump sum payment to you is $43,258.84 USD, which is included in your W-2 income. This payment is not tax equalized.

6. Air Fare

We will provide you and your dependents with air fare to the US in accordance with the Company's travel policy.

Excess baggage charges are not paid by the Company, but may be covered by you with the lump sum payment referred to in section 5 above.

7. Tax Equalization Related to Certain Relocation Costs

If any portion of the (i) relocation costs of the vendor or (ii) airfare for you and your family is considered taxable wages, then the Company will provide tax protection.

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8.Benefits; Medical coverage

You will be eligible for private medical insurance arrangements in place in the US. The scheme also allows you to cover your family members at a reduced rate. Upon arrival in the US, you will become eligible for benefits on your first day of employment. Other benefits available in the US will be reviewed with you as part of your US on-boarding process with the HR team.

Cindy Stein is available to answer any questions you might have about the relocation. Karla Fulton will review the on-boarding US paperwork (such as the required U.S. Confidentiality and Intellectual Property Agreement and other US forms) as well as the U.S. benefits package, standard company policies, and employee handbook.

Please sign below to affirm that you have received and agreed to these terms. Upon receipt of your signed letter agreement, you will be contacted by Relocation Synergy Group to begin preparations for your international move. If you have any questions at all, please let me know. We are excited to have you join us here in San Antonio!

/s/ Henry Sauer_________________________        

Henry Sauer

Interim VP, Human Resources

I hereby acknowledge that I understand and accept the terms and conditions outlined in this document.

Accepted:

/s/ Karl Pichler__________            ______February 2, 2012__________

Karl PichlerDate

Copy to: Cindy Stein

Karla Fulton

Pancho Davis

William Alberts

Relocation Synergy Group

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EX-10.36

FIFTH AMENDMENT TO LEASE

THIS FIFTH AMENDMENT TO LEASE (“Fifth Amendment”) is dated effective as of January 6, 2012 (the “Effective Date”), by and between Tarantula Ventures LLC, a Delaware limited liability company (“Landlord”), and RackSpace US, Inc., a Delaware corporation (“Tenant”).

W I T N E S S E T H:

R-1.    By that certain Lease dated July 31, 2009, by and between Landlord and Tenant (the “Initial Lease”), as amended by that certain First Amendment to Lease dated as of May 4, 2010 (the “First Amendment”); that certain Second Amendment to Lease dated as of February 24, 2011 (the “Second Amendment”); that certain Third Amendment to Lease dated as of March 31, 2011 (the “Third Amendment”); and that certain Fourth Amendment to Lease dated as of August 19, 2011 (the Initial Lease, as so amended, the “Original Lease”), Tenant leases seven (7) computer rooms referred to as Pods 5, 6, 7, 8, 11, 12 and 13 in CH1 Phase I and five (5) computer rooms referred to as Pods 23, 24, 25, 26 and 27 in CH1 Phase II (the “Existing Pods”), as well as the Office Space, the Storage Space, the Phase I Additional Storage Space, the Phase II Storage Space and the Phase II Additional Storage Space (all such area being hereinafter referred to as the “Premises”).

R-2.    Landlord and Tenant desire to modify the date on which Tenant may enter the Phase II Expansion Premises to perform Tenant's Phase II Expansion Premises Installations.

R-3.    Landlord and Tenant desire formally to reflect their understandings and agreements, and therefore to revise and modify the Original Lease accordingly.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. RECITALS; DEFINED TERMS. The foregoing recitals are hereby incorporated into this Fifth Amendment by reference, as if fully set forth in this first paragraph. Capitalized terms not otherwise defined herein shall have the same meaning as set forth in the Original Lease, as amended hereby. As of the Effective Date, the term “Lease” shall mean the Original Lease, as amended by this Fifth Amendment.

2. MODIFICATIONS TO ORIGINAL LEASE. The Original Lease shall be modified as set forth herein below.

A.The first three (3) sentences of Paragraph 2.C. of the Second Amendment are hereby deleted in their entirety and the following is substituted in lieu thereof:

“Tenant shall not enter the Phase II Expansion Premises for any reason until January 9, 2012 (the “Phase II Expansion Premises Access Date”). From and after the Phase II Expansion Premises Access Date, Landlord shall permit Tenant to enter the Phase II Expansion Premises (the “Phase II Expansion Premises Access”) in order to commence Tenant Installations in the Phase II Expansion Premises (“Phase II Expansion Premises Installations”), provided that, prior to commencing any such work in any Phase II Expansion Pod, Tenant shall comply in all respects with the requirements of Article IX of the Lease. In performing Tenant's Phase II Expansion Premises Installations from and after the Phase II Expansion Premises Access Date, up until the Phase II Expansion Premises Rent Commencement Date (the “Phase II Expansion Premises Access Period”), Tenant shall be permitted to use up to fifty (50) kilowatts of Critical Load Power and normal, non-Critical Load Power in any Phase II Expansion Pod, at its expense, for installation and testing.”

3. OTHER TERMS AND PROVISIONS.

A.Landlord Representation. As of the Effective Date, Landlord represents that there is no mortgage or deed of trust encumbering the Property.

B.Ratification. Except as otherwise expressly modified by the terms of this Fifth Amendment, the Original Lease shall remain unchanged and continue in full force and effect. All terms, covenants and conditions of the Original Lease not expressly modified herein are hereby confirmed and ratified and remain in full force and effect, and, as further amended hereby, constitute valid and binding obligations of Landlord and Tenant enforceable according to the terms thereof. If any provision of this Fifth Amendment conflicts with the Original Lease, the provisions of this Fifth Amendment shall control.

C.Binding Effect. All of the covenants contained in this Fifth Amendment, including, but not limited to, all

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covenants of the Original Lease as modified hereby, shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives and permitted successors and assigns.

D.Effectiveness. The submission of this Fifth Amendment shall not constitute an offer, and this Fifth Amendment shall not be effective and binding unless and until fully executed and delivered by each of the parties hereto.

E.Counterparts. This Fifth Amendment may be executed in multiple counterparts, each of which shall be an original, but all of which shall constitute one and the same Fifth Amendment. Additionally, the parties hereto hereby covenant and agree that, for purposes of facilitating the execution of this Fifth Amendment, (i) a facsimile signature shall be deemed to be an original signature and (ii) a telecopy delivery or electronic delivery (i.e., the transmission by any part of his, her or its signature on an original or any copy of this Fifth Amendment via telecopy, fax machine or e-mail) shall be deemed to be the delivery by such party of his, her or its original signature hereon.

F.Entire Agreement. The terms and provisions set forth in this Fifth Amendment constitute the entire agreement and understanding between Landlord and Tenant with respect to the specific subject matter addressed herein, and are hereby deemed to supersede all prior agreements and understandings (including, without limitation, those expressed originally in the Original Lease, to the extent inconsistent with the terms and provisions of this Fifth Amendment, and any prior oral or written communications between Landlord and Tenant, or their respective agents or representatives) concerning the specific subject matter hereof. No subsequent modification or amendment of the terms and provisions of this Fifth Amendment shall be effective unless in writing and signed by Landlord and Tenant.

G.Authority. By its execution and delivery hereof, Landlord does hereby certify and confirm to Tenant that the undersigned party executing this Fifth Amendment as Landlord is, in fact, presently the “Landlord” under the Lease, that the person(s) or party(ies) executing this Fifth Amendment on behalf of Landlord has/have done so with all requisite due authority, with the effect that this Fifth Amendment, as so executed, constitutes the valid and binding agreement of Landlord, enforceable against Landlord in accordance with the terms and provisions hereof, and that this Fifth Amendment has been duly executed and delivered by Landlord without the necessity of the joinder of any third party. By its execution and delivery hereof, Tenant does hereby certify and confirm to Landlord that the person(s) or party(ies) executing this Fifth Amendment on behalf of Tenant has/have done so with all requisite due authority, with the effect that this Fifth Amendment, as so executed, constitutes the valid and binding agreement of Tenant, enforceable against Tenant in accordance with the terms and provisions hereof, and that this Fifth Amendment has been duly executed and delivered by Tenant without the necessity of the joinder or consent of any third party.

H.Construction. Descriptive headings used herein are for convenience of reference only and shall not control or affect the meaning or construction of any provision set forth in this Fifth Amendment. Where required for proper interpretation, words used herein in the singular tense shall include the plural, and vice versa; the masculine gender shall include the neuter and the feminine, and vice versa. As used in this Fifth Amendment, the words “hereof,” “herein,” “hereunder” and words of similar import shall mean and refer to this entire Fifth Amendment and not to any particular section or paragraph of this Fifth Amendment, unless the context clearly indicates otherwise. If any provision hereof is for any reason unenforceable or inapplicable, the other provisions hereof will remain in full force and effect in the same manner as if such unenforceable or inapplicable provision had never been contained herein. This Fifth Amendment shall be construed without presumption of any rule requiring construction to be made against the party causing same to be drafted. This Fifth Amendment shall be construed and interpreted pursuant to the laws of the State of Illinois.

I.Guarantor. The Guarantor has joined in this Fifth Amendment for purposes of consenting to the terms and conditions of this Fifth Amendment and confirming that the Guaranty dated July 31, 2009 is in full force and effect and is fully enforceable with respect to the Original Lease, as amended by this Fifth Amendment.

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IN WITNESS WHEREOF, Landlord and Tenant have executed this Fifth Amendment to Lease on or as of the day and year first above written.

LANDLORD:

TARANTULA VENTURES LLC,

a Delaware limited liability company

By: Tarantula Interests LLC,

a Delaware limited liability company

its Managing Member

By: DuPont Fabros Technology, L.P.,

a Maryland limited partnership,

its Managing Member

By: DuPont Fabros Technology, Inc.,

a Maryland corporation,

its General Partner

By: /s/ Hossein Fateh_____________

Name: Hossein Fateh_____________

Title: President and CEO__________

TENANT:

RACKSPACE US, INC.,

a Delaware corporation

By: /s/ Mark Roenigk_________________

Name: Mark Roenigk_________________

Title: COO_________________________

GUARANTOR:

RACKSPACE HOSTING, INC.,

a Delaware corporation

By: /s/ Mark Roenigk_________________

Name: Mark Roenigk_________________

Title: COO_________________________

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EX-10.38

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

1215 DATACENTER PARK BOULEVARD

DATACENTER LEASE

Between

COLLINS TECHNOLOGY PARK PARTNERS, LLC

as Landlord

and

RACKSPACE US, INC.

as Tenant

Dated

December 29, 2011

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

Table of Contents

			Page
1		LEASE OF TENANT SPACE	1
	1.1	Tenant Space
	1.2	Condition of Tenant Space
	1.3	Interconnections
	1.4	Relocation Right
	1.5	Quiet Enjoyment; Access
	1.6	Common Area
2		TERM	2
	2.1	Term; Tenant’s Early Termination Right
	2.2	Delivery of Tenant Space; Delivery of Documentation; Early Access
	2.3	Extension Options
3		BASE RENT AND OTHER CHARGES	5
	3.1	Base Rent
	3.2	Operating Expenses and Taxes – Real Property
	3.3	Payments Generally
	3.4	Late Payments
	3.5	Utilities
4		TAXES-EQUIPMENT; TAXES-OTHER	7
	4.1	Taxes - Equipment
	4.2	Taxes - Other
5		INTENTIONALLY DELETED	8
6		PERMITTED USE; COMPLIANCE WITH RULES AND LAWS; HAZARDOUS MATERIALS	8
	6.1	Permitted Use
	6.2	Building Rules and Regulations
	6.3	Compliance with Laws; Hazardous Materials
	6.4	Electricity Consumption Threshold
	6.5	Maximum Structural Load
	6.6	Rooftop Rights
7		ACCESS CONTROL; SECURITY; ELECTRICITY; INTERRUPTION OF SERVICES; BUILDING MANAGEMENT SYSTEM	9
	7.1	Access Control; Security
	7.2	Electricity
	7.3	Interruption of Services
	7.4	Building Management System
8		MAINTENANCE; ALTERATIONS; REMOVAL OF TENANT’S PERSONAL PROPERTY	11
	8.1	Landlord’s Maintenance
	8.2	Tenant’s Maintenance
	8.3	Alterations
	8.4	Removal of Tenant’s Personal Property
	8.5	Depreciation
9		CASUALTY EVENTS; TAKINGS; INSURANCE	13

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

	9.1	Casualty Events; Takings
	9.2	Tenant’s Insurance
	9.3	Landlord’s Insurance
10		TRANSFERS	15
	10.1	Restrictions on Transfers; Landlord’s Consent
	10.2	Notice to Landlord
	10.3	Landlord’s Recapture Rights
	10.4	No Release; Subsequent Transfers
	10.5	Colocation
	10.6	Excess Rent
11		ESTOPPEL CERTIFICATES	16
12		SUBORDINATION AND ATTORNMENT; HOLDER RIGHTS	17
	12.1	Subordination and Attornment
	12.2	Intentionally Omitted
	12.3	SNDA
13		SURRENDER OF TENANT SPACE; HOLDING OVER	17
	13.1	Tenant’s Method of Surrender
	13.2	Disposal of Tenant’s Personal Property
	13.3	Holding Over
	13.4	Survival
14		WAIVERS; INDEMNIFICATION; CONSEQUENTIAL DAMAGES; LIENS	18
	14.1	Waivers
	14.2	Indemnification
	14.3	Consequential Damages
	14.4	Liens
15		TENANT DEFAULT	20
	15.1	Events of Default By Tenant
	15.2	Remedies
	15.3	Tenant’s Liability
16		LANDLORD’S LIABILITY	21
	16.1	Landlord Default; Tenant’s Remedies
	16.2	Landlord’s Liability
	16.3	Transfer of Landlord’s Interest
17		MISCELLANEOUS	22
	17.1	Severability
	17.2	No Waiver
	17.3	Attorneys’ Fees and Costs
	17.4	Waiver of Right to Jury Trial
	17.5	Headings; Time; Survival
	17.6	Notices
	17.7	Governing Law; Jurisdiction
	17.8	Incorporation; Amendment; Merger
	17.9	Brokers
	17.1	Examination of Lease; Binding on Parties
	17.1	Recordation

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

17.1	Authority
17.1	Successors and Assigns
17.1	Force Majeure
17.2	No Partnership or Joint Venture; No Third Party Beneficiaries
17.2	Access By Landlord
17.2	Rights Reserved by Landlord
17.2	Counterparts; Delivery by Facsimile or E-mail
17.2	Confidentiality
17.2	Incorporation of Schedules and Exhibits
17.2	Financial Statements
17.2	Intentionally Omitted
17.2	Re-Commissioning
17.2	Landlord’s Lien
17.3	Parking
17.3	Reporting

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SCHEDULE “1”

CERTAIN DEFINED TERMS

“1232 Alma Lease” shall mean and refer to that certain Datacenter Lease dated effective as of May 20, 2011, by and between Collins Technology Park Partners, LLC, as landlord (the “1232 Landlord”), and Rackspace US, Inc., as tenant, related to certain space located at 1232 Alma Road, Richardson, Texas.

“A&E Firm” shall mean and refer to the architectural and engineering firm that prepares the As-Built Drawings for Landlord.

“ACM” shall mean and refer to asbestos, asbestos-containing materials or presumed asbestos-containing materials.

“Additional Rent” shall mean and refer to all amounts (other than Base Rent) payable by Tenant to Landlord pursuant to this Lease, whether or not denominated as such.

“Affiliate Transfer” shall mean and refer to an assignment by Tenant of this Lease, or the sublease of the entire or any portion of the Tenant Space, to a Tenant Affiliate where (x) Tenant gives Landlord prior written notice of the name of such Tenant Affiliate, and (y) as applicable, the applicable Tenant Affiliate assumes, in writing, for the benefit of Landlord, all of Tenant's obligations under this Lease, or enters into a sublease with Tenant on a form approved by Tenant in Tenant's sole but good faith discretion.

“Alterations” shall mean and refer to any alterations, additions, improvements or replacements to the Tenant Space, or any other portion of the Building or Property (exclusive of any replacement(s) of any portion of the Infrastructure performed in accordance with Section 8.2, below) that are performed by or on behalf of Tenant or any other Tenant Party. For avoidance of doubt, and notwithstanding the fact that the manner and method of the installation of Tenant's Personal Property is subject to the terms of Section 8.3, the term “Alterations” expressly excludes Tenant's Personal Property.

“Applicable Laws” shall mean and refer to (a) all laws, ordinances, building codes, rules, regulations, orders and directives of any governmental authority now or hereafter having jurisdiction over the Property, (b) all covenants, conditions and restrictions now or hereafter affecting the Property, and (c) all rules, orders, regulations and requirements of any applicable fire rating bureau or other organization performing a similar function for the Property.

“As-Built Drawings” shall mean and refer to the As-Built Drawings, as defined on Exhibit “E-1”, attached hereto.

“Back-Up Power Systems” shall mean and refer to all emergency, supplemental and/or back-up power systems used in or for either of the Datacenters.

“Base Building” shall mean and refer to: (i) those walls in the Tenant Space that are structural in nature, (ii) the foundation of the Building, (iii) the steel structure of the Building, (iv) the exterior walls (including windows) of the Building, (v) the roof of the Building, (vi) the parking and grounds adjacent to the Building, (vii) the Base Building Systems; and (viii) the Common Area.

“Base Building Systems” shall mean and refer to the shared/common systems and equipment in the Building and/or otherwise for the Property, including, without limitation, the Fire Detection System, electrical, HVAC, plumbing, sprinkler, access control (including, without limitation, Landlord's Access Control Systems), mechanical, and telecommunications systems and equipment. For the avoidance of doubt, Base Building Systems shall: (i) in no event include any of the Infrastructure; and (ii) include all portions of the Building electrical system down to, but not including, that certain output side of the primary Building switchgear (i.e., that certain output side of the Vista switchgear) that exclusively serves the Premises.

“Base Rent” shall mean and refer to the amounts of Base Rent set forth in Item 8 of the Basic Lease Information.

“Building” shall mean and refer to the Building described in Item 15 of the Basic Lease Information.

“Building Management System” or “BMS” shall mean and refer to the Building's environmental diagnostic system for power, temperature and humidity, which includes remote sensors located in each Tenant Space to provide 24x7 monitoring of (i) the power supplied to each Tenant Space and (ii) the temperature and humidity in each Suite.

“Building Rules and Regulations” shall mean and refer to Landlord's rules and regulations for the Building, as same may be amended from time to time in accordance with Section 6.2 of the Lease. The current version of the Building Rules and Regulations is attached hereto as Exhibit “G”.

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“Cables” shall mean and refer to all fiber and/or copper and/or other cabling that is placed into the Pathway by Landlord on Tenant's behalf, or by Tenant and/or by any other Tenant Party.

“Casualty-Complete” shall mean and refer to a Casualty Event that results in the complete destruction of the Building.

“Casualty Event” shall mean and refer to fire, explosion or any other casualty or peril causing damage to the Property, the Building and/or the Tenant Space.

“Casualty Repair - Landlord” shall mean and refer to the repair and reconstruction of the damaged portion(s) of the Base Building and/or the Property (exclusive of the Tenant Space and Tenant's Repair Obligations) to substantially the same condition in which they existed immediately prior to a particular Casualty Event and in order to enable Tenant's access to and use of the Tenant Space in the ordinary conduct of Tenant's business. For the avoidance of doubt (and notwithstanding anything to the contrary contained in the foregoing), Landlord's obligations under the “Casualty Repair - Landlord” does not, and shall not, include the obligation to repair or replace any of the Infrastructure.

“Casualty Repair - Tenant” shall mean and refer to the repair and reconstruction of the damaged portion(s) of the equipment, item and materials that are included within Tenant's Repair Obligations to substantially the same condition in which they existed immediately prior to a particular Casualty Event.

“Casualty Repair Notice” shall mean and refer to written notice by Landlord to Tenant notifying Tenant of the Repair Period-Estimated.

“Claims” shall mean and refer to all third party claims, actions, suits and proceedings, and all losses, damages, obligations, liabilities, penalties, fines, costs and expenses arising from any such claims, actions, suits, or proceedings, including, without limitation, attorneys' fees, legal costs, and other costs and expenses of defending against any such claims, actions, suits, or proceedings.

“Colocation Activity” shall mean and refer to the installation, operation and maintenance by a Colocation Party of such Colocation Party's computer, switch and/or communications equipment in the Tenant Space, and the connection of such equipment with the equipment of Tenant and/or other Colocation Parties within the Tenant Space.

“Colocation Agreement” shall mean and refer to a license agreement, by and between Tenant and a Colocation Customer, whereby Tenant provides such Colocation Customer (and its related Colocation Parties) a license for the sole purpose of engaging in Colocation Activities within the Tenant Space.

“Colocation Customer” shall mean and refer to a customer of Tenant, who desires to engage in Colocation Activities within the Tenant Space, under and pursuant to a Colocation Agreement.

“Colocation Party” shall mean and refer to any Colocation Customer and any person claiming, directly or indirectly, by, through or under any Colocation Customer, together with the officers, agents, servants and employees of each Colocation Customer.

“Commencement Date” shall mean and refer to (a) the Commencement Date (A), as it relates to Datacenter-A and the Datacenter-A Period, and (b) the Commencement Date (B), as it relates to Datacenter-B and the Datacenter-B Period.

“Commencement Date (A)” shall mean and refer to the Commencement Date (A) set forth in Item 4 of the Basic Lease Information, subject to the terms of Section 2.2.2 of the Standard Lease Provisions.

“Commencement Date (B)” shall mean and refer to the Commencement Date (B) set forth in Item 4 of the Basic Lease Information, subject to the terms of Section 2.2.2 of the Standard Lease Provisions.

“Commencement Date Conditions” shall mean and refer (a) to Commencement Date Conditions (A) (as it relates to the occurrence of Commencement Date (A)), and (b) to Commencement Date Conditions (B) (as it relates to the occurrence of Commencement Date (B)).

“Commencement Date Conditions (A)” shall mean and refer to the occurrence of the following:

(a)    Landlord has performed the Commissioning of Datacenter-A, which condition shall be deemed to have been satisfied upon Landlord's receipt of the Commissioning Complete Letter for Datacenter-A;

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(b)    Landlord has completed Landlord's Installations (A) and has installed the Base Building Systems for the Building, which shall be substantially similar in functionality to the “Base Building Systems” (as defined in the 1232 Alma Lease) that have been installed by the 1232 Landlord at the 1232 Building as of the Effective Date of this Lease.

(c)    Landlord has completed installation of (i) the P-POP Room and S-POP Room, as defined in Item 16 of the Basic Lease Information, below; and (ii) the POP Premises, as defined in the POP Rider; and

(d)    Landlord has delivered the Suite A-1 Tenant Space and the POP Premises to Tenant and provided the Commencement Date Notice for the Suite A-1 Tenant Space to Tenant.

“Commencement Date Conditions (B)” shall mean and refer to the occurrence of the following:

(a)    Landlord has performed the Commissioning of Datacenter-B, which condition shall be deemed to have been satisfied upon Landlord's receipt of the Commissioning Complete Letter for Datacenter-B;

(b)    Landlord has completed Landlord's Installations (B); and

(c)    Landlord has delivered the Suite B-1 Tenant Space to Tenant and provided the Commencement Date Notice for the Suite B-1 Tenant Space to Tenant.

“Commencement Date Notice” shall mean and refer to a notice from Landlord to Tenant, substantially in the form attached hereto as Exhibit “E-4”, which shall (a) memorialize Landlord's delivery of the Suite A-1 Tenant Space (or the Suite B-1 Tenant Space, as applicable) to Tenant with Landlord's Installations (A) (or Landlord's Installations (B), as applicable) complete, (b) be accompanied by a copy of the Commissioning Complete Letter for Datacenter-A (or for Datacenter-B, as applicable), and (c) confirm the actual Commencement Date, as applicable.

“Commissioning” shall mean and refer to the act of causing the commissioning/turn up of the Infrastructure of a Datacenter pursuant to the Commissioning Criteria, so that such Infrastructure has passed Level 5 of such Commissioning Criteria, as certified by the Commissioning Agent by virtue of the Commissioning Complete Letter for the particular Datacenter.

“Commissioning Complete Letter” shall mean and refer to a letter from the Commissioning Agent, evidencing successful Commissioning of a Datacenter, substantially in the form attached hereto as Exhibit “J”.

“Commissioning Agent” shall mean and refer to the third party engineering firm that performs the Commissioning of the Infrastructure for a particular Datacenter.

“Commissioning Criteria” shall mean and refer to the commissioning criteria set forth on Exhibit “E-2”.

“Commissioning Documentation” shall mean and refer to the Commissioning Documentation, as defined on Exhibit “E-1”, attached hereto.

“Common Area” shall mean and refer to those portions of the Property and the Building designated by Landlord from time to time for the common use of all tenants of the Building, including among other facilities, the sidewalks, service corridors, curbs, truck ways, loading areas (including, without limitation, loading docks), private streets, driveways and alleys, lighting facilities, halls, lobbies, delivery passages, elevators, drinking fountains, meeting rooms, public toilets, parking areas and garages, decks and other parking facilities, landscaping and other common rooms and common facilities.

“Consequential Damages” shall mean and refer to consequential damages, incidental damages, indirect damages, special damages, loss of profit, loss of business opportunity and loss of income.

“Control”, as used in the definition of Tenant Affiliate, shall mean and refer to (i) the right to exercise, directly or indirectly, fifty percent (50%) or more of the voting rights attributable to the controlled entity, (ii) the power to elect a majority of the controlled entity's board of directors and/or (iii) the ability to otherwise direct the business, management and/or operational decisions of the entity in question, whether through ownership, voting rights, by contract or otherwise.

“Datacenter” shall mean and refer to (a) Datacenter-A, as it relates to Suites A-1, A-2 and A-3; and (b) Datacenter-B, as it relates to Suites B-1, B-2 and B-3.

“Datacenter-A” shall mean and refer to Datacenter-A described in Item 18 of the Basic Lease Information.

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“Datacenter-A Period” shall mean and refer to the period of time commencing on the Commencement Date (A) and continuing until the expiration of the one hundred eightieth (180^th)full calendar month thereafter, unless earlier terminated in accordance with the terms of this Lease.

“Datacenter-B” shall mean and refer to Datacenter-B described in Item 18 of the Basic Lease Information.

“Datacenter-B Period” shall mean and refer to the period of time commencing on the Commencement Date (B) and continuing until the expiration of the one hundred eightieth (180^th)full calendar month thereafter, unless earlier terminated in accordance with the terms of this Lease.

“Datacenter Period” shall mean and refer (a) to the Datacenter-A Period (as it relates to Tenant Space (A)), and (b) to the Datacenter-B Period (as it relates to Tenant Space (B)).

“Default Rate” shall mean and refer to an interest rate equal to the lesser of (a) one percent (1 %) per month or (b) the maximum lawful rate of interest.

“Delinquency Date” shall mean and refer to the date that is (a) five (5) business days after the date on which any particular payment of Base Rent is due from Tenant to Landlord; and (b) ten (10) days after the date on which any particular payment of Additional Rent is due from Tenant to Landlord.

“Digital” shall mean and refer to Digital Realty Trust, L.P., a Maryland limited partnership.

“DPD Campus” shall mean and refer to that certain real property located in Richardson, Texas bound on four sides by Collins Road on the north, International Parkway on the east, Security Row on the south and Alma Road on the west.

“Early Access” shall mean and refer to Tenant's ability and right, subject to the terms of Section 2.2.4 of the Standard Lease Provisions, to enter and use the Early Access Suites, during the Early Access Period for each such Suite, for the Permitted Use.

“Early Access Date” shall mean and refer to Commencement Date (A) (as it relates to Suite A-2 and Suite A-3) and Commencement Date (B) (as it relates to Suite B-2 and Suite B-3).

“Early Access Period” shall mean and refer to the period between the Early Access Date and the commencement of the applicable Suite Period.

“Early Access Suite” shall mean and refer to any Suite within a Datacenter for which the Datacenter Period has commenced, but for which the Suite Period has yet to commence.

“ECT Default Notice” shall mean and refer to written notice from Landlord notifying Tenant of an ECT Overage. The parties agree, however, that such written notice need only be delivered by e-mail to Tenant's legal notice e-mail address (i.e., legalnotice@rackspace.com), and need not be followed up by a confirming copy by any other method of delivery.

“ECT Overage” shall mean and refer to a situation in which the electricity consumption for a Datacenter exceeds such Datacenter's Electricity Consumption Threshold.

“Electricity Consumption Threshold” shall mean and refer to (a) the Electricity Consumption Threshold-A, as it relates to Datacenter-A (see Exhibit “F”, Table A, Item 1), and (b) the Electricity Consumption Threshold-B, as it relates to Datacenter-B (see Exhibit “F”, Table A, Item 2).

“Environmental Laws” shall mean and refer to all now and hereafter existing Applicable Laws regulating, relating to, or imposing liability or standards of conduct concerning public health and safety or the environment and/or Hazardous Materials [including, without limitation, CERCLA, RCRA, OSHA, HMTA, and the Clean Air Act].

“Event of Default by Tenant” shall mean and refer to the occurrence of any of the Events of Default by Tenant described in Sections 15.1.1-15.1.5, inclusive.

“Excess Rent” shall mean and refer to any consideration in excess of the sum of (a) the pro-rata portion of Rent applicable to the portion of the Tenant Space subject to the assignment or sublease, less (b) the reasonable leasing costs (e.g., tenant improvement allowances, legal fees actually incurred in connection with consummating such sublease or assignment, and broker commissions) actually incurred by Tenant in connection with such sublease or assignment.

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

“Extension Options” shall mean and refer to Tenant's options to extend the Term of the Lease with respect to each of Tenant Space (A) and Tenant Space (B), the number and duration of which are as set forth in Item 6 of the Basic Lease Information, and the terms for which are as set forth in Section 2.3 of the Standard Lease Provisions.

“Extension Option Exercise Notice” shall mean and refer to written notice from Tenant to Landlord specifying that Tenant is irrevocably exercising an Extension Option so as to extend the Term of this Lease for a particular Tenant Space by the applicable Extension Term on the terms set forth in Section 2.3 of the Standard Lease Provisions.

“Extension Term” shall mean and refer to the duration of each duly exercised Extension Option, as set forth in Item 6 of the Basic Lease Information.

“Extension Term Base Rent” shall mean and refer to the monthly Base Rent payable with respect to the applicable Tenant Space during an Extension Term.

“Financial Statements” shall mean and refer to audited annual financial statements of the indicated entity, including (i) an opinion of a certified public accountant, (ii) a balance sheet, and (iii) a profit and loss statement (income statement), all prepared in accordance with sound accounting principles consistently applied.

“Fire Detection System” shall mean and refer to a fire/life/safety system substantially similar in functionality to the fire/life/safety system installed by the 1232 Landlord at the 1232 Building as of the Effective Date of this Lease.

“Force Majeure” shall mean and refer to any cause or reason beyond the reasonable control of the party obligated to perform hereunder, including, but not limited to, strike, labor trouble, governmental rule, regulation, ordinance, statute or interpretation, or fire, earthquake or civil commotion. Notwithstanding the foregoing, neither financial disability nor financial hardship shall constitute Force Majeure hereunder.

“Foreclosure” shall mean and refer to any foreclosure, sale under a power of sale, ground lease termination or transfer in lieu of any of the foregoing or the exercise of any other remedy pursuant to any Security Document by virtue of which Landlord's interest in the Property is transferred to the applicable Holder.

“Guarantor” shall mean and refer to Rackspace Hosting, Inc., a Delaware corporation.

“Handle,” “Handled,” or “Handling” shall mean and refer to any installation, handling, generation, storage, treatment, use, disposal, discharge, release, manufacture, refinement, presence, migration, emission, abatement, removal, transportation, or any other activity of any type in connection with or involving Hazardous Materials.

“Hazardous Materials” shall mean and refer to: (1) any material or substance: (i) which is defined or becomes defined as a “hazardous substance,” “hazardous waste,” “infectious waste,” “chemical mixture or substance,” or “air pollutant” under Environmental Laws; (ii) containing petroleum, crude oil or any fraction thereof; (iii) containing PCBs; (iv) containing ACM; (v) which is radioactive; (vi) which is infectious; or (2) any other material or substance displaying toxic, reactive, ignitable, explosive or corrosive characteristics, and is defined, or becomes defined, as such by any Environmental Law.

“Holder” shall mean and refer to any mortgagee or beneficiary of a mortgage or deed of trust encumbering the Property or any portion thereof, or any lessor of a ground or underlying lease with respect to the Property or any portion thereof.

“HVAC” shall mean and refer to heating, ventilation and air conditioning.

“Infrastructure” shall mean and refer to all mechanical and electrical systems exclusively serving each Datacenter, and all components, equipment and facilities thereof, whether located inside or outside such Datacenter, including, without limitation, generators, PDUs, power distribution boards and other components of the UPS Plant, and PAHUs and other components of the HVAC system. On such Datacenter's applicable Commencement Date, the Infrastructure for the applicable Datacenter shall include the items (identified to the applicable Datacenter) set forth on Exhibit “I”, attached hereto.

“Infrastructure (A)” shall mean and refer to Infrastructure (A) as defined on Exhibit “I”.

“Infrastructure (B)” shall mean and refer to Infrastructure (B) as defined on Exhibit “I”.

“Insurable Casualty Event” shall mean and refer to a Casualty Event which is required to be covered by this Lease, or normally would be covered, or coverable, under the insurance actually carried, or required to be carried, by the parties pursuant to this Lease,

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whichever is greater.

“Land” shall mean and refer to the Land described in Item 14 of the Basic Lease Information.

“Landlord” shall mean and refer to the Landlord set forth in Item 1 of the Basic Lease Information.

“Landlord Default” shall mean and refer to the occurrence of a Landlord Default, as described in Section 16.1.1.

“Landlord Group” shall mean and refer to Landlord, Digital Realty Trust, L.P., Digital Realty Trust, Inc., and their respective directors, officers, shareholders, members, employees, agents, contractors, constituent partners, affiliates, beneficiaries and trustees.

“Landlord's Access Control Systems” shall mean and refer to: [*****], in each case, such items shall be substantially similar in functionality to the same items of “Landlord's Access Control Systems” that, as of the Effective Date of this Lease, have been installed by the 1232 Landlord at the 1232 Building (as defined in Exhibit “C”), under and pursuant to the 1232 Alma Lease.

“Landlord's Actual Knowledge” or similar phrase shall mean and refer to the actual current knowledge, as of the Effective Date, of [*****] (the foregoing two (2) individuals, being employees of Digital Realty Trust, L.P., each of whom has direct and specific knowledge regarding the Building, but neither of whom shall have the duty of additional investigation in connection with this Lease).

“Landlord's Installations” shall, as it relates to Datacenter-A and Commencement Date (A), mean and refer to Landlord's Installations (A); and, as it relates to Datacenter-B and Commencement Date (B), mean and refer to Landlord's Installations (B).

“Landlord's Installations (A)” shall mean and refer to (a) the installations for Datacenter-A defined as such, as set forth on Exhibit “I”, attached hereto, and (b) the Commissioning of Datacenter-A, including such installations, as certified by the Commissioning Agent. Landlord shall perform Landlord's Installations (A) at Landlord's sole cost and expense and without reimbursement from Tenant as an Operating Expense under Article 3 of the Lease or otherwise. [*****] For the avoidance of doubt, the parties acknowledge that Landlord shall have the obligations regarding Landlord's Installations (A) set forth in Section 2.2.1, below (i.e., as it relates to the requirement that Landlord use commercially reasonable efforts to cause the Commencement Date Conditions (A) to be completed prior to the Target Commencement Date (A)).

“Landlord's Installations (B)” shall mean and refer to (a) the installations for Datacenter-B defined as such, as set forth on Exhibit “I”, attached hereto, and (b) the Commissioning of Datacenter-B, including such installations, as certified by the Commissioning Agent. Landlord shall perform Landlord's Installations (B) at Landlord's sole cost and expense and without reimbursement from Tenant as an Operating Expense under Article 3 of the Lease or otherwise. [*****] For the avoidance of doubt, the parties acknowledge that Landlord shall have the obligations regarding Landlord's Installations (B) set forth in Section 2.2.1, below (i.e., as it relates to the requirement that Landlord use commercially reasonable efforts to cause the Commencement Date Conditions (B) to be completed prior to the Target Commencement Date (B)).

“Landlord's Lease Undertakings” shall mean and refer to any representation, warranty, covenant, undertaking or agreement contained in any of the Lease Documents that is to be provided or performed by Landlord.

“Landlord's Liability Cap” shall mean and refer to [*****].

“Late Charge” shall, as it relates to each Late Payment, mean and refer to a sum equal to [*****].

“Late Payment” shall mean and refer to any payment of Rent that Landlord has not received from Tenant prior to the Delinquency Date.

“Late Payment Interest” shall mean and refer to interest on a particular Late Payment at the Default Rate.

“Lease Documents” shall mean and refer to this Lease and all schedules, exhibits, riders, amendments, and addenda to this Lease.

“Lease Year” shall mean and refer, as it relates to each respective Tenant Space, to each period of twelve (12) consecutive calendar months during the Term, commencing with the first day (the “Calendar Month Commencement Date”) of the first full calendar month of (a) the Datacenter-A Period, as it relates to Tenant Space (A), and (b) the Datacenter-A Period, as it relates to Tenant Space (B) (and each successive anniversary thereof), and ending with the day before the anniversary of such Tenant Space's Calendar Month Commencement Date. In the event that a Commencement Date occurs on a date that is other than the Calendar Month Commencement Date for a particular Tenant Space, then the first (1^st) Lease Year for such Tenant Space shall be deemed

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to include the Partial Month.

“Maximum Structural Load” shall mean and refer to the Maximum Structural Load set forth in Item 19 of the Basic Lease Information.

“Metering Equipment - Tenant Space” shall mean and refer to a metering device (or metering devices) for monitoring, measuring, and allocating the cost of the utilities serving, provided to and/or used in the Tenant Space.

“MMR Services” shall mean and refer to the services typically provided by companies in the primary business of providing carrier-neutral interconnections, such as Equinix, CoreSite and Telehouse, including without limitation, furnishing of space, racks and pathway to telecommunications carriers for the purpose of such carriers' placement and maintenance of computer, switch and/or communications equipment and cross-connections by such carriers with the communications cable and facilities of other parties in the Building.

“Noticed Holder” shall mean and refer to a Holder for which Tenant has been notified in writing of the address of such Holder.

“Operating Expenses” shall mean and refer to all actual and reasonable expenses, costs and disbursements of every kind and nature which Landlord shall pay or become obligated to pay, without markup or surcharge (except as it relates to management fees as set forth in subparagraph (ix) below) because of or in connection with the ownership, operation, maintenance, repair, replacement, protection and security of the Property, none of which shall be a duplication of another Operating Expense, determined on an accrual basis in accordance with generally accepted accounting principles (or otherwise in accordance with sound accounting principles) consistently applied, including, without limitation, the following:

(i)    Salaries and wages of all employees (general manager and below) engaged in the operation, maintenance and security of the Property, including taxes, insurance and benefits (including pension, retirement and fringe benefits) relating thereto;

(ii)    Cost of all supplies and materials used in the operation, maintenance and security of the Property;

(iii)    Cost of all electricity supplied to the Common Areas of the Property and the OS Tenant Spaces and all water and sewage service supplied to the Property;

(iv)    Cost of all maintenance and service agreements for the Property and the equipment therein, including, without limitation, alarm service, parking facilities, security (both on-site and off-site), janitorial service, landscaping, fire protection, sprinklers, window cleaning and elevator maintenance;

(v)    Cost of all insurance relating to the Property, including the cost of casualty/property, rental and liability insurance applicable to the Property and Landlord's personal property used in connection therewith but only to the extent customarily carried by landlords of high quality class A datacenter buildings comparable to the Building (The foregoing notwithstanding, Landlord shall not be permitted to include as “Operating Expenses” the portions of its casualty/property insurance premiums that are attributable to the Infrastructure and to the infrastructure for any other tenant premises in the Building that is comparable to the Infrastructure. To the extent that Landlord's casualty insurance premiums are not ordinarily separated between Building and equipment, Landlord agrees to provide, and the parties shall rely on, an annual statement from Landlord's insurance broker that attributes an appropriate portion of the casualty/property insurance premium to the Infrastructure and to the infrastructure for any other tenant premises in the Building that is comparable to the Infrastructure for the purposes of satisfying the preceding sentence.);

(vi)    Cost of repairs and general maintenance, including the costs of maintaining, repairing and/or replacing the Base Building, but specifically excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or by any third parties;

(vii)    Cost of capital improvement items, including installation thereof, which are acquired: (a) primarily for the purpose of reducing Operating Expenses and which, within twenty-four (24) months after the date any such cost is made or incurred by Landlord, in fact, does result in a net decrease in Operating Expenses; or (b) in order to comply with any Applicable Law with which the Property (or Landlord) is not required to comply as of the Commencement Date (and excluding, e.g., costs to cure any violation(s) of Applicable Laws existing as of the Effective Date), with any such costs to be amortized on a straight line basis (calculated over the useful economic life of the applicable capital improvement item), as determined by Landlord in its reasonable discretion using generally accepted accounting principles (or, at least, sound accounting principles) consistently applied, with interest at the commercially-reasonable rate paid by Landlord on any funds borrowed for such item or, if the capital improvement item is not financed, at the Prime Rate;

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

(viii)    Capital expenditures which, though capital for accounting purposes, are customarily considered maintenance and repair items and, therefore, passed through as operating expenses by landlords of high quality class A datacenter buildings comparable to the Building and which relate to items that, by their nature, require periodic maintenance, repair and/or replacement (but excluding the initial costs thereof), such as painting of Common Areas, replacement of carpet in lobbies, and the like, with any such capital improvements or costs to be amortized over the useful economic life of such improvements as determined by Landlord in its reasonable discretion using generally accepted accounting principles (or, at least, sound accounting principles) consistently applied, with interest at the commercially-reasonable rate paid by Landlord on any funds borrowed for such item or, if the item is not financed, at the Prime Rate; and

(ix)    Reasonable management fees paid by Landlord to third parties or to management companies or managing agents owned by, or management divisions of, Landlord; provided that Tenant's Proportionate Share of such management fees shall not exceed [*****].

To the extent that any Operating Expenses are attributable to the Property and other properties of Landlord, a fair, equitable and reasonable allocation of such Operating Expenses shall be made between the Property and such other properties. The term “Operating Expenses” shall exclude the costs set forth on Exhibit “H”.

“Operating Expenses (Actual)” shall mean and refer, with respect to each calendar year during the Term of the Lease, to the actual Operating Expenses for such year.

“Operating Expenses (Projected)” shall mean and refer, with respect to each calendar year during the Term of the Lease, to Landlord's projection of Operating Expenses for such year.

“OS Rider” shall mean and refer to that certain Office Space Rider dated December 29, 2011, by and between Landlord and Tenant, related to certain office spaces (as more particularly described in the OS Rider, the “OS Tenant Spaces”) in the Building.

“Outside Commencement Date” shall mean and refer to the Outside Commencement Date set forth in Item 4 of the Basic Lease Information, subject to the terms of Section 2.2.2 of the Standard Lease Provisions.

“PAHUs” shall mean and refer to packaged air handling units.

“Partial Month” shall, in the event that a Commencement Date occurs on a date that is other than the first (1^st) day of a calendar month, mean and refer to the number of calendar days (including the applicable Commencement Date) remaining in the month in which such Commencement Date occurs.

“Pathway” shall mean and refer, collectively, to (a) the Suite A-1 Pathway (only during the Suite A-1 Period) with regard to Suite A-1, (b) the Suite A-2 Pathway (only during the Suite A-2 Period) with regard to Suite A-2, (c) the Suite A-3 Pathway (only during the Suite A-3 Period) with regard to Suite A-3, (d) the Suite B-1 Pathway (only during the Suite B-1 Period) with regard to Suite B-1, (e) the Suite B-2 Pathway (only during the Suite B-2 Period) with regard to Suite B-2, and (f) the Suite B-3 Pathway (only during the Suite B-3 Period) with regard to Suite B-3, as more particularly described in Item 7 of the Basic Lease Information and Exhibit “C”, attached hereto, and subject to the terms and provisions of said Exhibit “C”.

“PCBs” shall mean and refer to polychlorinated biphenyls.

“PDUs” shall mean and refer to power distribution units.

“Permitted Transfer” shall mean and refer to any of the following and, as applicable, any Transfer resulting from, as part of or in connection with the following: (i) the transfer of a majority interest of the outstanding shares of stock of Tenant, (ii) the merger of Tenant with another entity or entities (“Permitted Transfer - Merger”), (iii) the sale of all or substantially all of Tenant's assets (“Permitted Transfer - SSA”) and/or (iv) Affiliate Transfers; provided that, in any such event, (a) the action is taken pursuant to a bona fide business transaction and not principally or exclusively as a means to evade the consent requirements under this Lease, (b) the “Tenant” under this Lease after such Transfer assumes in writing all of the obligations and liabilities of Tenant under the Lease Documents; (c) the proposed use of the Premises by Transferee complies with the Permitted Use; and (d) the Guaranty remains in full force and effect.

“Permitted Use” shall mean and refer to: (i) the Permitted Use - Datacenter, as it relates to Suite A-1, Suite A-2, Suite A-3, Suite B-1, Suite B-2 and/or Suite B-3, (ii) the Permitted Use - UPS Room, as it relates to the Datacenter-A UPS Rooms and/or the Datacenter-B UPS Rooms, and (iii) the Permitted Use - Mechanical Yard Spaces, as it relates to the Mechanical Yard Space (A) and/or the Mechanical Yard Space (B).

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

“Permitted Use - Datacenter” shall mean and refer to the placement, installation, operation, use, replacement, repair and maintenance of the Infrastructure and any computer, switch and/or communications equipment in each Suite, all for data center operation, computing, hosting and managed services purposes (including, without limitation, Colocation Activity) and uses accessory or incidental thereto, including, without limitation, general office, storage and assembly to the extent that the same comply with Applicable Laws, and for no other use or purpose.

“Permitted Use - Mechanical Yard Spaces” shall mean and refer to the operation, use, replacement, repair and maintenance of Infrastructure located in the Mechanical Yard Space (A) and/or the Mechanical Yard Space (B).

“Permitted Use - UPS Room” shall mean and refer to the operation, use, replacement, repair and maintenance of Infrastructure located in a UPS Room that serves a Datacenter.

“POP Rider” shall mean and refer to that certain POP Room Rider by and between Landlord and Tenant dated of even date with the Effective Date of this Lease related to Tenant's presence in the POP Rooms in connection with this Lease.

“POP Rooms” shall mean and refer to the POP Rooms described in Item 16 of the Basic Lease Information.

“Premises” shall mean and refer, collectively, to (a) Premises-A-1 (only during the Suite A-1 Period), (b) Premises-A-2 (only during the Suite A-2 Period), (c) Premises-A-3 (only during the Suite A-3 Period), (d) Premises-B-1 (only during the Suite B-1 Period), (e) Premises-B-2 (only during the Suite B-2 Period), and (f) Premises-B-3 (only during the Suite B-3 Period), as more particularly described in Item 7 of the Basic Lease Information.

“Premises-A-1” shall mean and refer to Premises-A-1 described in Item 7(a) of the Basic Lease Information.

“Premises-A-2” shall mean and refer to Premises-A-2 described in Item 7(a) of the Basic Lease Information.

“Premises-A-3” shall mean and refer to Premises-A-3 described in Item 7(a) of the Basic Lease Information.

“Premises-B-1” shall mean and refer to Premises-B-1 described in Item 7(a) of the Basic Lease Information.

“Premises-B-2” shall mean and refer to Premises-B-2 described in Item 7(a) of the Basic Lease Information.

“Premises-B-3” shall mean and refer to Premises-B-3 described in Item 7(a) of the Basic Lease Information.

“Premises-A” shall mean and refer, collectively, to Suite A-1 (only during the Suite A-1 Period), Suite A-2 (only during the Suite A-2 Period), and Suite A-3 (only during the Suite A-3 Period).

“Premises-B” shall mean and refer, collectively, to Suite B-1 (only during the Suite B-1 Period), Suite B-2 (only during the Suite B-2 Period), and Suite B-3 (only during the Suite B-3 Period).

“Prepaid Rent” shall mean and refer to the Prepaid Rent set forth in Item 10 of the Basic Lease Information, subject to the terms of Section 3.1 of the Standard Lease Provisions.

“Prime Rate” shall mean and refer to the then-current “prime” interest rate published in the Money Rates section of the Wall Street Journal from time to time.

“Projected Operating Expenses Installment” shall mean and refer to an amount equal to one-twelfth (1/12) of the product of (i) the Operating Expenses (Projected), multiplied by (ii) Tenant's Proportionate Share.

“Projected Real Property Tax Installment” shall mean and refer to an amount equal to one-twelfth (1/12) of the product of (i) the Taxes - Real Property (Projected), multiplied by (ii) Tenant's Proportionate Share.

“Property” shall mean and refer to the Land, the Building, and Landlord's personal property thereon and/or therein.

“Re-Commissioning” shall mean and refer to Tenant causing the Infrastructure for a particular Datacenter to undergo a post-Commissioning set of commissioning/turn-up type tests, in accordance with the terms and conditions of Section 17.23 of the Standard Lease Provisions.

“Re-Commissioning Agent” shall mean and refer to the third party engineering firm (or firms) that is engaged by, through, for or under Tenant to perform Re-Commissioning of the Infrastructure for Datacenter-A and/or Datacenter-B.

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

“Rent” shall mean and refer to all Base Rent, plus all Additional Rent.

“Repair Period-Actual” shall mean and refer to the period of time that it actually takes to perform the Casualty Repair - Landlord.

“Repair Period-Estimated” shall mean and refer to the period of time, which Landlord estimates will be required for the performance of the Casualty Repair - Landlord.

“Security Documents” shall mean and refer to: (i) all ground leases or underlying leases; (ii) the lien of any mortgage, deed, or deed of trust; (iii) all past and future advances made under any such mortgages, deeds, or deeds of trust; and (iv) all renewals, modifications, replacements and extensions of any such ground leases, mortgages, deeds, and deeds of trust.

“SNDA” shall mean and refer to a subordination, non-disturbance and attornment agreement in a form that is reasonably acceptable to Tenant, which provides that, so long as there is no Event of Default by Tenant, Tenant shall remain in possession of the Tenant Space under the terms of this Lease, even if the Holder should acquire Landlord's title to the Building.

“Suite” shall mean and refer to each of (a) Suite A-1 (during the Suite A-1 Period), (b) Suite A-2 (during the Suite A-2 Period and, if applicable, the Early Access Period), (c) Suite A-3 (during the Suite A-3 Period and, if applicable, the Early Access Period), (d) Suite B-1 (during the Suite B-1 Period), (e) Suite B-2 (during the Suite B-2 Period and, if applicable, the Early Access Period), and (f) Suite B-3 (during the Suite B-3 Period and, if applicable, the Early Access Period), individually.

“Suite A-1 Base Rent” shall mean and refer to the amounts of Suite A-1 Base Rent set forth in Item 8(a) of the Basic Lease Information.

“Suite A-1 Pathway” shall mean and refer to the Suite A-1 Pathway, as defined on Exhibit “C”, attached hereto.

“Suite A-1 Period” shall mean and refer to the Suite A-1 Period, as defined in Item 5 of the Basic Lease information.

“Suite A-1 Tenant Space” shall mean and refer, collectively, to Premises-A-1 and the Suite A-1 Pathway.

“Suite A-2 Base Rent” shall mean and refer to the amounts of Suite A-2 Base Rent set forth in Item 8(b) of the Basic Lease Information.

“Suite A-2 Pathway” shall mean and refer to the Suite A-2 Pathway, as defined on Exhibit “C”, attached hereto.

“Suite A-2 Period” shall mean and refer to the Suite A-2 Period, as defined in Item 5 of the Basic Lease information.

“Suite A-2 Tenant Space” shall mean and refer, collectively, to Premises-A-2 and the Suite A-2 Pathway.

“Suite A-3 Base Rent” shall mean and refer to the amounts of Suite A-3 Base Rent set forth in Item 8(c) of the Basic Lease Information.

“Suite A-3 Pathway” shall mean and refer to the Suite A-3 Pathway, as defined on Exhibit “C”, attached hereto.

“Suite A-3 Period” shall mean and refer to the Suite A-3 Period, as defined in Item 5 of the Basic Lease information.

“Suite A-3 Tenant Space” shall mean and refer, collectively, to Premises-A-3 and the Suite A-3 Pathway.

“Suite B-1 Base Rent” shall mean and refer to the amounts of Suite B-1 Base Rent set forth in Item 8(d) of the Basic Lease Information.

“Suite B-1 Pathway” shall mean and refer to the Suite B-1 Pathway, as defined on Exhibit “C”, attached hereto.

“Suite B-1 Period” shall mean and refer to the Suite B-1 Period, as defined in Item 5 of the Basic Lease information.

“Suite B-1 Tenant Space” shall mean and refer, collectively, to Premises-B-1 and the Suite B-1 Pathway.

“Suite B-2 Base Rent” shall mean and refer to the amounts of Suite B-2 Base Rent set forth in Item 8(e) of the Basic Lease Information.

“Suite B-2 Pathway” shall mean and refer to the Suite B-2 Pathway, as defined on Exhibit “C”, attached hereto.

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

“Suite B-2 Period” shall mean and refer to the Suite B-2 Period, as defined in Item 5 of the Basic Lease information.

“Suite B-2 Tenant Space” shall mean and refer, collectively, to Premises-B-2 and the Suite B-2 Pathway.

“Suite B-3 Base Rent” shall mean and refer to the amounts of Suite B-3 Base Rent set forth in Item 8(f) of the Basic Lease Information.

“Suite B-3 Pathway” shall mean and refer to the Suite B-3 Pathway, as defined on Exhibit “C”, attached hereto.

“Suite B-3 Period” shall mean and refer to the Suite B-3 Period, as defined in Item 5 of the Basic Lease information.

“Suite B-3 Tenant Space” shall mean and refer, collectively, to Premises-B-3 and the Suite B-3 Pathway.

“Suite Period” shall mean and refer to (a) the Suite A-1 Period, as it relates to Suite A-1; (b) the Suite A-2 Period, as it relates to Suite A-2, (c) the Suite A-3 Period, as it relates to Suite A-3, (d) the Suite B-1 Period, as it relates to Suite B-1, (e) the Suite B-2 Period, as it relates to Suite B-2, and (f) the Suite B-3 Period, as it relates to Suite B-3.

“Taking” shall mean and refer to the Property, or some portion thereof, having been taken under the power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or sold to prevent the exercise thereof.

“Target Commencement Date (A)” shall mean and refer to the Target Commencement Date (A) set forth in Item 4 of the Basic Lease Information, subject to the terms of Section 2.2.2 of the Standard Lease Provisions.

“Target Commencement Date (B)” shall mean and refer to the Target Commencement Date (B) set forth in Item 4 of the Basic Lease Information, subject to the terms of Section 2.2.2 of the Standard Lease Provisions.

“Taxes” shall mean Taxes-Equipment, Taxes-Other and Taxes-Real Property. Notwithstanding anything to the contrary contained herein, Taxes shall not include federal and state income taxes, excess profits taxes, inheritance taxes, estate taxes, succession taxes, gains taxes, death taxes, gift taxes, franchise taxes, corporation taxes or, except as otherwise expressly provided herein, similar taxes assessed against or imposed on or measured by the income of Landlord from the operation of the Building, or grantor's taxes, recordation taxes and/or transfer taxes, except to the extent any of the foregoing are imposed in lieu of all or any part of Taxes-Real Property, [*****]. Furthermore, Taxes shall not include any interest or penalties for late payment by Landlord of taxes.

“Taxes - Equipment” shall mean and refer to all governmental fees, taxes, tariffs and other charges levied directly or indirectly against Tenant's Personal Property, the Infrastructure and any other personal property, fixtures, machinery, equipment, apparatus, systems, connections, interconnections and appurtenances that are included within Tenant's Repair Obligations.

“Taxes - Other” shall mean any excise, sales, privilege or other tax, assessment or other charge (other than income taxes) first imposed, assessed or levied after the Effective Date by any governmental or quasi‑governmental authority or agency upon Landlord on account of (i) the Rent (and other amounts) payable by Tenant hereunder (or any other benefit received by Landlord hereunder), including, without limitation, any gross receipts tax, license fee or excise tax levied by any governmental authority, (ii) this Lease, Landlord's business as a lessor hereunder, and/or the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of any portion of the Tenant Space (including, without limitation, any applicable possessory interest taxes), or (iii) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Tenant Space, but only to the extent that such taxes, assessments and/or charges are of the type customarily passed through to the tenant in a NNN-lease scenario.  Notwithstanding anything to the contrary contained herein, Taxes-Other shall include so-called “value added taxes” first imposed, assessed or levied after the Effective Date by any governmental authority on account of the items set forth in items (i) - (iii), but shall exclude the portion of such taxes that are hereafter instituted by any governmental authority as a replacement for and/or are imposed in lieu of all or any part of [*****].

“Taxes - Real Property” shall mean and refer to all taxes, assessments and governmental charges (foreseen or unforeseen, general or special, ordinary or extraordinary), whether federal, state, county or municipal, and whether levied by taxing districts or authorities presently taxing the Property or by others subsequently created or otherwise, levied or assessed against the Property and any other taxes and assessments attributable to the Property or its operation, and all taxes of whatsoever nature that are imposed in substitution for or in lieu of any of the taxes, assessments or other charges herein defined; provided, however, Taxes - Real Property shall not include taxes paid by tenants of the Property as a separate charge on the value of their leasehold improvements and shall not include any Taxes - Other.

“Taxes - Real Property (Actual)” shall mean and refer, with respect to each calendar year during the Term of the Lease, to the

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

actual Taxes - Real Property for such year.

“Taxes - Real Property (Projected)” shall mean and refer, with respect to each calendar year during the Term of the Lease, to Landlord's projection of Taxes - Real Property for such year.

“Tenant” shall mean and refer to the Tenant set forth in Item 2 of the Basic Lease Information.

“Tenant Affiliate” shall mean and refer to any partnership, limited liability company, or corporation or other entity, which, directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, Tenant.

“Tenant Delay” shall mean and refer to a delay in (i) Landlord's completion of Landlord's Installations (A) and/or Landlord's Installations (B), and/or (ii) the Commissioning of either Datacenter, as applicable, which is attributable to or caused by Tenant (by virtue of a change request, or otherwise). The foregoing notwithstanding, Landlord and Tenant agree that (a) Tenant shall have no express right hereunder to demand or require a change in the specifications of Landlord's Installations (A), Landlord's Installations (B) or the Commissioning Criteria, but (b) in the event that Tenant requests any such changes, the same shall be subject to Landlord's reasonable approval. In that regard, Landlord and Tenant acknowledge and agree that, if Landlord reasonably approves of such change(s), such approval may be reasonably conditioned upon (1) Tenant's agreement to bear the incremental costs related to such change(s); and (2) Tenant's acknowledgment and agreement of the Tenant Delay effects of such change(s), if any. For the avoidance of doubt, however, in order for any Tenant-requested change to have any effect, all such change requests (if acceptable to Landlord) must be documented in an amendment to this Lease (any such change, once documented in an amendment to the Lease, is referred to herein as a “Change”). Without limiting the foregoing, should Landlord or its agents, contractors and/or employees experience any event of Tenant Delay affecting the timing of completion of the Commencement Date Conditions (A) and/or the Commencement Date Conditions (B), Landlord shall, as soon as is reasonably practicable after acquiring actual knowledge of such Tenant Delay, notify Tenant in writing of the existence of such Tenant Delay. If Landlord fails to notify Tenant of any Tenant Delay within ten (10) days after acquiring actual knowledge of such Tenant Delay, then such Tenant Delay shall automatically be deemed to be waived by Landlord for the period of such Tenant Delay occurring prior to the date of such notice. Promptly upon cessation of any Tenant Delay as to which Landlord has previously notified Tenant, Landlord shall notify Tenant in writing of such cessation.

“Tenant Group” shall mean and refer to Tenant and its directors, officers, shareholders, members, employees, constituent partners, and Tenant Affiliates.

“Tenant Parties” shall mean and refer, collectively to Tenant, the other members of the Tenant Group, Tenant's Transferees, and their respective contractors, clients, servants, representatives, licensees, customers [including without limitation any Tenant Space Customer], Colocation Parties, agents, and invitees.

“Tenant Space” shall mean and refer, collectively, to Tenant Space (A) (as the same may be comprised from time to time during the Term of this Lease) and Tenant Space (B) (as the same may be comprised from time to time during the Term of this Lease).

“Tenant Space (A)” shall mean and refer, collectively, to the Suite A-1 Tenant Space (only during the Suite A-1 Period), the Suite A-2 Tenant Space (only during the Suite A-2 Period), and the Suite A-3 Tenant Space (only during the Suite A-3 Period).

“Tenant Space (B)” shall mean and refer, collectively, to the Suite B-1 Tenant Space (only during the Suite B-1 Period), the Suite B-2 Tenant Space (only during the Suite B-2 Period), and the Suite B-3 Tenant Space (only during the Suite B-3 Period).

“Tenant Space Customer” shall mean and refer to each customer or other person or entity to which Tenant, any Tenant Affiliate, any other Tenant Party, or any Transferee, provides goods or services, which are in any way related to or associated with the use of the Tenant Space, including, but not limited to, those customers, persons or entities now or hereafter conducting transactions or other operations by or through or in connection with equipment located within the Tenant Space.

“Tenant's Early Termination Right” shall mean and refer to Tenant's Early Termination Right, as defined in Section 2.1.2 of the Standard Lease Provisions, below.

“Tenant's Emergency Contacts” shall mean the following: (a) dfw2Notifications@lists.rackspace.com (twenty-four (24) hours per day, seven (7) days per week and three hundred sixty-five (365) days per year); and (b) (210) 789-8895 (twenty-four (24) hours per day, seven (7) days per week and three hundred sixty-five (365) days per year), and/or to such other email address and/or phone number as Tenant shall from time to time notify Landlord in writing.

“Tenant's Lease Undertakings” shall mean and refer to any representation, warranty, covenant, undertaking or agreement contained in any of the Lease Documents that is to be provided or performed by Tenant.

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“Tenant's Personal Property” shall mean and refer, collectively, to all cable, wiring, connecting lines, and other installations, equipment, trade fixtures, furniture, furnishings and other personal property installed or placed by, for, through, under or on behalf of Tenant or any Tenant Party anywhere in the Building and/or the Tenant Space, not including any equipment or property owned, leased or licensed by Landlord or any other member of the Landlord Group. Additionally, for the purposes of clarity, the parties acknowledge that “Tenant's Personal Property” includes all equipment or property, other than equipment or property owned, leased or licensed by Landlord or any other member of the Landlord Group, installed and/or placed anywhere in the Building and/or the Tenant Space by any party specifically and solely in order to provide any service to Tenant or any Tenant Party (e.g., data storage/archiving and data recovery type equipment that is utilized by or for Tenant or any Tenant Party in the Tenant Space, but which is actually owned by a third party, other than Landlord or any other member of the Landlord Group).

“Tenant's Proportionate Share” shall mean and refer to the Tenant's Proportionate Share described in Item 17 of the Basic Lease Information. Landlord and Tenant acknowledge that Tenant's Proportionate Share is a “deemed” share, which has been calculated by taking into consideration the rentable square feet of all space that is included collectively in and/or serving the respective Premises and the Building.

“Tenant's Proportionate Share of Operating Expenses (Actual)” shall mean and refer, with respect to each calendar year during the Term of this Lease, to an amount equal to the product of (i) the Operating Expenses (Actual), multiplied by (ii) Tenant's Proportionate Share.

“Tenant's Proportionate Share of Taxes - Real Property (Actual)” shall mean and refer, with respect to each calendar year during the Term of this Lease, to an amount equal to the product of (i) the Taxes - Real Property (Actual), multiplied by (ii) Tenant's Proportionate Share.

“Tenant's Utility Payment” shall (a) as it relates to the Datacenter-A Period, mean and refer to the cost of all utilities (including electricity) serving, provided to and/or used in a Datacenter, including but not limited to (a) the cost of utilities provided to and/or used in, or for, spaces that support the Datacenter (e.g., utility costs related to the UPS room(s) supporting a Datacenter), (b) the cost of power loss that occurs prior to the Metering Equipment - Tenant Space for such Datacenter, and (c) “commitment charges”, “capacity charges”, “feeder charges”, “utility taxes” and all other similar utility charges with respect to utilities serving, provided to and/or used in the Datacenter, whether or not such charges are determined upon actual utility usage, dedicated capacity or any other manner of allocation reasonably determined by Landlord. For avoidance of doubt, Tenant shall not be responsible or liable to pay for the cost, charges or taxes of, or with respect to, any utilities which are not provided to Tenant, but which are provided solely to other tenants or occupants of the Building.

“Term”; “Term of this Lease”; and “Term of the Lease” shall mean and refer, with respect to each Tenant Space, to the respective period described in Item 5 of the Basic Lease Information, subject to the terms of such Item 5.

“Third Party POP Room Operator” shall mean and refer to an entity, who is not an affiliate of Landlord, with whom Landlord may hereafter contract for the operation and control of one or more POP Rooms.

“Transfer” shall mean and refer to (a) a sublease of all or any part of the Tenant Space, (b) an assignment of this Lease, and/or (c) any other agreement (i) permitting a third party (other than Tenant's employees, Colocation Parties and occasional guests) to occupy or use any portion of the Tenant Space, or (ii) otherwise assigning, transferring, licensing, mortgaging, pledging, hypothecating, encumbering, or permitting a lien to attach to its interest under, this Lease.

“Transferee” shall mean and refer to any person or entity to whom/which a Transfer is made or sought to be made.

“Transfer Notice” shall mean and refer to a written request for Landlord's consent to a particular Transfer, which notice shall include (i) a statement containing: (a) the name and address of the proposed Transferee; and (b) all of the principal terms of the proposed Transfer; (ii) current financial statements of the proposed Transferee reasonably acceptable to Landlord, and any other information and materials reasonably required by Landlord to enable Landlord to adequately review the financial responsibility of the proposed Transferee; (iii) such other information and materials as Landlord may reasonably request (and if Landlord requests such additional information or materials, the Transfer Notice shall not be deemed to have been received until Landlord receives such additional information or materials); and (iv) the form of the proposed assignment or other Transfer documentation that will be executed by Tenant and the proposed Transferee.

“Uninsurable Casualty Event” shall mean and refer to a Casualty Event that is not an Insurable Casualty Event.

“UPS Plant” shall mean and refer to an uninterruptable power supply plant.

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

“UPS Room” shall mean and refer, in general, to (a) the Datacenter-A UPS Rooms (defined in item 7 of the Basic Lease Information, below), which exclusively serve (but are located outside of) Suites A-1, A-2 and A-3, and (b) the Datacenter-B UPS Rooms (defined in item 7 of the Basic Lease Information, below), which exclusively serve (but are located outside of) Suites B-1, B-2 and B-3.

CONFIDENTIAL MATERIAL HAS BEEN OMMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION. BOXES AND ASTERIXES DENOTE SUCH OMISSION

1215 DATACENTER PARK BOULEVARD

DATACENTER LEASE

This Datacenter Lease (this “Lease”) is entered into as of the Effective Date specified in Item 4 of the Basic Lease Information, by and between Landlord and Tenant):

RECITALS

A.    Landlord is the owner of the Land. The Land is currently being improved with, among other things, the Building.

B.    Tenant desires to lease (i) certain Premises, and (ii) certain Pathway, each as more particularly described in this Lease.

C.    Unless otherwise specifically indicated to the contrary, all initially capitalized terms contained in this Lease shall have the meanings set forth on Schedule “1”, attached to this Lease.

NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, Landlord and Tenant agree as follows:

BASIC LEASE INFORMATION

1. Landlord:	Collins Technology Park Partners, LLC, a Delaware limited liability company
2. Tenant:	Rackspace US, Inc., a Delaware corporation
3. Tenant Addresses:	Tenant Address for Notices: [*****] With Copies to: [*****]

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4. Effective Date/ Commencement Date: (a) Effective Date: (b) Target Commencement Date (A): (c) Outside Commencement Date (A): (d) Commencement Date (A): (e) Target Commencement Date (B): (f)Outside CommencementDate (B): (g) Commencement Date (B): December __, 2011* (being the latest of the parties' respective dates of execution of this Lease, as set forth on the signature page of this Lease, the “Effective Date”). August 1, 2012 October 31, 2012 The “Commencement Date (A)” shall, subject to the terms of Section 2.2.2 of the Standard Lease Provisions, mean and refer to the date upon which Landlord has completed the Commencement Date Conditions (A). August 1, 2015 October 31, 2015 The “Commencement Date (B)” shall, subject to the terms of Section 2.2.2 of the Standard Lease Provisions, mean and refer to the date upon which Landlord has completed the Commencement Date Conditions (B), provided that, except as set forth in this Item 4(g) herein below, under no circumstances shall the Commencement Date (B) occur prior to the Target Commencement Date (B). Notwithstanding anything to the contrary contained herein, the parties hereto agree that, if Tenant delivers written notice to Landlord that Tenant desires to occupy and use Datacenter-B prior to the Target Commencement Date(B), which such notice shall not be given by Tenant to Landlord prior to the date that is six (6) months after the Commencement Date (A), Landlord shall use commercially-reasonable, diligent efforts to complete the Commencement Date Conditions (B) and cause the Commencement Date (B) to occur within eighteen (18) weeks after receipt of such notice from Tenant. * For the avoidance of doubt, such date shall be inserted by Landlord, upon Landlord's counter-execution of this Lease.

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5. Term:

As to the Suite A-1 Tenant Space, the “Term of this Lease” (also referred to herein as the “Suite A-1 Period”, as the same may hereafter be extended or reduced in accordance with the terms hereof) shall be approximately one hundred eighty (180) full calendar months, commencing on the Commencement Date (A) and expiring on the last day of the one hundred eightieth (180th) full calendar month thereafter. As to the Suite A-2 Tenant Space, the “Term of this Lease” (also referred to herein as the “Suite A-2 Period”, as the same may hereafter be extended or reduced in accordance with the terms hereof) shall be approximately one hundred sixty-eight (168) full calendar months, commencing on the first (1st) day of the thirteenth (13th) month of the Datacenter-A Period and expiring on the last day of the one hundred eightieth (180th) full calendar month of the Datacenter-A Period. As to the Suite A-3 Tenant Space, the “Term of this Lease” (also referred to herein as the “Suite A-3 Period”, as the same may hereafter be extended or reduced in accordance with the terms hereof) shall be approximately one hundred fifty-six (156) full calendar months, commencing on the first (1st) day of the twenty-fifth (25th) month of the Datacenter-A Period and expiring on the last day of the one hundred eightieth (180th) full calendar month of the Datacenter-A Period. As to the Suite B-1 Tenant Space, the “Term of this Lease” (also referred to herein as the “Suite B-1 Period”, as the same may hereafter be extended or reduced in accordance with the terms hereof) shall be approximately one hundred eighty (180) full calendar months, commencing on the Commencement Date (B) and expiring on the last day of the one hundred eightieth (180th) full calendar month thereafter. As to the Suite B-2 Tenant Space, the “Term of this Lease” (also referred to herein as the “Suite B-2 Period”, as the same may hereafter be extended or reduced in accordance with the terms hereof) shall be approximately one hundred sixty-eight (168) full calendar months, commencing on the first (1st) day of the thirteenth (13th) month of the Datacenter-B Period and expiring on the last day of the one hundred eightieth (180th) full calendar month of the Datacenter-B Period. As to the Suite B-3 Tenant Space, the “Term of this Lease” (also referred to herein as the “Suite B-3 Period”, as the same may hereafter be extended or reduced in accordance with the terms hereof) shall be approximately one hundred fifty-six (156) full calendar months, commencing on the first (1st) day of the twenty-fifth (25th) month of the Datacenter-B Period and expiring on the last day of the one hundred eightieth (180th) full calendar month of the Datacenter-B Period. For the avoidance of doubt, Landlord and Tenant acknowledge and agree that, if the applicable Commencement Date occurs on a date that is other than the first (1st) day of a calendar month, the applicable Term of this Lease shall be deemed to have been automatically extended by the number of calendar days in the Partial Month, such that the applicable Term of the Lease shall then be equal to the number of full calendar months described above, plus the number of calendar days in the Partial Month. For example: If the Commencement Date (A) occurred on August 21, 2012, then the Term of this Lease, as it relates to the Suite A-1 Tenant Space, would commence on August 21, 2012, and expire on August 31, 2027. In this example, the period occurring from and including August 21, 2012 through August 31, 2012 is a Partial Month.

6. Extension Options/Extension Term:

With respect to each of Tenant Space (A) (inclusive of the Suite A-1 Tenant Space, the Suite A-2 Tenant Space and the Suite A-3 Tenant Space) and Tenant Space(B) (inclusive of the Suite B-1 Tenant Space, the Suite B-2 Tenant Space and the Suite B-3 Tenant Space), Tenant shall have one (1) Extension Option of ten (10) Lease Years each, subject to the terms of Section 2.3 of the Standard Lease Provisions.

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7. Premises/Pathway: (a) Premises: (b) Pathway: Landlord and Tenant acknowledge and agree that the “Premises” will, subject to the terms set forth below, consist of ten (10) spaces (being Suite A-1, Suite A-2, Suite A-3, Suite B-1, Suite B-2, Suite B-3, the Datacenter-A UPS Rooms, the Datacenter-B UPS Rooms, Mechanical Yard Space (A), and Mechanical Yard Space (B), each as defined below) within the Building (as defined in Item 15, below) and the Property, and shall, subject to (i) the terms and provisions of Section 2.2.4 of the Standard Lease Provisions and (ii) Landlord's satisfaction of the applicable Commencement Date Conditions on or before the applicable Commencement Date, be leased to Tenant in six (6) phases, as follows: 1. Premises A-1. During the Suite A-1 Period, the “Premises” shall be deemed to include “Suite A-1” (as depicted on Exhibit “A”, attached hereto; also referred to herein as “Premises-A-1”), with Suite A-1 consisting of approximately 9,700 square feet of datacenter space in the Building. During the Suite A-1 Period, the term “Tenant Space” shall be deemed to include the Suite A-1 Tenant Space. 2. Premises A-2. During the Suite A-2 Period, the “Premises” shall be deemed to include “Suite A-2” (as depicted on Exhibit “A”, attached hereto; also referred to herein as “Premises-A-2”), with Suite A-2 consisting of approximately 9,700 square feet of datacenter space in the Building. During the Suite A-2 Period, the term “Tenant Space” shall be deemed to include the Suite A-2 Tenant Space. 3. Premises A-3. During the Suite A-3 Period, the “Premises” shall be deemed to include “Suite A-3” (as depicted on Exhibit “A”, attached hereto; also referred to herein as “Premises-A-3”), with Suite A-3 consisting of approximately 9,700 square feet of datacenter space in the Building. During the Suite A-3 Period, the term “Tenant Space” shall be deemed to include the Suite A-3 Tenant Space. 4. Premises B-1. During the Suite B-1 Period, the “Premises” shall be deemed to include “Suite B-1” (as depicted on Exhibit “A”, attached hereto; also referred to herein as “Premises-B-1”), with Suite B-1 consisting of approximately 9,700 square feet of datacenter space in the Building. During the Suite B-1 Period, the term “Tenant Space” shall be deemed to include the Suite B-1 Tenant Space. 5. Premises B-2. During the Suite B-2 Period, the “Premises” shall be deemed to include “Suite B-2” (as depicted on Exhibit “A”, attached hereto; also referred to herein as “Premises-B-2”), with Suite B-2 consisting of approximately 9,700 square feet of datacenter space in the Building. During the Suite B-2 Period, the term “Tenant Space” shall be deemed to include the Suite B-2 Tenant Space. 6. Premises B-3. During the Suite B-3 Period, the “Premises” shall be deemed to include “Suite B-3” (as depicted on Exhibit “A”, attached hereto; also referred to herein as “Premises-B-3”), with Suite B-3 consisting of approximately 9,700 square feet of datacenter space in the Building. During the Suite B-3 Period, the term “Tenant Space” shall be deemed to include the Suite B-3 Tenant Space. Additionally: A. “Datacenter-A UPS Room-1”, “Datacenter-A UPS Room-2” and “Datacenter-A UPS Room-3” (each, as depicted on Exhibit “A”; collectively, the “Datacenter-A UPS Rooms”) contain items of Infrastructure (A). As such, commencing on the Commencement Date (A), and continuing until the expiration or earlier termination of the Datacenter-A Period, the Datacenter-A UPS Rooms shall be deemed to be included in the “Premises-A” and the “Tenant Space (A)” and, if applicable, the Early Access Suites. B. “Datacenter-B UPS Room-1”, “Datacenter-B UPS Room-2” and “Datacenter-B UPS Room-3” (each, as depicted on Exhibit “A”; collectively, the “Datacenter-B UPS Rooms”) contain items of Infrastructure (B). As such, commencing on the Commencement Date (B), and continuing until the expiration or earlier termination of the Datacenter-B Period, the Datacenter-B UPS Rooms shall be deemed to be included in the “Premises-B” and the “Tenant Space (B)” and, if applicable, the Early Access Suites. C. The “Mechanical Yard Space (A)” (as depicted on Exhibit “A”) contains the DC-A Primary Generators and the DC-A Redundant Generator (as those terms are defined on Exhibit “I”) that provide back-up power for the Suites in Datacenter-A. As such, commencing on the Commencement Date (A), and continuing until the expiration or earlier termination of the Datacenter-A Period, the Mechanical Yard Space (A) shall be deemed to be included in the “Premises-A” and the “Tenant Space (A)” and, if applicable, the Early Access Suites. D. The “Mechanical Yard Space (B)” (as depicted on Exhibit “A”) contains the DC-B Primary Generators and the DC-B Redundant Generator (as those terms are defined on Exhibit “I”) that provide back-up power for the Suites in Datacenter-B. As such, commencing on the Commencement Date (B), and continuing until the expiration or earlier termination of the Datacenter-B Period, the Mechanical Yard Space (B) shall be deemed to be included in the “Premises-B” and the “Tenant Space (B)” and, if applicable, the Early Access Suites. For the avoidance of doubt, the Datacenter-A Period and the Datacenter-B Period are not mutually exclusive. Rather, during that portion of the Term of this Lease for which the Datacenter-A Period and the Datacenter-B Period run concurrently, the Tenant Space will be deemed to include the Tenant Space (A) and Tenant Space (B). As described on Exhibit “C”.

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8. Base Rent: (a) Suite A-1 Base Rent: (b) Suite A-2 Base Rent: (c) Suite A-3 Base Rent:	Base Rent related to Tenant Space (A) (items (a), (b) and (c), collectively, “Base Rent (A)”) shall be as follows: See Column B of Datacenter-A Base Rent Table set forth on Schedule “1”, attached hereto (collectively, “Suite A-1 Base Rent”). See Column C of Datacenter-A Base Rent Table set forth on Schedule “1”, attached hereto (collectively, “Suite A-2 Base Rent”). See Column D of Datacenter-A Base Rent Table set forth on Schedule “1”, attached hereto (collectively, “Suite A-3 Base Rent”).
(d) Suite B-1 Base Rent: (e) Suite B-2 Base Rent: (f) Suite B-3 Base Rent:	Base Rent related to Tenant Space (B) (items (d), (e) and (f), collectively, “Base Rent (B)”) shall be as follows: See Column B of Datacenter-B Base Rent Table set forth on Schedule “1”, attached hereto (collectively, “Suite B-1 Base Rent”). See Column C of Datacenter-B Base Rent Table set forth on Schedule “1”, attached hereto (collectively, “Suite B-2 Base Rent”). See Column D of Datacenter-B Base Rent Table set forth on Schedule “1”, attached hereto (collectively, “Suite B-3 Base Rent”). Base Rent (A) and Base Rent (B) are referred to herein collectively, for the respective portions of the Term during which the relevant amounts are in effect, as “Base Rent”.
9. Intentionally Omitted.	Intentionally Omitted.
10.Prepaid Rent; Guaranty: (a) Prepaid Rent: (b) Guaranty:	[*****] Tenant agrees to provide Landlord, on the date that Tenant executes this Lease, a Guaranty by Rackspace Hosting, Inc. (“Guarantor”), in the form set forth on Exhibit “K”, attached hereto with regard to the Lease (the “Guaranty”). Landlord and Tenant acknowledge and agree that Tenant's submission of the GUARANTY in accordance with the foregoing paragraph is a material inducement to Landlord for entering into this Lease. the CONTINUED EFFECTIVENESS of the GuarantY shall, in all events, be A COVENANT AND AN OBLIGATION OF TENANT THROUGHOUT THE TERM OF THIS LEASE.
11. Landlord's Address for Notices:	[*****]	With copies to: [*****] And: [*****]
12. Landlord's Address for Payment of Rent:	ACH Payments: [*****] Wire Transfer: [*****] Contact Information: [*****]
13. Brokers:
(a) Landlord's Broker:	None.
(b) Tenant's Broker:	None.
14. Land:	The Land located at: 1215 Datacenter Park Boulevard, Richardson, Texas 75081 The Land is more particularly described on Exhibit “A-1” attached hereto and made a part hereof.

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15. Building:	1215 Datacenter Park Boulevard: A one (1)-story building being constructed on the Land, which will be laid out approximately as shown on Exhibit “A”.
16. POP Rooms:	The primary point-of-presence room for the Building is approximately in the location depicted on Exhibit “A”, attached hereto (the “P-POP Room”) and the secondary point-of-presence room for the Building is approximately in the location depicted on Exhibit “A”, attached hereto (the “S-POP Room”, the P-POP Room together with the S-POP Room, collectively, the “POP Rooms”; individually, a “POP Room”).
17. Tenant's Proportionate Share:	Tenant's Proportionate Share related to Suite A-1 = [*****]%, during the Suite A-1 Period. Tenant's Proportionate Share related to Suite A-2 = [*****]%, during the Suite A-2 Period. Tenant's Proportionate Share related to Suite A-3 = [*****]%, during the Suite A-3 Period. Tenant's Proportionate Share related to Suite B-1 = [*****]%, during the Suite B-1 Period. Tenant's Proportionate Share related to Suite B-2 = [*****]%, during the Suite B-2 Period. Tenant's Proportionate Share related to Suite B-3 = [*****]%, during the Suite B-3 Period.
18. Datacenter-A; Datacenter-B:	Datacenter-A located on the first (1st) floor of the Building approximately as depicted on Exhibit “A” (“Datacenter-A”). Datacenter-B located on the first (1st) floor of the Building approximately as depicted on Exhibit “A” (“Datacenter-B”).
19. Maximum Structural Load:	[*****] pounds of live load per square foot at the slab.

This Lease shall consist of the foregoing Basic Lease Information, the provisions of the Standard Lease Provisions, below, Schedule “1”, above, and Exhibits “A” through “L”, inclusive, all of which are incorporated herein by this reference as of the Effective Date. In the event of any conflict between the provisions of the Basic Lease Information and the provisions of the Standard Lease Provisions, the Basic Lease Information shall control.

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STANDARD LEASE PROVISIONS

1. LEASE OF TENANT SPACE.

1.1Tenant Space. In consideration of the covenants and agreements to be performed by Tenant, and upon and subject to the terms and conditions of this Lease, Landlord hereby leases to Tenant for the Term, (i) the Premises; and (ii) the Pathway.

1.2Condition of Tenant Space. Except as otherwise expressly provided herein, Tenant accepts the Tenant Space in its “AS IS, WHERE IS” condition on the Commencement Date, subject to (i) Landlord's obligations regarding the Commencement Date Conditions and (ii) Landlord's repair obligations under Section 8.1 below. Tenant acknowledges and agrees that (y) except as specifically set forth herein, no representation or warranty (express or implied) has been made by Landlord as to the condition of the Property, the Building or the Tenant Space or their suitability or fitness for the conduct of the Permitted Use, its business or for any other purpose, and (z) except as specifically set forth herein, Landlord shall have no obligation to construct or install any improvements in or to make any other alterations or modifications to the Property, Building or the Tenant Space. Notwithstanding anything to the contrary contained herein, Landlord covenants to Tenant that, as of the Commencement Date, the following items will have been completed, obtained and/or will be true, as applicable, with respect to the Tenant Space: (A) the Infrastructure for the applicable Premises shall include the items (identified to the applicable Premises) set forth on Exhibit “I”, attached hereto and made a part hereof; (B) the Infrastructure of each Premises and the remainder of the Tenant Space shall be in good working order, condition and repair; (C) the Tenant Space, including the Infrastructure, shall be in compliance with Applicable Laws; and (D) a certificate of occupancy and/or any other required occupancy and/or use permits will have been issued by all applicable governmental authorities for the Tenant Space. In the event of a breach of any of the foregoing representations, warranties and/or covenants, Landlord shall, promptly (but in no event more than ten (10) days) after receipt of written notice thereof and at its sole cost and expense, cause any such non-compliant aspect of the applicable Tenant Space to become compliant; unless more than ten (10) days is reasonably necessary to remedy the same, in which case Landlord must commence the remedy within such ten (10) day period and thereafter diligently and in good faith pursue the completion thereof.

1.3Interconnections. Tenant acknowledges and agrees that all interconnections between the systems of Tenant and those of other occupants of the Building, and all cross-connects between the systems of Tenant and those of carriers in the Building, must be made in the POP Rooms. Anything to the contrary contained in this Lease notwithstanding, Tenant acknowledges that one or both of the POP Rooms may hereafter be operated by one or more Third Party POP Room Operators. In such event, all operations in the relevant POP Room(s) (including all MMR Services), and all Tenant presences in such POP Room(s), including pathway therein (but, for avoidance of doubt, expressly excluding the Pathway), may be governed and controlled by the Third Party POP Room Operator; each and all of which would be subject to the terms of this Lease and such agreements and costs as are mutually agreed in writing, by and between Tenant and the relevant Third Party POP Room Operator.

1.4Relocation Right. [Intentionally Deleted.]

1.5Quiet Enjoyment; Access. Subject to all of the terms and conditions of this Lease, Tenant shall quietly have, hold and enjoy the Tenant Space in conformity with the Permitted Use without hindrance from Landlord or any person or entity claiming by, through or under Landlord or the Landlord Group. Subject to the terms and conditions of this Lease, including, without limitation, the Building Rules and Regulations and Landlord's Access Control Systems and Force Majeure, Tenant shall have access to the Tenant Space twenty-four (24) hours per day, seven (7) days per week.

1.6Common Area. The Common Area shall be subject to Landlord's sole management and control, subject to the terms and provisions of this Lease, and Landlord shall cause the Common Areas to be maintained in good order, repair and operable condition, consistent with standards of high quality class A datacenter buildings comparable to the Building. Tenant, and the other Tenant Parties, shall have a non-exclusive, irrevocable right to use the Common Area as constituted from time to time; such use to be in common with Landlord, the other members of the Landlord Group, other tenants of the Building and other persons entitled to use the same, and subject to such reasonable rules and regulations governing use of the Common Areas as Landlord may from time to time prescribe, which right to use shall be appurtenant to the Tenant Space and shall run with the Land during the Term of this Lease. Landlord may temporarily close any part of the Common Area for such periods of time as may be necessary to prevent the public from obtaining prescriptive rights or to make repairs or alterations, provided that no such activity unreasonably interferes with or disrupts Tenant's access to and/or use of the Tenant Space for the Permitted Use.

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2. TERM.

2.1Term; Tenant's Early Termination Right.

2.1.1    Term. The term of this Lease, and Tenant's obligation to pay Rent under this Lease, shall commence on the Commencement Date and shall continue in effect for the Term of the Lease, as the same may be extended, or earlier terminated, in accordance with the express terms of this Lease.

2.1.2    Tenant's Early Termination Right. Notwithstanding anything to the contrary contained herein (but subject to the terms of this Section 2.1.2), Tenant shall have a continuing right to terminate this Lease as it relates to the Suite B-1 Tenant Space, the Suite B-2 Tenant Space and/or the Suite B-3 Tenant Space for any reason or no reason, at any time during the Term of this Lease (as it relates to each such portion of Tenant Space (B), a “Tenant's Early Termination Right”). Landlord and Tenant agree that Tenant's Early Termination Right, with regard to each such portion of Tenant Space (B), is subject to (and limited by) the following terms and conditions:

(a)    Tenant must provide Landlord prior written notice (each, a “TETR Notice”) of Tenant's exercise of a Tenant's Early Termination Right, which notice must include the applicable date of Tenant's termination (the effective date of the termination with regard to the applicable portion(s) of Tenant Space (B) is referred to herein as the “TETR Termination Date”). In the event that Tenant delivers a TETR Notice with regard to the entirety of Tenant Space (B) any time prior to the occurrence of the Commencement Date (B), then notwithstanding anything herein to the contrary, Landlord shall not be obligated to cause the completion of the Commencement Date Conditions (B), and Tenant shall not be entitled to any rental credits or termination rights in connection therewith. In the event that Tenant delivers a TETR Notice any time after the occurrence of the Commencement Date (B), the applicable TETR Termination Date shall be a date no earlier than the one hundred eightieth (180^th) day following the date upon which Landlord receives the applicable TETR Notice from Tenant. For the purposes of this Lease, the term “Terminated Portion of Tenant Space (B)” shall mean and refer to each portion of Tenant Space (B) (i.e., the Suite B-1 Tenant Space, the Suite B-2 Tenant Space and/or the Suite B-3 Tenant Space) that is the (or a) subject of a TETR Notice.

(b)    On or prior to the applicable TETR Termination Date, Tenant must pay Landlord the applicable TETR Fee, defined below, as Additional Rent. Landlord must receive the applicable TETR Fee on or prior to the applicable TETR Termination Date in order for Tenant's exercise of the applicable Tenant's Early Termination Right to have effect. In the event that Landlord does not receive the applicable TETR Fee on or prior to the applicable TETR Termination Date described in the applicable TETR Notice, Tenant will be deemed to have withdrawn the applicable TETR Notice and the Term of this Lease shall continue with regard to the applicable portion of Tenant Space (B) as though such TETR Notice had never been provided. The “TETR Fee” shall mean and refer to an amount equal to the amount set forth opposite the corresponding portion of Tenant Space (B) in Table 2.1.2(b), below.

Table 2.1.2(b).

If the (or an) applicable Terminated Portion of Tenant Space (B) is:	The TETR Fee related to such Terminated Portion of Tenant Space (B) shall be:
The Suite B-1 Tenant Space	[*****]
The Suite B-2 Tenant Space	[*****]
The Suite B-3 Tenant Space	[*****]

(c)    Notwithstanding the foregoing, (y) Tenant shall have no right to exercise a Tenant's Early Termination Right, or deliver a TETR Notice, and the applicable TETR Termination Date may not occur, at any time in which an Event of Default exists under the Lease, and any delivery of a TETR Notice during such period of time shall automatically be null and void and of no effect, and (z) if an Event of Default occurs under the Lease at any time after Tenant provides a TETR Notice, but prior to the applicable TETR Termination Date, the applicable TETR Notice shall automatically, upon such occurrence, be deemed to have been withdrawn.

(d)    If Tenant exercises a Tenant's Early Termination Right, Tenant shall surrender full and complete possession of the entire applicable Terminated Portion of Tenant Space (B) to Landlord on or before the applicable TETR Termination Date in accordance with Section 13.1 of this Lease (and otherwise, in accordance with the provisions of the Lease), and free and clear of all leases, tenancies, and rights of occupancy of any entity claiming by or through Tenant. If Tenant shall fail to strictly comply with the terms of this paragraph (d), Tenant shall be deemed to be in holdover as it relates to the applicable

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Terminated Portion of Tenant Space (B) from and after the applicable TETR Termination Date, until Tenant's obligations under this paragraph (d) are satisfied. For the avoidance of doubt, once and if Tenant's obligations under this paragraph (d) are satisfied, Landlord will cause the applicable Terminated Portion of Tenant Space (B) to be separately demised from the remaining portion(s) of Tenant Space (B), if any. In connection with any such demising work, Landlord shall reasonably cooperate and coordinate with Tenant regarding the performance of any such demising work, including timing, staging and other reasonable construction controls. Additionally, the parties shall, prior to the applicable TETR Termination Date, enter into an amendment of this Lease (which shall be effective as of the applicable TETR Termination Date) that effects such changes to this Lease as are reasonably necessary in order to account for the effects of such termination (e.g., modification of the applicable Electricity Consumption Threshold to apply only to those portions, if any, of Tenant Space (B) that have not been terminated).

(e)    If Tenant properly and timely exercises a Tenant's Early Termination Right and the effectiveness thereof has not been otherwise negated as set forth in this Section 2.1.2, the Lease, as it relates to the applicable Terminated Portion of Tenant Space (B), shall cease and expire on the applicable TETR Termination Date with the same force and effect as if such TETR Termination Date were the date originally provided in the Lease as the expiration date of the Term hereof with regard to the applicable Terminated Portion of Tenant Space (B). For the avoidance of doubt, Landlord and Tenant acknowledge and agree that the exercise of a Tenant's Early Termination Right shall have no effect upon the Term of the Lease as it relates to (i) Tenant Space (A) or any portion thereof, or (ii) any portion of Tenant Space (B) other than the applicable Terminated Portion of Tenant Space (B).

(f)    Tenant's Early Termination Right is personal to the undersigned (named) Tenant, any Tenant Affiliate of the undersigned (named) Tenant or other successor by Permitted Transfer. If a Transfer occurs (other than a Permitted Transfer), Tenant's Early Termination Right shall thereupon be deemed null and void.

(g)    Notwithstanding anything in this Section 2.1.2 to the contrary, Tenant's Early Termination Right applies only to the original Tenant Space (B) described in this Lease and not to any additional premises in the Building (e.g., Tenant's Early Termination Right would not entitle Tenant to terminate this Lease with regard to any subsequent expansion of Tenant Space (B)). In that regard, if Tenant leases any such additional premises, the Lease with respect to such additional premises would remain in full force and effect following the TETR Termination Date.

(h)    No exercise of Tenant's Early Termination Right will obviate Tenant's obligation to satisfy all terms, covenants, conditions, obligations, requirements and liabilities related to the applicable Terminated Portion of Tenant Space (B) (including, without limitation, all payments of Base Rent (B) related to the Terminated Portion of Tenant Space (B)) that are, or become, due from Tenant prior to the applicable TETR Termination Date. Such obligations shall survive the termination of this Lease.

(i)    The terms of this Section 2.1.2 shall survive the expiration or termination of this Lease.

2.2Delivery of Tenant Space; Delivery of Documentation; Early Access.

2.2.1    Delivery of Tenant Space. Landlord shall use commercially reasonable efforts to satisfy the applicable Commencement Date Conditions prior to the applicable Target Commencement Date. Landlord agrees to deliver the applicable Commencement Date Notice to Tenant upon Landlord's completion of Landlord's Installations, as applicable. Landlord shall deliver possession of the applicable Tenant Space to Tenant on the applicable Commencement Date.

2.2.2    In the event that the applicable Commencement Date Conditions have not been completed by the applicable Target Commencement Date, subject to extension by virtue of Tenant Delay and Force Majeure, Landlord shall not be deemed in default hereunder, and the applicable Commencement Date shall be postponed until the date on which the applicable Commencement Date Conditions have been completed. Notwithstanding the foregoing, in the event that applicable Commencement Date Conditions have not occurred prior to the applicable Outside Commencement Date, subject to extension by virtue of Tenant Delay and Force Majeure, Tenant shall have the right to terminate this Lease with regard to the applicable Tenant Space only, provided that (a) Tenant notifies Landlord of such termination prior to the earlier to occur of (1) completion of the applicable Commencement Date Conditions; or (2) ten (10) days after the applicable Outside Commencement Date; and (b) Landlord has not caused the applicable Commencement Date Conditions to have been completed within ten (10) days after its receipt of such notice of termination from Tenant. If (aa) the applicable Commencement Date Conditions are completed prior to Tenant's exercise of the foregoing termination right, (bb) the applicable Commencement Date Conditions are completed within ten (10) days after Tenant's exercise of the foregoing termination right, or (cc) Tenant shall fail to exercise such termination right within ten (10) days after the applicable Outside Commencement Date, then such termination right shall, in any such event, be deemed to have expired

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and shall, thereafter, be of no further force or effect. In the event of such a termination, Landlord will refund to Tenant any Prepaid Rent theretofore received from Tenant within thirty (30) days after the date of such termination.

2.2.2.1     Notwithstanding anything contained herein to the contrary, in the event that Landlord has not completed the Commencement Date Conditions (A) prior to the date occurring thirty (30) days after the Target Commencement Date (A) (the “Late Delivery Date-A”), subject to extension by virtue of Tenant Delay and Force Majeure, Tenant shall be entitled to a credit against Suite A-1 Base Rent equal to [*****].

2.2.2.2.    Notwithstanding anything contained herein to the contrary, in the event that Landlord has not completed the Commencement Date Conditions (B) prior to the date occurring thirty (30) days after the Target Commencement Date (B) (the “Late Delivery Date-B”), subject to extension by virtue of Tenant Delay and Force Majeure, Tenant shall be entitled to a credit against Suite B-1 Base Rent equal to [*****].

2.2.2.3    The termination rights, the credits against Base Rent and the refund of Prepaid Rent provided for in Sections 2.2.2, 2.2.2.1 and 2.2.2.2, above, respectively, shall be Tenant's sole and exclusive remedies related to Landlord's failure to timely complete the applicable Commencement Date Conditions, as set forth herein above.

2.2.3    Delivery of Documentation. Landlord agrees to cause copies of the As-Built Drawings for the applicable Tenant Space and Commissioning Documentation for the applicable Tenant Space to be delivered to Tenant within ten (10) business days after the later to occur of (a) the applicable Commencement Date and (b) execution and delivery by both parties of a mutually acceptable reasonable confidentiality/non-disclosure agreement protecting Landlord's interests in such materials. The foregoing notwithstanding, Landlord and Tenant acknowledge and agree that Landlord's delivery of the As-Built Drawings for the applicable Tenant Space and the Commissioning Documentation for the applicable Tenant Space is not a condition precedent to any obligation of Tenant to pay Rent, nor is such delivery a condition precedent to the occurrence of the applicable Commencement Date.

2.2.4    Early Access. Landlord agrees, subject to the terms and conditions of this Section 2.2.4, to permit Tenant and the other Tenant Parties to have Early Access in the Early Access Suites, on and after the Early Access Date applicable to such Suites. Tenant's Early Access shall be subject to (and, during such periods, Tenant must comply with) all of the terms and provisions of this Lease (including the obligation to maintain, repair and replace such spaces and the Infrastructure for same), as though the Early Access Suites were part of the Premises and the Tenant Space during the Early Access Period, excepting only the payment of Base Rent, Operating Expenses, Taxes-Real Property and Taxes-Other that would (if the applicable Suite Period was then in effect) otherwise be applicable to the pertinent Early Access Suites.

2.2.5    Early Installations. Without limiting the terms and provisions of Section 2.2.4 above, and notwithstanding anything to the contrary contained herein, Landlord agrees, subject to the terms and conditions of this Section 2.2.5, to permit Tenant and the other Tenant Parties to have access in and to the applicable Datacenter on and after the respective Early Installations Date, but prior to the Commencement Date for each Datacenter, for the sole purpose of installing Tenant's Personal Property. Landlord agrees to use commercially-reasonable, diligent efforts to cause the Early Installations Date for each Datacenter to occur at least thirty (30) days before the applicable Commencement Date. As used herein, the term “Early Installations Date,” as it relates to each Datacenter, shall mean and refer to the date upon which Landlord provides Tenant the Early Installations Notice for such Datacenter. As used herein, “Early Installations Notice” shall mean and refer to the notice from Landlord to Tenant notifying Tenant that Landlord has advanced the applicable Landlord Installations sufficiently to allow Tenant to install Tenant's Personal Property in the applicable Datacenter prior to the applicable Commencement Date.

2.2.5.1    Notwithstanding anything in this Lease to the contrary, the Early Installations Period may be reduced by Landlord to the extent, and, in such event, for only so long as, such early access by Tenant as set forth in this Section 2.2.5 materially interferes with Landlord's ability to complete the Landlord Installations on or before the Target Commencement Date. Tenant's early access as set forth in this Section 2.2.5 shall be subject to (and, during such period, Tenant must comply with) all of the terms and provisions of this Lease, excepting only the payment of Rent. As used herein, “Early Installations Period”, as it relates to each Datacenter, shall mean and refer to the period between the Early Installations Date and the Commencement Date.

2.3 Extension Options.

2.3.1Subject to and in accordance with the terms and conditions of this Section 2.3, Tenant shall have the number of Extension Options specified in Item 6 of the Basic Lease Information to extend either or both Datacenter Periods, for

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the Extension Terms specified in such Item 6, upon the same terms, conditions and provisions applicable to the pertinent Tenant Space's then-current Datacenter Period (except as provided otherwise herein). The monthly Extension Term Base Rent payable with respect to the Tenant Space (i.e., Tenant Space (A) or Tenant Space (B)) being extended for each Lease Year of such Tenant Space's extended Datacenter Period shall be automatically increased hereunder as of the first (1^st) day of each such Lease Year of a Tenant Space's extended Datacenter Period to be equal to [*****] of such Tenant Space's aggregate monthly Base Rent that was payable for the immediately preceding month of such Tenant Space's Datacenter Period, as extended.

2.3.2Tenant may exercise each Extension Option only by delivering an Extension Option Exercise Notice to Landlord at least nine (9) calendar months prior to the expiration date of the applicable Datacenter Period, specifying that Tenant is irrevocably exercising its Extension Option so as to extend the Term of this Lease with regard to the applicable Tenant Space by an Extension Term on the terms set forth in this Section 2.3. In the event that Tenant shall duly exercise an Extension Option, the applicable Datacenter Period shall be deemed to have been extended to include the applicable Extension Term (and all references to the Term in this Lease, as it relates to the Datacenter Period that is then being extended, shall be deemed to refer to the Term specified in Item 5 of the Basic Lease Information, as extended in accordance with the foregoing). In the event that Tenant shall fail to deliver an Extension Option Exercise Notice within the applicable time period specified herein for the delivery thereof, time being of the essence, at the election of Landlord, Tenant shall be deemed to have forever waived and relinquished the Extension Option related to the applicable Datacenter Period, and any other options or rights to renew or extend the Term with regard to such Datacenter Period effective after the then applicable expiration date of such Datacenter Period shall have terminated and shall be of no further force or effect.

2.3.3Tenant shall have the right to exercise any Extension Option with respect to a particular Tenant Space only with respect to the entirety of such Tenant Space (to the extent that it relates to the Datacenter Period being extended) leased by Tenant at the time that Tenant delivers the applicable Extension Option Exercise Notice. If Tenant duly exercises an Extension Option, Landlord and Tenant shall execute an amendment reflecting such exercise. Notwithstanding anything to the contrary herein, any attempted exercise by Tenant of an Extension Option shall, at the election of Landlord, be invalid, ineffective, and of no force or effect if, on the date on which Tenant delivers an Extension Option Exercise Notice, or on the date on which the Extension Term is scheduled to commence, there shall be an uncured Event of Default by Tenant under this Lease.

3. BASE RENT AND OTHER CHARGES.

3.1Base Rent. Tenant shall pay Base Rent to Landlord throughout the Term of this Lease as set forth herein. All Base Rent shall be paid to Landlord in monthly installments in advance on the first day of each and every calendar month throughout the Term of this Lease; provided, however, that (a) the installment of Suite A-1 Base Rent applicable to the first (1^st) full calendar month of the Suite A-1 Period shall be payable upon Tenant's execution of this Lease; (b) if the Term of this Lease does not commence on the first day of a calendar month, the initial level of Suite A-1 Base Rent payable with respect to the first full calendar month of the Term shall (i) be calculated on a per diem basis determined by dividing the initial monthly Suite A-1 Base Rent [i.e., [*****]] by the total number of calendar days in such first full calendar month and multiplying such amount by the number of days occurring in such first full calendar month from and including the Commencement Date (A), and (ii) be paid by Tenant to Landlord on the Commencement Date (A); and (c) if the Suite B-1 Period does not commence on the first day of a calendar month, the initial level of Suite B-1 Base Rent payable with respect to the first (1^st) full calendar month of the Suite B-1 Period shall (i) be calculated on a per diem basis determined by dividing the initial monthly Suite B-1 Base Rent [i.e., [*****]] by the total number of calendar days in the calendar month in which Commencement Date (B) occurs, and multiplying such amount by the number of days occurring in such calendar month from and including the Commencement Date (B), and (ii) be paid by Tenant to Landlord on the Commencement Date (B). Except as set forth in this Section 3.1, Tenant shall not pay any installment of Rent more than one (1) month in advance. For avoidance of doubt, if Tenant is entitled to any credits against Rent for a particular Tenant Space under the terms and provisions of this Lease, Tenant shall have the right to deduct such credited amounts against the next payment(s) of Rent related to the applicable Tenant Space due and payable hereunder.

3.2Operating Expenses and Taxes - Real Property.

3.2.1    Tenant shall be obligated to pay to Landlord as Additional Rent an amount equal to Tenant's Proportionate Share of Operating Expenses (Actual). In addition, Tenant shall be obligated to pay to Landlord as Additional Rent an amount equal to Tenant's Proportionate Share of Taxes - Real Property (Actual).

3.2.2    Beginning with the applicable Commencement Date (or as soon thereafter as reasonably possible), Landlord shall provide to Tenant a statement of the Operating Expenses (Projected) and the Taxes - Real Property (Projected). On

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or about January 1 each calendar year of the Term thereafter (or as soon thereafter as Landlord reasonably is able to provide such statement), Landlord will provide Tenant with a statement of the Operating Expenses (Projected) and the Taxes - Real Property (Projected) for such calendar year. Tenant shall pay each Projected Operating Expenses Installment and each Projected Real Property Tax Installment to Landlord the first day of each month during the Term of the Lease. Until Tenant has received the statement of the Operating Expenses (Projected) and the Taxes - Real Property (Projected) from Landlord, Tenant shall continue to pay Projected Operating Expenses Installments and Projected Real Property Tax Installments to Landlord in the same amount (if any) as required for the last month of the prior calendar year. Within thirty (30) days after Tenant's receipt of such statement of the Operating Expenses (Projected), Tenant shall pay to Landlord, or Landlord shall pay to Tenant (whichever is appropriate), the difference between the amount paid by Tenant as Projected Operating Expenses Installments prior to receiving such statement and the amount payable by Tenant therefor as set forth in such statement. In addition, within thirty (30) days after Tenant's receipt of such statement of the Taxes - Real Property (Projected), Tenant shall pay to Landlord, or Landlord shall pay to Tenant (whichever is appropriate), the difference between the amount paid by Tenant as Projected Real Property Tax Installments prior to receiving such statement and the amount payable by Tenant therefor as set forth in such statement. Landlord shall provide Tenant a statement on or before May 1 (or as soon thereafter as reasonably possible) after the end of each calendar year, showing Operating Expenses (Actual) as compared to the Operating Expenses (Projected) for such calendar year and Taxes - Real Property (Actual) as compared to the Taxes - Real Property (Actual) for such calendar year. If Tenant's Proportionate Share of Operating Expenses (Actual) for such calendar year exceeds the aggregate of the Projected Operating Expenses Installments collected by Landlord from Tenant, Tenant shall pay to Landlord, within thirty (30) days following Tenant's receipt of such statement, the amount of such excess. However, if Tenant's Proportionate Share of Operating Expenses (Actual) for such calendar year is less than the aggregate of Projected Operating Expenses Installments collected by Landlord from Tenant, Landlord shall pay to Tenant, within thirty (30) days following Tenant's receipt of such statement, the amount of such excess. If Landlord fails to make such payment within said 30-day period, Tenant shall have the right to offset such amount against the next payment(s) of Rent due and payable hereunder. If Tenant's Proportionate Share of Taxes - Real Property (Actual) for such calendar year exceeds the aggregate of the Projected Real Property Tax Installments collected by Landlord from Tenant, Tenant shall pay to Landlord, within thirty (30) days following Tenant's receipt of such statement, the amount of such excess. However, if Tenant's Proportionate Share of Taxes - Real Property (Actual) for such calendar year is less than the aggregate of Projected Real Property Tax Installments collected by Landlord from Tenant, Landlord shall pay to Tenant, within thirty (30) days following Tenant's receipt of such statement, the amount of such excess. If Landlord fails to make such payment within said 30-day period, Tenant shall have the right to offset such amount against the next payment(s) of Rent due and payable hereunder. Landlord shall have the right from time to time during each calendar year to revise the Operating Expenses (Projected) and/or the Taxes - Real Property (Projected) and provide Tenant with a revised statement thereof. Thereafter, Tenant shall pay Projected Operating Expenses Installments and Projected Real Property Tax Installments on the basis of the revised statement. If the Commencement Date is not the first day of a calendar year, or the expiration or earlier termination date of this Lease is not the last day of a calendar year, the Tenant's Proportionate Share of Operating Expenses (Actual) and Tenant's Proportionate Share of Taxes - Real Property (Actual) shall be prorated. The foregoing adjustment provisions shall survive the expiration or termination of the Term of this Lease.

3.2.3    Intentionally Deleted.

3.2.4    Landlord agrees to keep books and records reflecting the Operating Expenses and Taxes - Real Property of the Property in accordance with generally accepted accounting principles (or, at least, “sound” accounting principles) consistently applied. Tenant, at its expense, shall have the right, within twelve (12) months after receiving Landlord's statement of Operating Expenses (Actual) and Taxes - Real Property (Actual) for a particular year, to audit Landlord's books and records relating to the Operating Expenses and Taxes as the case may be for such year. If conducted by Tenant, such audit shall be conducted only during regular business hours at a location reasonably designated by Landlord on the DPD Campus and only after Tenant gives Landlord fourteen (14) days' written notice. Tenant shall deliver to Landlord a copy of the results of such audit within fifteen (15) days after its receipt by Tenant. If the audit reveals that the amounts paid by Tenant to Landlord on account of Operating Expenses and/or Taxes: (a) exceed the amounts to which Landlord is entitled hereunder, then Landlord shall credit the amount of such excess toward the next monthly payment(s) of Rent due and payable hereunder, or (b) are less than the amounts to which Landlord is entitled hereunder, then Tenant shall pay such deficiency as Additional Rent within thirty (30) days after Tenant delivers the result of such audit to Landlord. If the amount of Operating Expenses or Taxes set forth in Landlord's statement of Operating Expenses (Actual) and Taxes - Real Property (Actual) was overstated by Landlord by more than [*****], Landlord shall, within thirty (30) days after receipt of written request from Tenant, accompanied by back-up documentation reasonably acceptable to Landlord, reimburse Tenant for the actual, reasonable costs and expenses paid by Tenant in connection with Tenant's audit, not to exceed [*****] per audit. No audit shall be conducted at any time that there is an uncured Event of Default by Tenant under this Lease. No subtenant shall have any right to conduct an audit and no assignee shall conduct an audit for any period during which such assignee was not in possession of the Tenant Space. Such audit must be conducted by an independent nationally or regionally recognized accounting

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firm. All information obtained through the Tenant's audit with respect to financial matters (including, without limitation, costs, expenses, income) and any other matters pertaining to the Landlord and/or the Property as well as any compromise, settlement, or adjustment reached between Landlord and Tenant relative to the results of the audit shall be held in strict confidence by Tenant, subject to the terms and provisions of Section 17.19 below; and Tenant shall cause its auditor and any of its officers, agents, and employees to be similarly bound. As a condition precedent to Tenant's exercise of its right to audit, Tenant must deliver to Landlord a signed covenant from the auditor in a form reasonably satisfactory to Landlord acknowledging that all of the results of such audit as well as any compromise, settlement, or adjustment reached between Landlord and Tenant shall be held in strict confidence and shall not be revealed in any manner to any person other than Tenant and/or Tenant's officers, agents and employees, except upon the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion, or if required pursuant to any litigation between Landlord and Tenant related to such audit, or if required by Applicable Laws. Tenant understands and agrees that the confidentiality provisions set forth herein are of material importance to Landlord and that any violation of such provisions shall result in immediate and irreparable harm to Landlord. Notwithstanding anything to the contrary contained herein, including without limitation this Section 3.2.4 and/or Section 17.19 below, Landlord shall have all rights allowed by law or equity if Tenant, its officers, agents, or employees violate the terms of this provision, and, if Tenant and/or its officers or employees violates the terms of this provision the result of which is the material impairment and/or interference of Landlord's operation of the Building, Landlord shall have the right to terminate Tenant's right to audit in the future pursuant to this Section 3.2.4. In the event Tenant's auditor violates the terms of this provision, Landlord shall have the right to condition Tenant's right to audit in the future pursuant to this Section 3.2.4 on Tenant engaging a different auditor to perform any future audit. If within such twelve (12) month period Tenant does not give Landlord written notice stating in reasonable detail any objection to the statement of Operating Expenses (Actual) and/or Taxes - Real Property (Actual), Tenant shall be deemed to have approved such statement in all respects, provided that the foregoing shall not preclude Tenant from objecting to payments of amortized amounts for capital improvement items charged to Tenant under subparagraph (vii) of the definition of Operating Expenses in Schedule “1.”

3.2.5    Intentionally Omitted.

3.3Payments Generally. Base Rent and all forms of Additional Rent payable hereunder by Tenant (i) shall be payable to Landlord when due, without any prior notice or demand therefor, in lawful money of the United States without any abatement, offset or deduction whatsoever (except as specifically provided otherwise herein), and (ii) shall be payable to Landlord at the address of Landlord specified in Item 12 of the Basic Lease Information (or to such other person or to such other place as Landlord may from time to time designate in writing to Tenant). No receipt of money by Landlord from Tenant after the termination of this Lease, the service of any notice, the commencement of any suit, or a final judgment for possession shall reinstate, continue or extend the Term of this Lease or affect any such notice, demand, suit or judgment. No partial payment by Tenant shall be deemed to be other than on account of the full amount otherwise due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord shall be entitled to accept such payment without compromise or prejudice to any of the rights of Landlord hereunder or under any Applicable Laws. In the event that the applicable Commencement Date or the expiration of the applicable Term (or the date of any earlier termination of this Lease) falls on a date other than the first or last day of a calendar month, respectively, the Rent payable for such partial calendar month shall be prorated based on a per diem basis.

3.4Late Payments. Landlord and Tenant agree that if Landlord has not received any payment of Rent on or before the Delinquency Date, Tenant shall, in addition to Tenant's obligation to pay the Late Payment to Landlord, also be required to pay to Landlord, as Additional Rent, (i) a Late Charge, and (ii) Late Payment Interest from the Delinquency Date until the date the foregoing are paid, collectively, to cover Landlord's additional administrative costs and damages related to such Late Payment, which are difficult, if not impossible, to determine. In no event, however, shall the charges permitted under this Section 3.4, or elsewhere in this Lease, to the extent the same are considered to be interest under Applicable Law, exceed the maximum lawful rate of interest. Landlord's acceptance of any Late Charge, or any Late Payment Interest, shall not be deemed to constitute a waiver of Tenant's default with respect to the Late Payment, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord hereunder or under any Applicable Laws.

3.1Utilities. Landlord shall bill Tenant monthly for Tenant's Utility Payment. Tenant shall pay Tenant's Utility Payment to Landlord, as Additional Rent, within thirty (30) days after Tenant's receipt of each Tenant's Utility Payment invoice.

4. TAXES-EQUIPMENT; TAXES-OTHER.

4.1Taxes - Equipment. Tenant shall be liable for and shall pay before delinquency all Taxes - Equipment.

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If any such Taxes - Equipment are levied or assessed against Landlord or the Property, and if Landlord elects to pay the same, Tenant shall pay to Landlord as Additional Rent, within thirty (30) days of Landlord's demand therefor, that part of such Taxes - Equipment for which Tenant is liable hereunder.

4.1.1    Taxes - Equipment Rebate. In the event that Tenant desires to apply to the City of Richardson, Texas, for a reduction or rebate with regard to Taxes-Equipment that apply to the Infrastructure, Landlord agrees to reasonably cooperate with Tenant in connection with such undertaking, including the execution of reasonably acceptable documentation that must (according to the City of Richardson) be executed by the owner of the Infrastructure in order to achieve/receive such rebate(s). Tenant shall be entitled to receive any such rebates related to any particular calendar year's Taxes-Equipment for the Infrastructure, up to the amount of Taxes-Equipment for the Infrastructure that Tenant actually paid with regard to such calendar year.

4.1Taxes - Other. Tenant shall pay to Landlord, as Additional Rent and within thirty (30) days of Landlord's demand therefor, and in such manner and at such times as Landlord shall direct from time to time by written notice to Tenant all Taxes - Other.

5.INTENTIONALLY DELETED.

6.PERMITTED USE; COMPLIANCE WITH RULES AND LAWS; HAZARDOUS MATERIALS.

6.1Permitted Use. Tenant shall use the Tenant Space only for the Permitted Use. Any other use of the Tenant Space is subject to Landlord's prior written consent, which consent may be withheld or conditioned in Landlord's sole but reasonable discretion. For avoidance of doubt, Landlord acknowledges and agrees that, as part of the Permitted Use, Tenant will provide tours of the Tenant Space to prospective or current customers of Tenant. Tenant acknowledges that all such tours shall be subject to compliance with the Building Rules & Regulations.

6.1.1    Limitations on Permitted Use. Tenant agrees that neither Tenant, nor any other Tenant Party, may use the Tenant Space, or operate within the Tenant Space and/or the Building, in any manner, which: (i) causes or is reasonably likely to cause damage to the Property, the Building, the Tenant Space or any Base Building System; (ii) will invalidate or otherwise violate a requirement or condition of any fire, extended coverage or any other insurance policy covering the Land, the Base Building, and/or the Common Area, or the property located therein (to the extent not part of Tenant's Repair Obligations), or will increase the cost of any of the same; (iii) constitutes a nuisance and/or otherwise unreasonably interferes with other tenants' or occupants' use of space in the Building or otherwise at the Property, and/or any equipment, facilities or systems of any such tenant or occupant; (iv) unreasonably interferes with the transmission or reception of microwave, television, radio, telephone, or other communication signals by antennas or other facilities located at the Property. Additionally, and notwithstanding anything to the contrary contained in this Section 6.1, Tenant agrees that neither Tenant, nor any other Tenant Party, may (a) operate a meet-me room in the Tenant Space or any other portion of the Building, (b) provide MMR Services in the Tenant Space or any other portion of the Building, or (c) refer to the Tenant Space as a “meet-me room”. Tenant agrees to reimburse Landlord for any losses, costs or damages caused by unauthorized parties who gain access to the Tenant Space or the Building through access cards/badges, keys or other access devices provided to Tenant (or any other Tenant Party) by Landlord, except for the extent to which the same is caused by an act of negligence or willful misconduct of Landlord (or any other member of the Landlord Group). Tenant agrees to reimburse Landlord, as Additional Rent, for any additional insurance premium charged by Landlord's insurance carrier for any insurance policy by reason of Tenant's failure to comply with the provisions of this Section 6.1.1.

6.2Building Rules and Regulations. Tenant's Permitted Use shall be subject to, and Tenant, and all other Tenant Parties, shall comply fully with the Building Rules and Regulations. Landlord shall have the right, from time-to-time, to change, amend and/or supplement the Building Rules and Regulations as may be deemed by Landlord, in the exercise of its sole but reasonable discretion, advisable for the safety, care and/or cleanliness of the Tenant Space, the Building and/or the Property, and/or for the preservation of good order in any of same; provided, however, that such changes to the Building Rules and Regulations may not: (a) increase Tenant's monetary obligations; (b) materially increase Tenant's non-monetary obligations; and/or (c) materially decrease Tenant's rights, under this Lease or unreasonably interfere with Tenant's Permitted Use of the Tenant Space or access thereto. In the event of a conflict between the Building Rules and Regulations and the terms of this Lease, the terms of this Lease shall govern. Tenant shall be responsible for causing the other Tenant Parties to comply with the Building Rules and Regulations. Landlord shall apply and enforce the Building Rules and Regulations in uniform and non-discriminatory manner.

6.3 Compliance with Laws; Hazardous Materials.

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6.3.1Compliance with Laws. Tenant, at Tenant's sole cost and expense, shall timely take all action required to cause all Alterations, and Tenant's (and all other Tenant Parties') use of the Tenant Space and the Infrastructure (including generators), to comply at all times during the Term of this Lease in all respects with all Applicable Laws. Subject to the terms and provisions of Section 1.2 above (i.e., except for the extent to which the Infrastructure was not in compliance with Applicable Laws on the Commencement Date), Tenant, at Tenant's sole cost and expense, shall timely take all action to cause the Infrastructure to comply at all times during the Term of this Lease in all respects with all Applicable Laws. Landlord, at Landlord's sole cost and expense (subject to reimbursement pursuant to Section 3.2 above, if and to the extent permitted thereby or elsewhere under this Lease), shall timely take all action required to cure violations of Applicable Laws with regard to the Base Building, the Base Building Systems, the Common Area, and any other portions of the Building located outside of the Tenant Space that exist or arise during the Term of this Lease.

6.3.2Hazardous Materials. Tenant agrees that neither Tenant, nor any other Tenant Party, shall Handle any Hazardous Materials in the Tenant Space or any portion of the Building or the Property, provided that Tenant and any Tenant Party may use and store normal and reasonable quantities of Hazardous Materials in the Tenant Space as are customarily maintained by data center tenants and operators and as may be reasonably necessary for Tenant and any Tenant Party to conduct normal operations in the Tenant Space, taking into account the Permitted Use, so long as such Hazardous Materials are properly, safely and lawfully stored and used by Tenant and/or any Tenant Party. Additionally, Tenant agrees that neither Tenant, nor any other Tenant Party, shall use the Tenant Space in any manner which may directly or indirectly lead to any non-compliance with any Environmental Law.

6.3.2.1    Notwithstanding anything to the contrary contained herein, Landlord represents to Tenant, to the best of Landlord's Actual Knowledge, that there are no Hazardous Materials in or about the Property, the removal or remediation of which is required by Applicable Laws. In the event that Hazardous Materials are discovered in, on and/or under the Property during the Term of this Lease in violation of Applicable Laws, and such Hazardous Materials were not introduced by Tenant or any Tenant Party, Landlord will cause such Hazardous Materials to be remediated, encapsulated, or otherwise handled, at Landlord's sole cost and expense, within the time frames and parameters required by Applicable Laws.

6.4Electricity Consumption Threshold. Tenant's actual electricity consumption for each Datacenter, as reasonably determined by Landlord utilizing meters, sub-meters and/or pulse meters, shall not at any time, exceed such Datacenter's Electricity Consumption Threshold. The power drawn by the Infrastructure and all of Tenant's Personal Property, shall, collectively, be included in the calculation of Tenant's actual electricity consumption for each Datacenter. In the event that an ECT Overage occurs for which Landlord desires for Tenant to take a certain action, Landlord shall provide notice thereof to Tenant's Emergency Contacts by email and telephone call, and Tenant agrees to take immediate action to cause power consumption in the relevant Datacenter to be at or below the Electricity Consumption Threshold. Tenant will be permitted to configure the BMS as needed.

6.5Maximum Structural Load. Tenant shall not place a load upon the Premises exceeding the Maximum Structural Load.

6.6Rooftop Rights. As set forth on Exhibit “L”, attached hereto.

7. ACCESS CONTROL; SECURITY; ELECTRICITY; INTERRUPTION OF SERVICES; BUILDING MANAGEMENT SYSTEM.

7.1Access Control; Security. Landlord will provide Landlord's Access Control Systems during the Term of this Lease. Landlord reserves the right, but without assuming any duty, to institute additional access control measures in order to further control and regulate access to the Building or any part thereof, provided same: (a) are consistent with high quality class A datacenter buildings comparable to the Building; and (b) do not unreasonably interfere with Tenant's use of and/or access to the Tenant Space for the Permitted Use. Landlord shall not, under any circumstances, be responsible for [*****].

7.1.1    Tenant shall, upon ten (10) days' advance written notice to Landlord, have the right to obtain, at no additional cost to Tenant, monthly reports (regarding the two (2) most recently completed calendar months) from Landlord regarding entry data and [*****] for: (a) each person on the Tenant Access List (as hereinafter defined) that enters the Building; and (b) each person that enters the Tenant Space. Tenant shall, further, have the right to request entry data and [*****] for the Tenant Space, the Building and the Common Area (including the parking lot), as situations dictate to resolve its own reasonable security concerns or support any necessary personnel inquires, and Landlord shall use commercially reasonable efforts to furnish copies of or access to all such records [*****], all subject to availability [*****].

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7.1.2    Tenant shall have the right, subject to Section 8.3 below, to install, manage and/or maintain, at its sole cost and expense, access control and/or security services and systems to protect the Tenant Space, [*****], in addition to Landlord's Access Control Systems. Tenant agrees that such security systems shall not (i) limit Landlord's ability to access the space in the event of an emergency or otherwise pursuant to and in accordance with Section 17.16, below, or (ii) materially, adversely affect any area outside of the Tenant Space.

7.1.3    [*****].

7.2Electricity. Landlord shall furnish electricity to (i) Datacenter-A during the Datacenter-A Period sufficient to meet the Electricity Consumption Threshold-A in accordance with the specifications set forth in Item 1 of Exhibit “F” Table A attached hereto, and (ii) Datacenter B during the Datacenter-B Period sufficient to meet the Electricity Consumption Threshold-B in accordance with the specifications set forth in Item 2 of Exhibit “F” Table A attached hereto. The obligation of Landlord to provide electricity to Datacenter-A and Datacenter-B shall be subject to the rules, regulations and requirements of the supplier of such electricity and of any governmental authorities regulating providers of electricity and shall be limited to providing the respective Electricity Consumption Threshold. Aside from Landlord's obligation to complete Landlord's Installations, Tenant shall be solely responsible for Back-Up Power Systems for use in the Tenant Space.

7.2.1    [*****].

7.3Interruption of Services. Except with respect to a breach by Landlord of its covenant set forth in Section 7.2.1 above, Landlord shall not be liable or responsible to Tenant for any loss, damage or expense of any type which Tenant may sustain or incur if the quantity or character of the utility-provided electric service is changed, is no longer available, or is no longer suitable for Tenant's requirements. Additionally, unless caused by the gross negligence or willful misconduct of Landlord or by a breach or default by Landlord of its covenant set forth in Section 7.2.1 above, and except as otherwise expressly provided herein, no interruption or malfunction of any electrical or other service to the Premises, or to any other portion of the Building or Property, shall, in any event, (i) constitute an eviction or disturbance of Tenant's use and possession of the Tenant Space, (ii) render Landlord liable for damages of any type or entitle Tenant to be relieved from any of Tenant's obligations under this Lease (including the obligation to pay Base Rent, Additional Rent, or other charges), (iii) grant Tenant any right of setoff or recoupment, (iv) provide Tenant with any right to terminate this Lease, or (v) make Landlord liable for any injury to or interference with Tenant's business or any punitive, incidental or Consequential Damages, whether foreseeable or not. In the event of the interruption of any such service, however, Landlord shall employ commercially reasonable, diligent efforts to restore such service or cause the same to be restored in any circumstances in which such restoration is within the reasonable control of Landlord.

7.3.1    Essential Services Failure. Notwithstanding anything to the contrary contained herein, commencing on the [*****] consecutive day of any Essential Service Failure (defined below) within Landlord's control to prevent or correct (unless the Essential Service Failure is caused by a fire or other casualty, in which event Section 9.1 below controls), Tenant shall be entitled to terminate this Lease upon written notice to Landlord, given prior to the earlier of: (a) the [*****] day of the Essential Service Failure or (b) cure of the Essential Service Failure. Further notwithstanding anything to the contrary contained herein, commencing on the [*****] consecutive day of any Essential Service Failure that is not within the control of Landlord to prevent or correct (unless the Essential Service Failure is caused by a fire or other casualty, in which event Section 9.1controls), Tenant shall be entitled to terminate this Lease upon written notice to Landlord, given prior to the earlier of: (x) the [*****] day of the Essential Service Failure or (y) cure of the Essential Service Failure. As used herein, the term, “Essential Service Failure” shall mean and be limited to the interruption, malfunction, suspension or termination of any of the following services: (i) access to the Building and/or the Tenant Space, and (ii) electricity to the Tenant Space (which, for the avoidance of doubt, shall mean electricity being available at the output side of the primary Building switchgear that exclusively serves the Premises). Landlord and Tenant agree that the duration of an Essential Service Failure related to access to the Building and/or the Tenant Space shall be deemed (for the purposes of the foregoing periods) to have commenced upon Landlord's receipt of written notice from Tenant notifying Landlord of same with reasonable particularity.

7.4Building Management System. Landlord shall provide Tenant with access, within each Tenant Space, to the Building Management System, to permit Tenant to monitor and observe, twenty-four (24) hours per day, seven (7) days per week during the Term, (a) the environmental conditions [i.e., temperature and humidity] within each Suite; (b) the status of the PAHUs within each Suite; and (c) the load parameters (current, KVA & kW) for the Infrastructure and that portion of any other electrical systems and equipment in the Building directly supporting each Tenant Space. Landlord and Tenant agree that Landlord's BMS responsibility will be limited to the initial installation and configuration of the BMS and the equipment, facilities and other components thereof. The foregoing notwithstanding, from and after the Commencement Date Tenant will be responsible for the BMS.

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8. MAINTENANCE; ALTERATIONS; REMOVAL OF TENANT'S PERSONAL PROPERTY.

8.1Landlord's Maintenance. Except as expressly provided in this Section 8.1, Landlord shall have no obligation to repair and/or maintain the Tenant Space or any Early Access Suite. Landlord will maintain and keep in good repair and condition the Base Building, including without limitation, the Common Area cable management systems (comprised of ladder racks, fiber trays, under-floor cable trays and other similar equipment located within the Common Area that are installed for the benefit of all occupants of the Building) and Base Building Systems, including the Common Area HVAC system within the Building.

8.2Tenant's Maintenance. During the Term of this Lease, Tenant shall, at Tenant's sole cost and expense, maintain and keep in good order and repair and in a clean and safe condition, the Tenant Space, all Infrastructure and all other non-Base Building equipment located therein or located outside the Tenant Space but exclusively serving the Tenant Space, including, without limitation, the Pathway, the PDUs serving the Premises, the elements of access control (other than Landlord's Access Control Systems) exclusively serving the Premises, the HVAC systems exclusively serving the Premises, the UPS Plants serving the Premises, all components of the electrical system exclusively serving the Premises, commencing with the output side of the primary Building switchgear, the Back-Up Power Systems, the raised floor system and non-structural walls, collectively, in accordance with the Maintenance Schedule described in Section 8.2.1 below (collectively, “Tenant's Repair Obligations”). For the avoidance of doubt, Landlord and Tenant acknowledge and agree that, as part of Tenant's Repair Obligations, Tenant shall, at Tenant's sole cost and expense but subject to the terms and provisions of Section 8.2.3 below, replace any equipment comprising the Infrastructure which cannot reasonably be repaired or restored to operate in accordance with its design intent, including the extent to which any such equipment is damaged by Casualty or Taking. All such replacement equipment shall be (x) new, (y) of a quality at least as good as the original quality of the equipment being replaced, and (z) designed to perform in accordance with the original design intent of the Premises served by such equipment. Tenant shall perform all maintenance and make all repairs and replacements with due diligence and due care in a good and workmanlike manner and in compliance with all Applicable Laws. Notwithstanding anything to the contrary contained herein, if Tenant fails to perform its covenants of maintenance, repair and/or replacement hereunder, or if Tenant or any of Tenant's technicians or representatives physically damages the Property, the Building or any portion of any of the above, or the personal property of any other tenant or occupant, or causes an interruption of services to the Premises and/or in the Building, Landlord may, at its election (but shall not be obligated to), after giving Tenant written notice of the need for any such maintenance and repair and the passage of ten (10) days to cure [or, if such repair is such that it cannot reasonably be completed with 10 days, such longer time reasonably required to perform such maintenance and repair, provided Tenant commences to perform such maintenance and repair within such 10-day period and proceeds to completion with diligence and continuity], perform all necessary or appropriate maintenance and repair, and any amounts expended by Landlord in connection therewith, plus an administrative charge of [*****] of such amounts, shall be reimbursed by Tenant to Landlord as Additional Rent within thirty (30) days after Landlord's demand therefor, together with reasonable supporting documentation.

8.2.1    As part of Tenant's obligation to maintain the Tenant Space, Tenant agrees during the Term of this Lease to adhere to the standard maintenance practices with respect to the Infrastructure prescribed by (a) Applicable Laws, (b) the National Fire Protection Association, (c) the equipment manufacturers' recommended maintenance standards (to the extent provided to Tenant by Landlord in writing), and (d) otherwise, consistent with the standard maintenance practices to which operators of first class datacenters adhere at other datacenters of comparable size and quality (the “Maintenance Schedule”). Tenant shall be permitted to deviate from and/or change the Maintenance Schedule upon Landlord's approval thereof, such approval not to be unreasonably withheld, conditioned or delayed. Tenant agrees to keep books and records reflecting its repair and maintenance activities with respect to the Infrastructure consistent with industry standards for first-class datacenters (“Books and Records”). During the Term, Landlord shall have the right, once per Lease Year with regard to each Premises, to confirm Tenant's compliance with the Maintenance Schedule by inspecting Tenant's Books and Records, interviewing Tenant's relevant employees or contractors, and visually inspecting the Infrastructure (collectively, “Landlord's Maintenance Inspection”). Landlord shall exercise the foregoing right by delivering prior written notice (the “Maintenance Inspection Notice”) to Tenant no less than thirty (30) days before the date upon which Landlord desires to perform Landlord's Maintenance Inspection, detailing the equipment for which Landlord wishes to inspect the Books and Records. Any Landlord's Maintenance Inspection shall be performed during Tenant's normal business hours at a time reasonably designated by Tenant. Tenant shall respond to Landlord's Maintenance Inspection Notice within five (5) business days after Tenant's receipt of the Maintenance Inspection Notice with the date, time and location of Landlord's Maintenance Inspection. If Landlord's Maintenance Inspection reveals that Tenant is delinquent in complying with the Maintenance Schedule, Landlord shall deliver written notice to Tenant of such delinquency, and Tenant shall cure such delinquency within the time allowed pursuant to Section 15.1.2 of this Lease.

8.2.2    Landlord shall assign all warranties for all Infrastructure located in or supporting the Tenant Space, to

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the extent that such warranties are assignable by Landlord without unreasonable payment to the applicable vendor, to Tenant within sixty (60) days after the Commencement Date (or such longer period as is reasonably necessary, using commercially reasonable, diligent efforts to complete the same). For any warranties that are not assignable by Landlord to Tenant without unreasonable payment or that are assignable but have not yet been assigned by Landlord as aforesaid, (a) Landlord agrees to enforce such warranties on Tenant's behalf using diligent efforts consistent with a first class datacenter operator; and (b) during the Term, Landlord delegates all of its rights and remedies under such non-assigned warranties to Tenant. In the event Landlord fails to: (x) timely assign any warranties regarding any component or portion of the Infrastructure to Tenant that are assignable; or (y) enforce any warranties that are not assignable without unreasonable payment or otherwise using diligent efforts as set forth hereinabove, then any costs actually incurred by Tenant to maintain, repair and/or replace any component or portion of the Infrastructure that would have been covered by any such warranties shall be reimbursed by Landlord to Tenant within thirty (30) days after Tenant's demand therefor, together with reasonable supporting documentation.

8.2.3    With respect to any equipment comprising the Infrastructure that Tenant is obligated to replace pursuant to and in accordance with Section 8.2 above as part of Tenant's Repair Obligations, the following terms and provisions shall apply, provided that Tenant has theretofore fully complied with its maintenance and repair obligations as described herein with regard to the equipment (including any generator) being replaced: (a) in the event Tenant is obligated to replace any such equipment in any Tenant Space during the final twelve (12) months of the applicable Datacenter Period (as the same may be extended), the cost thereof (not to exceed market rates) shall be amortized on a straight line basis, calculated over the useful economic life of such equipment, as determined using generally accepted accounting principles consistently applied, with interest at the Prime Rate, and that portion of the cost attributable to the time period falling within the applicable Datacenter Period (as the same may be extended) will be the responsibility of Tenant and that portion of the cost attributable to the time period occurring after the expiration of the applicable Datacenter Period (as the same may be extended) will be paid by Landlord to Tenant within thirty (30) days after Tenant's demand therefor, together with reasonable supporting documentation; and (b) without limiting the foregoing, in the event Tenant is obligated to replace any generator serving the Tenant Space at any point during the Term of this Lease (as the same may be extended), the cost (not to exceed market rates) thereof shall be amortized and allocated in the same manner as set forth in subsection (a) above.

8.3Alterations.

8.3.1    Notwithstanding any provision in this Lease to the contrary, Tenant shall not make or cause to be made any Alterations to the Tenant Space, or any other portion of the Building or Property, without the prior written consent and approval of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. The foregoing notwithstanding, Landlord's consent shall not be required for any usual and customary installations and/or removals of equipment and/or telecommunication cables within the Tenant Space or any non-structural Alterations, if and to the extent that such installations, removals and/or non-structural Alterations (i) are usual and customary within the industry, (ii) are in compliance with the Building Rules and Regulations, and (iii) will not adversely affect the Building's structure, the provision of services to other Building tenants and/or any Base Building Systems. Landlord and Tenant acknowledge and agree that all Alterations shall be left as part of the Tenant Space, upon the expiration or earlier termination of this Lease, in good and operable condition, ordinary wear and tear excepted.

8.3.1.1    Landlord and Tenant acknowledge the possibility that Tenant's Alterations request could include a request for additional power to the Building and/or the Tenant Space. In the event of such a request, and in the event that additional power is reasonably available to be routed to the Building for such purpose without depriving any other space, building or tenant in the DPD Campus of appropriate power, Landlord and Tenant agree to work together in good faith to determine mutually acceptable terms and economics related to such additional power.

8.3.2    Each request for Alterations consent must contain one (1) full size hard copy of all drawings together with one (1) full set of drawings on CD.

8.3.3    In any instance where Tenant desires to conduct Alterations, Tenant's contractors, laborers, material men and others furnishing labor or materials for Tenant's job shall not unreasonably interfere with any labor utilized by Landlord, Landlord's contractors or mechanics or by any other tenant or such other tenant's contractors or mechanics; and if at any time such entry by one (1) or more persons furnishing labor or materials for Tenant's work shall result in unreasonable interference, Tenant shall cause the activity(ies) that is/are causing such unreasonable interference to cease immediately. Landlord shall have the right to remove or cause Tenant to remove any such persons from the Building upon written notice to Tenant. Additionally, all of Tenant's contractors, laborers, material men and others must obtain (and provide Landlord evidence of) commercially reasonable insurance (naming Landlord as an additional insured), prior to any such entry.

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8.4Removal of Tenant's Personal Property. Tenant agrees that, upon the expiration or earlier termination of this Lease, Tenant shall at Tenant's sole cost and expense, promptly remove all of Tenant's Personal Property, and shall restore those portions of the Building and/or the Tenant Space damaged by such removal of (or by the initial installation of) such Tenant's Personal Property to their condition existing immediately prior to the installation or placement of such items (including, without limitation, the replacement of all damaged floor tiles in the Premises), ordinary wear and tear excepted. If Tenant fails to promptly remove any such Tenant's Personal Property pursuant to this Section 8.4, Landlord shall have the right to cause the removal of such Tenant's Personal Property and the restoration of those portions of the Building and/or the Tenant Space damaged by such removal to their condition existing immediately prior to the installation or placement of such Tenant's Personal Property, ordinary wear and tear excepted, in which case Tenant agrees to reimburse Landlord within thirty (30) days of Landlord's demand therefor, for all of Landlord's costs of removal and restoration plus an administrative fee equal to [*****] of such costs.

8.5Depreciation. Notwithstanding the ownership of the Alterations and the Infrastructure, Tenant retains the right to depreciation deductions of (a) all Alterations and (b) all equipment comprising the Infrastructure that Tenant replaces as part of Tenant's Repair Obligations, made at Tenant's expense, provided that Tenant agrees that such right to depreciation deductions shall not apply to the extent of any expenditures made by Tenant to replace equipment comprising the Infrastructure which are subsequently reimbursed to Tenant pursuant to Section 8.2.3 above.

9. CASUALTY EVENTS; TAKINGS; INSURANCE.

9.1Casualty Events; Takings.

9.1.1Casualty Events. If, during the Term of this Lease, any portion of the Building and/or the Property shall be damaged or destroyed, in whole or in part, by a Casualty Event, (a) Landlord shall, subject to the terms of this Section 9.1.1, and Sections 9.1.1.1 and 9.1.1.2, below, cause any applicable Casualty Repair - Landlord to commence as soon as is reasonably practicable following the Casualty Event and to proceed to completion with reasonable diligence; and (b) Tenant shall, subject to the terms of this Section 9.1.1, and Sections 9.1.1.1 and 9.1.1.2, below, cause any applicable Casualty Repair - Tenant to occur. Landlord shall provide the Casualty Repair Notice to Tenant as soon as is reasonably practicable following the Casualty Event. For the avoidance of doubt, however, such repair and reconstruction obligation shall not be deemed to include any obligation on the part of Landlord with regard to any Alteration, nor any of Tenant's Personal Property, nor any equipment that is included within Tenant's Repair Obligations.

9.1.1.1    Landlord's Termination Right. Notwithstanding the foregoing, in the event of an Insurable Casualty Event, if (a) any portion of the Base Building Systems and/or the Building reasonably considered by landlords of high quality class A datacenter buildings comparable to the Building to be material to the operation of the Building is/are destroyed or materially damaged, and (b) the Repair Period-Estimated exceeds [*****], Landlord shall have the right to terminate this Lease by, and effective upon, written notice to Tenant as part of the Casualty Repair Notice given within [*****] after the date of such damage or destruction, provided that no termination by Landlord shall be effective unless Landlord has previously or simultaneously terminated the leases of all other tenants and occupants of the Building that are similarly affected by such damage or destruction. Further notwithstanding the foregoing, in the event of an Uninsurable Casualty Event, if more than [*****] of the Building is destroyed or materially damaged, then Landlord shall have the right to terminate this Lease by, and effective upon, written notice to Tenant as part of the Casualty Repair Notice given within [*****] after the date of such damage or destruction, provided that no termination by Landlord shall be effective unless Landlord has previously or simultaneously terminated the leases of all other tenants and occupants of the Building that are similarly affected by such damage or destruction. If this Lease is terminated pursuant to this Section 9.1.1.1 or Sections 9.1.1.2 or 9.1.1.3 below, Landlord shall grant to Tenant a license, expiring [*****] after the effective date of such termination, allowing Tenant the right to access the Building and the Tenant Space for the purpose of removing Tenant's Personal Property.

9.1.1.2    Tenant's Termination Right. Notwithstanding anything to the contrary contained herein, if a Casualty Event causes damage to: (a) the Tenant Space; (b) any critical electrical and/or mechanical infrastructure comprising the Base Building Systems and serving the Tenant Space and/or (c) any other portion of the Property outside of the Tenant Space the result of which is material impairment to access to and/or use of the Tenant Space, then Tenant shall have the right to terminate this Lease by, and effective upon, written notice to Landlord if: (1) the Repair Period-Estimated exceeds [*****] (in which case Tenant must provide written notice to Landlord of such termination within [*****] after Tenant's receipt of the Casualty Repair Notice), or (2) the Repair Period-Actual exceeds [*****] (in which case Tenant must provide written notice to Landlord of such termination prior to the [*****] of the Repair Period-Actual). Further notwithstanding anything to the contrary contained herein, in the event an: (x) Insurable Casualty Event damages and/or destroys: (i) any portion of the Infrastructure for a particular Tenant Space, the result of which is material impairment of Tenant's use of such Tenant Space for the Permitted Use, and such damage

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and/or destruction cannot reasonably be fully repaired and/or restored within [*****] after the occurrence of such damage and/or destruction; or (ii) a Tenant Space during the last year of the Datacenter Period for such Tenant Space and the cost of repair and/or restoration work to the Infrastructure that would be required to be performed by Tenant as a result of such damage and/or destruction is reasonably estimated to exceed [*****] of the replacement cost of all Infrastructure for the damaged Tenant Space; or (y) Uninsurable Casualty Event damages and/or destroys a particular Tenant Space and the cost of repair and/or restoration work to the Infrastructure that would be required to be performed by Tenant as a result of such damage and/or destruction is reasonably estimated to exceed [*****] of the replacement cost of all Infrastructure for the damaged Tenant Space, then Tenant shall have the right to terminate this Lease with respect to such Tenant Space by, and effective upon, written notice to Landlord given within [*****] after the date of such damage or destruction.

9.1.1.3    Casualty-Complete. The foregoing notwithstanding, in the event of a Casualty-Complete, this Lease shall automatically terminate as of the date of the Casualty-Complete.

9.1.1.4    Remedies - Casualty Events. In the event that this Lease is terminated pursuant to Sections 9.1.1.1, 9.1.1.2 or 9.1.1.3, above, Landlord shall refund to Tenant any prepaid Base Rent, less any sum then owing to Landlord by Tenant, and, if the Casualty Event is an Insurable Casualty Event, Tenant shall promptly provide Landlord an amount (i.e., not limited to available insurance proceeds) equal to the replacement value of all equipment that is the subject of Tenant's Repair Obligations and that is damaged or destroyed in connection with such Insurable Casualty Event. If, however, this Lease is not terminated pursuant to any of said Sections, Base Rent shall be abated proportionately during the Repair Period-Actual to the extent that: (a) (i) the Tenant Space is inaccessible by Tenant and/or (ii) damage to the Base Building elements of the Tenant Space render the Tenant Space unfit for use by Tenant in the ordinary conduct of Tenant's business; and (b) the Tenant Space actually is not used by Tenant. For the avoidance of doubt, however, in the event that a Casualty Event only damages one of the Tenant Spaces, the proportionate abatement of Base Rent shall only be provided as it relates to the damaged Tenant Space, regardless of the extent to which, if at all, the Tenant Spaces are then being operated jointly.

9.1.2Takings.

9.1.2.1    Total Taking. If all or substantially all of the Tenant Space, the Building or the Property shall be the subject of a Taking, this Lease shall terminate as of the date of the vesting of title in the condemning authority.

9.1.2.2    Partial Taking. If only a part of the Tenant Space, the Building or the Property shall be the subject of a Taking, this Lease shall continue in full force and effect, subject to the terms of Sections 9.1.2.3-9.1.2.7, below.

9.1.2.3    Landlord's Termination Right - Partial Taking. If the part of the Building or the Property that is taken or condemned as part of the Taking contains a part of the Tenant Space, the Building or the Property that, in Landlord's reasonable discretion, is material to Landlord's ability to provide services to, or otherwise satisfy Landlord's obligations with respect to, the Tenant Space as provided for herein, Landlord may terminate this Lease by notice to Tenant given within [*****] following the date upon which Landlord received notice of such Taking. If Landlord so notifies Tenant, this Lease shall terminate upon the date set forth in the notice, which date shall not be more than [*****] following the giving of such notice.

9.1.2.4    Tenant's Termination Right - Partial Taking. If: (a) the part of the Building or the Property that is taken or condemned as part of the Taking contains greater than [*****] of the total area of the Tenant Space that existed immediately prior to such Taking; (b) by reason of such Taking, Tenant no longer has reasonable means of access to the Tenant Space; (c) any electrical and/or mechanical infrastructure comprising the Base Building Systems and serving the Tenant Space and/or any portion of the Infrastructure located outside the Tenant Space that is/are material to the operation of the Tenant Space for the Permitted Use is/are taken or condemned as part of the Taking; or (d) all or any portion of the Datacenter-A UPS Rooms, the Mechanical Yard Space (A), the Datacenter-B UPS Rooms and/or the Mechanical Yard Space (B), that is/are material to the operation of the Tenant Space for the Permitted Use is/are taken or condemned as part of the Taking, then Tenant may terminate this Lease by notice to Landlord given within [*****] following the date upon which Tenant received notice of such Taking. If Tenant so notifies Landlord, this Lease shall terminate upon the date set forth in the notice, which date shall not be more than [*****] following the giving of such notice.

9.1.2.5    Restoration - Taking. If this Lease shall not have been terminated pursuant to Sections 9.1.2.3 or 9.1.2.4, above, Landlord, at Landlord's expense, shall commence as soon as is reasonably practicable following the Taking, and proceed to completion with reasonable diligence, the repair and/or restoration of those Base-Building elements of the Tenant Space that were not taken or condemned as part of the Taking to self‑contained rental units substantially equivalent (with respect to character, quality and appearance) to that which existed immediately prior to occurrence of the Taking, excluding Tenant's Personal Property, Tenant's Repair Obligations and Tenant's Alterations. If all or any portion of the Common Area is taken, then Landlord

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shall promptly restore any Common Area elements that are reasonably material to Tenant's use of, and/or access to, the Tenant Space for the Permitted Use (e.g., loading docks or public restrooms) or furnish substitute facilities that are functionally equivalent to or better than, and within a reasonable distance from, any such Common Area elements that were taken.

9.1.2.6    Base Rent Abatement - Taking. In the event that this Lease is terminated pursuant to Sections 9.1.2.1, 9.1.2.3 or 9.1.2.4, above, Landlord shall refund to Tenant any prepaid Base Rent, less any sum then owing to Landlord by Tenant. If, however, this Lease is not terminated pursuant to any of said Sections, Base Rent related to the taken Tenant Space shall be reduced proportionately to the extent that the square footage of each such Tenant Space is reduced as a result of the Taking.

9.1.2.7    Taking Award Rights. Landlord reserves the right to receive the entirety of the condemning authority's award related to a Taking of any portion of the Property. The foregoing notwithstanding, in the event that this Lease is terminated in connection with any Taking, nothing contained herein shall prevent or preclude Tenant from making a separate claim against the condemning authority, in any appropriate proceeding, for the value of Tenant's unamortized, but taken, leasehold improvements or other improvements to the Tenant Space made by Tenant and for Tenant's moving expenses related to such Taking, but only if such claim and/or recovery does not reduce the condemnation/taking award otherwise payable to Landlord in connection with such Taking. If any such award that is made, or compensation that is paid, to either party specifically includes an award or amount for the other, the party first receiving the same shall promptly make an accounting of same to the other.

9.1.3Tenant's Remedy. Tenant's termination rights and rights to Base Rent abatement, to the extent provided above in this Article 9, shall be Tenant's sole and exclusive remedies in the event of a Casualty Event or Taking. Notwithstanding anything to the contrary contained herein, however, if any Casualty Event is caused by any grossly negligent act or omission or act of willful misconduct of Tenant or any Tenant Party, then Tenant shall not be entitled to terminate this Lease under Section 9.1.1.2, and there shall be no abatement of any Base Rent (or any other Rent or other amounts) due hereunder.

9.2Tenant's Insurance. Tenant shall, at Tenant's expense, procure and maintain throughout the Term of this Lease a policy or policies of insurance in accordance with the terms and requirements set forth in Exhibit “B-1” to this Lease. All of Tenant's insurance policies with respect to the Tenant Space shall be endorsed so as to include a waiver of subrogation in accordance with and to the full extent of Tenant's waiver of claims with respect to the Landlord Group set forth in Section 14.1.1 of this Lease.

9.2.1    The commercial liability policies procured by Tenant hereunder shall name Landlord and Landlord's managing agent, and any Holders designated by Landlord as additional insureds. The property (special peril) policies procured by Tenant hereunder to insure the Infrastructure shall name Landlord and any Holders designated by Landlord as additional insureds with regard to the Infrastructure coverage only. Prior to occupying the Tenant Space, and prior to the expiration of each such policy, Tenant shall submit to Landlord certificates of insurance evidencing such policies (and the applicable renewals thereof) being in effect. All insurance policies procured hereunder shall contain a provision stating that the insurer shall endeavor to provide at least thirty (30) days' written notice to Landlord and all others named as additional insureds prior to any cancellation of such policy. If Tenant does not deliver to Landlord a certificate or other proof of renewal or coverage from an insurance carrier at least fifteen (15) days prior to the expiration dates of each expiring policy, Landlord may obtain such insurance on behalf of Tenant, and Tenant shall, within thirty (30) days after Landlord's written demand therefor, pay to Landlord an amount equal to the cost of such insurance policies plus an administrative surcharge of [*****].

9.3Landlord's Insurance. Landlord shall, at Landlord's expense, procure and maintain throughout the Term of this Lease a policy or policies of insurance in accordance with the terms and requirements set forth in Exhibit “B-2” to this Lease. Each of such insurance policies shall be endorsed so as to include a waiver of subrogation in accordance with and to the full extent of Landlord's waiver of claims with respect to the Tenant Group set forth in Section 14.1.2 of this Lease. For the avoidance of doubt, however, Landlord and Tenant acknowledge and agree that, in no event, shall Landlord be obligated to carry any insurance covering any of Tenant's Personal Property, any Alteration to the Tenant Space made by or on behalf of Tenant, any of Tenant's Repair Obligations, or covering any Tenant Party.

10.TRANSFERS.

10.1Restrictions on Transfers; Landlord's Consent. Except as otherwise expressly set forth in Section 10.1.1 and Section 10.5, below, to the contrary, Tenant shall not effect a Transfer, without Landlord's express prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Except as otherwise expressly set forth in this Lease, no Transfer (whether voluntary, involuntary or by operation of law) shall be valid or effective without Landlord's prior written consent.

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10.1.1Permitted Transfer. Notwithstanding anything to the contrary in this Lease, Tenant may, without the consent of Landlord (and without being subject to Landlord's recapture rights under Section 10.3, below) undertake Permitted Transfers.

10.2Notice to Landlord. If Tenant desires to make any Transfer (other than a Permitted Transfer, for which Tenant must merely notify Landlord prior to the occurrence of same), then at least [*****] (but no more than one hundred eighty (180) days) prior to the proposed effective date of the Transfer, Tenant shall submit a Transfer Notice to Landlord. If, thereafter, Tenant modifies any of the terms and conditions relevant to a proposed Transfer specified in the Transfer Notice, Tenant agrees to re-submit such Transfer Notice to Landlord for its consent pursuant to all of the terms and conditions of this Article 10.

10.3Landlord's Recapture Rights. Except with regard to a Permitted Transfer, in the event of (a) a proposed Transfer during the final year of the Term or (b) a proposed sublease of more than [*****] of the total number of rentable square feet in the Suites, Landlord shall have the right (but not the obligation), exercisable by written notice to Tenant at any time within [*****] after Landlord's receipt of all (but not less than all) of the information and documents described in Section 10.2, to elect to cancel and terminate this Lease. Notwithstanding the foregoing, if Landlord sends Tenant a termination notice pursuant to the immediately preceding sentence, then Tenant shall have the right, for a period of [*****] after receipt of such notice, to withdraw (by written notice to Landlord) the applicable Transfer Notice, thereby rendering Landlord's termination right set forth in this Section 10.3 null and void and of no further force or effect with regard to such Transfer Notice.

10.4No Release; Subsequent Transfers. No Transfer (whether or not a Permitted Transfer) will release the undersigned Tenant from Tenant's obligations under this Lease or alter the primary liability of the undersigned Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. In no event shall the acceptance of any payment by Landlord from any other person be deemed to be a waiver by Landlord of any provision hereof. Consent by Landlord to one Transfer will not be deemed consent to any subsequent Transfer. In the event of breach by any Transferee in the performance of any of the terms hereof, Landlord may proceed directly against the undersigned Tenant without the necessity of exhausting remedies against such Transferee. Notwithstanding anything to the contrary contained herein, in the event of an assignment of this Lease effectuated pursuant to and in accordance with the terms and provisions of this Article 10, if Tenant's assignee or any subsequent assignee has, at the time of the assignment, a market capitalization of at least [*****], determined as of the end of the most recent fiscal year of such assignee prior to such intended release (unless more current figures are available), then Tenant shall be released and discharged from any further liability under this Lease. The provisions of the foregoing sentence shall not apply where the Transfer in question is a Permitted Transfer.

10.5Colocation. Landlord acknowledges that the business to be conducted by the undersigned Tenant in the Premises may include Tenant entering into Colocation Agreements that will permit Colocation Parties to engage in Colocation Activities. Landlord expressly agrees that Tenant may, without the need for Landlord's consent, enter into such Colocation Agreements; provided, however, that (a) the Colocation Agreements, and each Colocation Party's use of the Tenant Space, must comply with the terms of this Lease (including the Building Rules and Regulations) and all Applicable Laws; (b) the Colocation Agreements, and the Colocation Parties' rights thereunder, shall be subject and subordinate at all times to this Lease and all of its provisions, covenants and conditions; and (c) in no event may the rights of any Colocation Party, vis a vis the members of the Landlord Group, be greater than the rights of Tenant hereunder. Anything to the contrary contained herein notwithstanding, Landlord and Tenant acknowledge and agree that the Colocation Agreements shall not constitute, or be deemed to be: (x) the grant of a leasehold interest, or otherwise constitute, or be deemed to be, a real property interest; or (y) an assignment of this Lease or a sublet of the Tenant Space, or any portion thereof, or otherwise constitute, or be deemed to be, a Transfer. Furthermore, for avoidance of doubt, the Colocation Activities and Colocation Agreements shall not be subject to the terms and provisions of Section 10.3 above or 10.6 below.

10.6Excess Rent. Landlord and Tenant agree that, if Tenant assigns this Lease, or subleases any part of the Tenant Space, for any Excess Rent, then Tenant shall pay to Landlord, as Additional Rent, [*****] of any such Excess Rent immediately upon Tenant's receipt thereof.

11.ESTOPPEL CERTIFICATES. At any time and from time to time, within [*****] after written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement in writing certifying, to Tenant's actual knowledge without duty of inquiry, matters relating to this Lease customarily and reasonably requested by Landlord and/or any prospective purchaser of the Building and/or the Property and/or any Holder. Tenant acknowledges and agrees that any statement delivered (or to be delivered) pursuant to this Article 11 may be relied upon by Landlord and any prospective purchaser of the Building and/or the Property and by any current and/or prospective Holder, and any assignee of any such Holder.

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12.SUBORDINATION AND ATTORNMENT; HOLDER RIGHTS.

12.1Subordination and Attornment. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any Holder, this Lease will, subject to the terms and provisions of this Article 12, be subject and subordinate at all times to all Security Documents, which may now exist or hereafter be executed which constitute a lien upon or affect the Property or any portion thereof, or Landlord's interest and estate in any of said items. Notwithstanding the foregoing, Landlord reserves the right to subordinate (or cause the subordination of) any such Security Documents to this Lease. In the event of any termination or transfer of Landlord's estate or interest in the Property, the Building or the Tenant Space by reason of any Foreclosure of any such Security Documents (and notwithstanding any subordination of such Security Document to this Lease that may or may not have occurred), Tenant agrees to attorn to and become the tenant of any successor-in-interest to Landlord, provided that Tenant's right to possession of the Tenant Space pursuant to and in accordance with the terms and provisions of this Lease, shall not be disturbed as long as Tenant is not in default under this Lease beyond any applicable notice, grace and/or cure periods. Tenant covenants and agrees to execute and deliver a commercially reasonable SNDA within [*****] after mutual agreement by Tenant, Landlord and the applicable Holder on the form thereof.

12.2Intentionally Omitted.

12.3SNDA. At any time that the Building is hereafter made subject to the lien(s) of any Security Document(s), Landlord shall use commercially reasonable, good-faith efforts to cause the Holder to execute and deliver an SNDA to Tenant. Notwithstanding anything herein to the contrary, the subordination of this Lease to any Security Document hereafter placed upon the Building, and Tenant's agreement to attorn to the Holder as provided in this Article 12, shall be conditioned upon the Holder and Landlord entering into an SNDA with Tenant. [*****].

13.SURRENDER OF TENANT SPACE; HOLDING OVER.

13.1Tenant's Method of Surrender. Upon the expiration of the Term of this Lease, or upon any earlier termination of this Lease or the termination of Tenant's right to possess the Tenant Space, Tenant shall, subject to the provisions of this Article 13 and Sections 8.3.1, 8.4 and Article 9 above, quit and surrender possession of the Tenant Space to Landlord in good working order and clean condition (including all of Tenant's Repair Obligations being met), ordinary wear and tear excepted.

13.2Disposal of Tenant's Personal Property. Subject to the terms and provisions of Section 9.1.1.1 above, if any property not belonging to Landlord remains in the Tenant Space after the expiration of, or within thirty (30) days after any earlier termination of, the Term of this Lease or the termination of Tenant's right to possess the Tenant Space, Tenant shall be deemed to have abandoned such property and to have authorized Landlord to make such disposition of such property as Landlord may desire without liability for compensation or damages to Tenant or any other Tenant Party.

13.3Holding Over. If Tenant should remain in possession of all or any portion of the Tenant Space after the expiration of the Term of this Lease (or any earlier termination of this Lease or the termination of Tenant's right to possess the Tenant Space), without the execution by Landlord and Tenant of a new lease or an extension of the Term of this Lease, then Tenant shall be deemed to be occupying the entire Tenant Space as a tenant-at-sufferance, upon all of the terms contained herein, except as to term and Base Rent. During any such holdover period, Tenant shall pay to Landlord a monthly Base Rent in an amount equal to [*****] of the Base Rent payable by Tenant to Landlord during the last month of the Term of this Lease and Additional Rent as set forth in the Lease. The monthly rent payable for such holdover period shall in no event be construed as a penalty or as liquidated damages for such retention of possession, nor shall such monthly rent be considered to be any form of Consequential Damages related to such retention of possession. Neither any provision hereof nor any acceptance by Landlord of any rent after any such expiration or earlier termination shall be deemed a consent to any holdover hereunder or result in a renewal of this Lease or an extension of the Term, or any waiver of any of Landlord's rights or remedies with respect to such holdover. As such, and notwithstanding any provision to the contrary contained herein, Landlord expressly reserves the right to require Tenant to surrender possession of the Tenant Space upon the expiration of the Term of this Lease or upon the earlier termination hereof or at any time during any holdover and the right to assert any remedy at law or in equity to evict Tenant and collect damages in connection with any such holdover.

13.4Survival. The provisions of this Article 13 shall survive the expiration or early termination of this Lease.

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14.WAIVERS; INDEMNIFICATION; CONSEQUENTIAL DAMAGES; LIENS.

14.1Waivers.

1.Tenant hereby waives its rights against the Landlord Group with respect to any claims or damages or losses for damage to any Tenant's Personal Property and to items, equipment and/or materials that are included within Tenant's Repair Obligations, which are caused by or result from (i) risks insured against under any insurance policies which are required to be obtained and maintained by Tenant under this Lease, and were, in fact, carried by Tenant at the time of such claim, damage, loss or injury, or (ii) risks which would have been covered under any insurance required to be obtained and maintained by Tenant under this Lease had such insurance been obtained and maintained as required, including all such claims, damages and losses, which are caused by or result from the negligence or willful misconduct of any member of the Landlord Group. The foregoing waivers shall be in addition to, and not a limitation of, any other waivers or releases contained in this Lease.

2.Landlord hereby waives its rights against the Tenant Group with respect to any claims or damages or losses for damage to the Base Building, the Property and/or any of Landlord's equipment and fixtures that are not part of Tenant's Repair Obligations, which are caused by or result from (i) risks insured against under any insurance policies which are required to be obtained and maintained by Landlord under this Lease and that were, in fact, carried by Landlord at the time of such claim, damage, loss or injury, or (ii) risks which would have been covered under any insurance required to be obtained and maintained by Landlord under this Lease had such insurance been obtained and maintained as required, including all such claims, damages and losses, which are caused by or result from the negligence or willful misconduct of any member of the Tenant Group. The foregoing waivers shall be in addition to, and not a limitation of, any other waivers or releases contained in this Lease. However, the foregoing waivers shall apply with regard to claims, damages and/or losses, which are caused by, or during, or arise as a result of, the Re-Commissioning and/or are caused by any Tenant Party in connection with the same, only to the extent that such claims, damages and/or losses exceed the amounts of the limits required for Tenant's commercial liability insurance, as set forth in Exhibit “B-1”, attached hereto.

14.2Indemnification.

14.2.1    Subject to the terms and provisions of Section 14.2.2 below, Tenant hereby agrees to indemnify, defend, and hold harmless Landlord and the other members of the Landlord Group from and against (and to reimburse Landlord and the other members of the Landlord Group for) any and all Claims arising from and/or in connection with:

(i)    the use or occupancy of the Tenant Space by Tenant or any other Tenant Party and/or any person claiming by, through or under Tenant or any other Tenant Party, including, without limitation:

(a)    Claims related to any Colocation Agreement;

(b)    the acts or omissions of any Colocation Party;

(c)    the payment (or non-payment) of Taxes - Equipment;

(d)    Intentionally Omitted;

(e)    Claims related to any of Tenant's Personal Property;

(f)    Claims by any Tenant Party (or any individual accessing the Tenant Space on any Tenant Party's behalf) for bodily injury;

(g)    Tenant's failure to surrender the Tenant Space upon the expiration or any earlier termination of this Lease or the termination of Tenant's right to possess the Tenant Space in accordance with the terms of this Lease;

(h)    the removal, exercise of dominion over and/or disposition of any of Tenant's Personal Property that is left in the Tenant Space after the expiration of the Term of this Lease in violation of Section 13.2; and

(i)    Claims related to the performance of any Re-Commissioning of any Suite; and

(ii)    the gross negligence or willful misconduct of Tenant or any other Tenant Party with respect

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to any other portion of the Building or the Property; and

(iii)    any person or entity, other than the Tenant's Broker listed in Item 13 of the Basic Lease Information, making a claim for any commission or other compensation in connection with the execution of this Lease or the leasing of the Tenant Space to Tenant if based on an allegation that such claimant represented Tenant.

14.2.2    The foregoing Section 14.2.1 notwithstanding, Tenant shall not be required to indemnify Landlord or any other member of the Landlord Group to the extent that the relevant Claims were caused by the gross negligence or willful misconduct of any member of the Landlord Group.

14.2.3    In the event that any action or proceeding is brought against Landlord or any other member of the Landlord Group by reason of any indemnified Claim, Tenant, upon notice from Landlord, shall defend such action or proceeding at Tenant's cost and expense by counsel reasonably approved by Landlord. Tenant agrees that no settlement offer shall be offered or accepted by Tenant in connection with any such indemnification and/or defense without Landlord's prior written consent, which shall not be unreasonably withheld, conditioned or delayed. This indemnity provision and Tenant's obligations under this Section 14.2 shall survive the expiration or termination of this Lease as to any matters arising prior to such expiration or termination or prior to Tenant's vacation of the Tenant Space and the Building. Notwithstanding any provision to the contrary contained in this Section 14.2, nothing contained in this Section 14.2 shall be interpreted or used in any way to affect, limit, reduce or abrogate any insurance coverage provided by any insurer to either Tenant or Landlord.

14.2.4    Subject to the terms and provisions of Section 14.2.5 below, Landlord hereby agrees to indemnify, defend, and hold harmless Tenant and the other members of the Tenant Group from and against (and to reimburse Tenant and the Tenant Group for) any and all Claims arising from and/or in connection with: (i) the negligent acts or acts of willful misconduct in connection with the use and operation of any portion of the Building and the Property other than the Tenant Space by Landlord or any member of the Landlord Group; (ii) the gross negligence or willful misconduct of Landlord or any member of the Landlord Group with respect to the Tenant Space; and (iii) any person or entity, other than the Landlord's Broker listed in Item 13 of the Basic Lease Information, making a claim for any commission or other compensation in connection with the execution of this Lease or the leasing of the Tenant Space to Tenant if based on an allegation that such claimant represented Landlord.

14.2.5    The foregoing Section 14.2.4 notwithstanding, Landlord shall not be required to indemnify Tenant or any member of the Tenant Group to the extent that the relevant Claims were caused by the gross negligence or willful misconduct of Tenant or any Tenant Party.

14.2.6    In the event that any action or proceeding is brought against Tenant or any other member of the Tenant Group by reason of any indemnified Claim, Landlord, upon notice from Tenant, shall defend such action or proceeding at Landlord's cost and expense by counsel reasonably approved by Tenant. Landlord agrees that no settlement offer shall be offered or accepted by Landlord in connection with any such indemnification and/or defense without Tenant's prior written consent, which shall not be unreasonably withheld, conditioned or delayed. This indemnity provision and Landlord's obligations under this Section 14.2 shall survive the expiration or termination of this Lease as to any matters arising prior to such expiration or termination or prior to Tenant's vacation of the Tenant Space and the Building. Notwithstanding any provision to the contrary contained in this Section 14.2, nothing contained in this Section 14.2 shall be interpreted or used in any way to affect, limit, reduce or abrogate any insurance coverage provided by any insurer to either Tenant or Landlord.

14.3    Consequential Damages. Notwithstanding anything to the contrary (express or implied) contained herein, under no circumstances whatsoever shall Landlord [*****] ever be liable under this Lease for first-party or third-party Consequential Damages.

14.4    Liens. Notwithstanding anything to the contrary herein, in no event shall Tenant have any right (express or implied) to create or permit there to be established any lien or encumbrance of any nature against the Tenant Space, the Building or the Property or against Landlord's or Tenant's interest therein or hereunder, including, without limitation, for any improvement or improvements by Tenant, and Tenant shall fully pay the cost of any improvement or improvements made or contracted for by Tenant. Tenant shall require each contractor which it engages to perform any improvements or alterations within the Tenant Space or elsewhere in the Building or the Property, to acknowledge and agree in writing that it is performing its work under its agreement with Tenant solely for the benefit of Tenant and that Tenant is not acting as Landlord's agent. Any mechanic's lien filed against the Tenant Space, the Building or the Property, or any portion of any of the above, for work claimed to have been done, or materials claimed to have been furnished to Tenant, shall be duly discharged by Tenant within thirty (30) days after the filing of the lien. Notwithstanding the foregoing, Tenant shall have the right, in good faith and at its own expense, to contest or protest any claim

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relating to any such mechanic's lien. If any such mechanic's lien is filed against the Tenant Space, Tenant shall, within [*****] after the filing of such lien, bond over such lien. In the event of any contest or protest of such lien by Tenant within [*****] after the filing of such lien together with the timely bonding over of such lien, Landlord shall not pay the claimant or discharge the lien on Tenant's account, and shall have no right to seek reimbursement of such payments if it does.

14.4.1    Collateral Access Agreement. Section 14.4, above, notwithstanding, Landlord acknowledges that Tenant will, in all likelihood, finance all or a portion of Tenant's Personal Property. Landlord further acknowledges that Tenant's lender(s) for such financing will, in all likelihood, desire to enter into a “collateral access agreement”, to enable such lender(s) to access and/or remove the financed items of Tenant's Personal Property in connection with such financing. As such, Landlord does hereby agree to work diligently and in good faith with Tenant and Tenant's lender(s), following the Effective Date, to settle on, execute and deliver a mutually acceptable commercially reasonable form of collateral access agreement related to such financing of Tenant's Personal Property.

15.TENANT DEFAULT.

15.1Events of Default By Tenant. Each of the following shall constitute an Event of Default by Tenant under this Lease:

15.1.1Any failure or refusal by Tenant to timely pay any Rent or any other payments or charges required to be paid hereunder, or any portion thereof, within five (5) days of notice that the same is due.

15.1.2Any failure by Tenant to perform or observe any other covenant or condition of this Lease (including, without limitation, those contained in the Building Rules and Regulations) to be performed or observed by Tenant (other than those described in Section 15.1.1, above or Sections 15.1.3, 15.1.4, or 15.1.5, below) if such failure continues for a period of [*****] following written notice to Tenant of such failure; provided, however, that in the event Tenant's failure to perform or observe any covenant or condition of this Lease to be performed or observed by Tenant cannot reasonably be cured within [*****] following written notice to Tenant, Tenant shall not be in default if Tenant commences to cure same within such [*****] period and thereafter diligently prosecutes the curing thereof to completion.

15.1.2.1    Event of Default-ECT Overage. Section 15.1.2, above, notwithstanding, it shall be an Event of Default by Tenant (i) if Tenant fails to remedy* an ECT Overage within [*****] after its receipt of an ECT Default Notice, and/or (ii) if [*****] Separate/Independent ECT Overages occur in any rolling [*****] period. As used herein, the term “Separate/Independent ECT Overages” shall mean and refer to ECT Overages that occur from separate and unrelated root causes, each of which continues for [*****] or more consecutive hours after Tenant's receipt of an ECT Default Notice.

*In connection with this Section 15.1.2.1, the term “remedy” shall mean and refer to a meaningful and relatively permanent remedy of the condition causing the ECT Overage.

15.1.3The filing or execution or occurrence of any one of the following: (i) a petition in bankruptcy or other insolvency proceeding by or against Tenant, (ii) a petition or answer seeking relief under any provision of the Bankruptcy Act, (iii) an assignment for the benefit of creditors, or (iv) a petition or other proceeding by or against Tenant for the appointment of a trustee, receiver or liquidator of Tenant or any of Tenant's property, (v) a proceeding by any governmental authority for the dissolution or liquidation of Tenant.

15.1.4Any failure by Tenant to execute and deliver any statement or document described in Article 11, Section 12.1 or Section 17.21 requested to be so executed and delivered by Landlord within the time periods specified in such Article or Section, where such failure continues for [*****] after delivery of written notice of such failure by Landlord to Tenant.

15.1.5Intentionally Omitted.

The parties hereto acknowledge and agree that all of the notice periods provided in this Section 15.1 are in lieu of, and not in addition to, the notice requirements of any Applicable Laws.

15.2Remedies. Upon the occurrence of any Event of Default by Tenant, Landlord shall, in addition to an action for money damages, specific performance and/or injunctive relief, have the option to pursue any one or more of the remedies described in Section 1 of Exhibit “D” attached hereto and incorporated herein by this reference, each and all of which shall, subject to applicable law, be cumulative and nonexclusive.

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15.3Tenant's Liability. Notwithstanding anything to the contrary contained in the Lease Documents, it is expressly understood and agreed by and between the parties to this Lease that no personal liability or personal responsibility of any sort with respect to any of Tenant's Lease Undertakings, or any alleged breach thereof, is assumed by, or shall at any time be asserted or enforceable against, any member of the Tenant Group other than Tenant and Guarantor.

16.LANDLORD'S LIABILITY.

16.1Landlord Default; Tenant's Remedies.

1.Landlord Default. It shall constitute a Landlord Default if: (a) Landlord shall fail to perform or observe any of Landlord's Lease Undertakings, and (b) such failure continues for a period of [*****] following written notice to Landlord of such failure; provided, however, that in the event that Landlord's failure to perform or observe any of Landlord's Lease Undertakings cannot reasonably be cured within [*****] following written notice to Landlord, such failure to cure shall not be a Landlord Default if Landlord commences its cure within such [*****] period and thereafter diligently prosecutes the curing thereof to completion (a “Landlord Default”). Notwithstanding the foregoing, Tenant shall be required to provide Landlord with neither notice nor the opportunity to cure in order to exercise any of the remedies of Tenant set forth under: (x) Section 2.2.2 related to a failure of Landlord to timely cause the Commencement Date Conditions to be completed; and (y) Section 7.3.1 above regarding Essential Service Failures, except for the extent to which, if at all, notice and/or the opportunity to cure are expressly provided under such sections.

2.Tenant's Remedies. Except as otherwise expressly provided herein, (a) in the event of any Landlord Default, Tenant's sole and exclusive remedies for any such failure shall be an action for money damages, specific performance, injunctive relief and/or the right to terminate this Lease, and (b) in no event shall Tenant's obligation to pay Base Rent or other charges under this Lease abate based upon any default by Landlord of Landlord's Lease Undertakings.

3.[*****].

4.Payments Due from Landlord. If Landlord (a) fails to pay to Tenant [*****] within [*****] after Landlord's receipt of an invoice therefor, or (b) fails to pay any other amount due to Tenant under this Lease (including, but not limited to, a final, non-appealable money judgment against Landlord) within [*****] after Tenant gives Landlord written notice of such past due amount (or, in the case of the final, non-appealable money judgment, within [*****] after the due date specified in such judgement), then in addition to all other rights and remedies that Tenant may have against Landlord (but without duplication in recovering the amounts due Tenant), Tenant shall be entitled to [*****].

16.2Landlord's Liability. In consideration of the benefits accruing under this Lease to Tenant, and notwithstanding anything to the contrary contained in the Lease Documents, it is expressly understood and agreed by and between the parties to this Lease that:

(i)    the collective recourse of Tenant and its successors and assigns against Landlord (and the liability of Landlord to Tenant, its successors and assigns) with respect to (a) any actual or alleged breach or breaches by or on the part of Landlord of any of Landlord's Lease Undertakings, and (b) any other matter relating to Tenant's occupancy of the Tenant Space, shall be limited, in the aggregate, solely to an amount equal to Landlord's Liability Cap;

(ii)    other than Landlord's Liability Cap, Tenant shall have no recourse against any other assets of Landlord;

(iii)    Tenant shall have no recourse against any assets of any member of the Landlord Group other than Landlord;

(iv)    except to the extent of Landlord's Liability Cap, no personal liability or personal responsibility of any sort with respect to any of Landlord's Lease Undertakings, or any alleged breach thereof, is assumed by, or shall at any time be asserted or enforceable against, Landlord; and

(v)    no personal liability or personal responsibility of any sort with respect to any of Landlord's Lease Undertakings, or any alleged breach thereof, is assumed by, or shall at any time be asserted or enforceable against, any member of the Landlord Group other than Landlord.

16.3Transfer of Landlord's Interest. Landlord (and each of Landlord's successors-in-interest) shall have the right,

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from time to time, to assign its interest and obligations, in writing and/or by operation of law, in and under this Lease to any third party to whom Landlord conveys its interest in the Property. Subject to the terms and provisions of the immediately succeeding sentence, once and if Landlord (and/or any successor to Landlord) shall convey its interest in the Property to a third party, (a) Landlord (and each such successor) shall be fully released from all of the obligations and liabilities of Landlord under the Lease Documents accruing on or after the date of such transfer of Landlord's interest in the Property to such third party, and (b) Tenant agrees to look solely to the successor-in-interest of Landlord for all such obligations and liabilities accruing on or after the date of such transfer, provided such third-party transferee assumes in writing all obligations of Landlord under the Lease Documents accruing on and after the date of such transfer. If any security has been given by Tenant to secure the faithful performance of any of the covenants of this Lease, Landlord shall transfer or deliver said security, as such, to Landlord's successor in interest and thereupon Landlord shall be discharged from any further liability with regard to said security. Without limiting the foregoing, upon acceptance of any Rent from Tenant, the transferee shall be deemed to have automatically and unconditionally assumed all obligations of Landlord under this Lease accruing on and after the date of such transfer, and Tenant shall be entitled to rely upon such assumption.

16.3.1    Status as a Real Estate Investment Trust. Landlord shall have the right, from time to time, to assign part of its interest and obligations in and under this Lease to a wholly owned subsidiary of Landlord (or a wholly owned subsidiary of Landlord's parent company), if and to the extent that Landlord determines such partial transfer is necessary or advisable in connection with the status of Landlord, or any other member of the Landlord Group, as a real estate investment trust, provided that no such assignment or other transfer set forth in this Section 16.3.1 shall release, or alter the primary liability of, the undersigned Landlord from, or to perform, Landlord's Lease Undertakings under the Lease Documents.

17.MISCELLANEOUS.

17.1Severability. If it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that any term or provision hereof is invalid or unenforceable, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect; and (ii) the invalid or unenforceable term or provision shall be replaced by a term or provision that is valid and enforceable and that comes closest to effectuating the intention of such invalid or unenforceable term or provision.

17.2No Waiver. No failure or delay by either party hereto to insist on the strict performance of any obligation, covenant, agreement, term or condition of this Lease, or to exercise any right or remedy available upon such non-performance, will constitute a waiver thereof, and no breach or failure by either party to perform will be waived, altered or modified, except by written instrument signed by the non-breaching party.

17.3Attorneys' Fees and Costs. If either Landlord or Tenant initiates any litigation, mediation, arbitration or other proceeding regarding the enforcement, construction or interpretation of this Lease, then the non-prevailing party shall pay the prevailing party's reasonable attorneys' fees and costs (including, without limitation, but only to the extent applicable, all expense reimbursements, expert witness fees, litigation costs, court or arbitration tribunal costs, filing fees, exhibit fees, forensic consultant fees, litigation support costs, the costs of appeals and attorneys' fees and costs incurred in connection with post-judgment collection and enforcement efforts). In addition, if it should otherwise be necessary or proper for Landlord to consult an attorney concerning this Lease for the review of instruments evidencing a proposed Transfer or for the purpose of collecting Rent, Tenant agrees to pay to Landlord its actual attorneys' fees whether suit be brought or not to the extent such fees exceed $500.00. The parties agree that this Section 17.3 shall survive the expiration or termination of this Lease.

17.4Waiver of Right to Jury Trial. TO THE FULLEST EXTENT PERMITTED BY LAW, LANDLORD AND TENANT EACH EXPRESSLY WAIVES ITS RIGHT TO TRIAL BY JURY IN ANY TRIAL HELD AS A RESULT OF A CLAIM ARISING OUT OF, IN CONNECTION WITH, OR IN ANY MANNER RELATED TO THIS LEASE IN WHICH LANDLORD AND TENANT ARE ADVERSE PARTIES. FOR THE AVOIDANCE OF DOUBT, THE FILING OF A CROSS-COMPLAINT BY ONE AGAINST THE OTHER IS SUFFICIENT TO MAKE THE PARTIES “ADVERSE.”

17.5Headings; Time; Survival. The headings of the Articles, Sections, Schedules and Exhibits of this Lease are for convenience only and do not define, limit or construe the contents thereof. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. In all instances where a party is required to pay any sum or do any act at a particular indicated time or within an indicated period, it is understood that time is of the essence. Except as expressly set forth herein, any obligations of a party accruing prior to the expiration or termination of this Lease shall survive the expiration or termination of this Lease, and such party shall promptly perform all such obligations whether or not this Lease has expired.

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17.6Notices. Any notice which may or shall be given under the provisions of this Lease shall be in writing and may be delivered by (i) hand delivery or personal service, (ii) a reputable overnight courier service which provides evidence of delivery, (iii) facsimile (so long as a confirming copy is forwarded by a reputable overnight courier service within twenty-four (24) hours thereafter), or (iv) e-mail (so long as a confirming copy is forwarded by a reputable overnight courier service within twenty-four (24) hours thereafter), if for Landlord, to the Building office and at the address specified in Item 11 of the Basic Lease Information, or if for Tenant, at the address specified in Item 3 of the Basic Lease Information and, in the event of notice by email, to Tenant's Emergency Contacts, or at such other addresses as either party may have theretofore specified by written notice delivered in accordance herewith. Such address may be changed from time to time by either party by giving notice as provided herein. Notice shall be deemed given, (a) when delivered (if delivered by hand or personal service), (b) if sent by a reputable overnight courier service, on the business day immediately following the business day on which it was sent, (c) the date the facsimile is transmitted (provided a confirming copy is forwarded by reputable overnight courier service within 24 hours thereafter), or (d) the date the e-mail is transmitted (provided a confirming copy is forwarded by reputable overnight courier service within 24 hours thereafter).

17.7Governing Law; Jurisdiction. This Lease shall be governed by, and construed in accordance with, the laws of the state in which the Property is located. In addition, Landlord and Tenant hereby submit to the local jurisdiction of the State in which the Property is located. Each party agrees that any action by the other against such party shall be instituted in the State in which the Property is located.

17.8Incorporation; Amendment; Merger. This Lease, along with any schedules, exhibits and attachments or other documents referred to herein, all of which are hereby incorporated into this Lease by this reference, constitutes the entire and exclusive agreement between Landlord and Tenant relating to the Tenant Space and the Property and each of the aforementioned documents may be altered, amended or revoked only by an instrument in writing signed by the party to be charged thereby. All prior or contemporaneous oral or written agreements, understandings and/or practices relative to the leasing or use of the Tenant Space and/or the Property are merged herein or revoked hereby.

17.9Brokers. Each party hereto represents to the other that the representing party has not engaged, dealt with or been represented by any broker in connection with this Lease other than the respective broker specified in Item 13 of the Basic Lease Information.

17.10Examination of Lease; Binding on Parties. Each of the parties hereto acknowledges that it has read and reviewed this Lease and that it has had the opportunity to confer with counsel in the negotiation of this Lease. Accordingly, this Lease shall be construed neither for nor against Landlord or Tenant, but shall be given a fair and reasonable interpretation in accordance with the meaning of its terms and the intent of the parties. This Lease shall not be binding or effective until each of the parties hereto has executed and delivered an original counterpart hereof to each other. No contractual or other rights shall exist between Landlord and Tenant with respect to the Tenant Space and/or the Property until both have executed and delivered this Lease, notwithstanding that Landlord has delivered to Tenant an unexecuted copy of this Lease. The submission of this Lease to Tenant shall not constitute the grant of an option for the Tenant to lease, or otherwise create any interest by Tenant in, the Tenant Space. The execution of this Lease by Tenant and return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has, in fact, executed and delivered this Lease to Tenant.

17.11Recordation. Neither Tenant nor any person or entity acting through, under or on behalf of Tenant shall record or cause the recordation of this Lease, a short form memorandum of this Lease or any reference to this Lease, provided that nothing in this Section 17.11 shall prohibit the recordation by either party hereto of any SNDA.

17.12Authority. Each of Landlord and Tenant represents to the other party that the person executing this Lease on its behalf is duly authorized to execute and deliver this Lease pursuant to its respective by-laws, operating agreement, resolution or other legally sufficient authority. Further, each party represents to the other party that (i) if it is a partnership, the undersigned are all of its general partners, (ii) it has been validly formed or incorporated, (iii) it is duly qualified to do business in the state in which the Property is located, and (iv) this Lease is being executed on its behalf and for its benefit.

17.13Successors and Assigns. Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon, and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives and permitted successors and assigns.

17.14Force Majeure. Except for the extent to which a party's obligations or rights are expressly stated herein to apply

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notwithstanding the effect of Force Majeure events, a party shall incur no liability to the other party with respect to, and shall not be responsible for any failure to perform, any of its obligations hereunder (other than payment obligations or obligations that may be cured by the payment of money (e.g., maintaining insurance)) if such failure is caused by a Force Majeure event. The amount of time for a party to perform any of its obligations (other than payment obligations) shall be extended by the amount of time such party is delayed in performing such obligation by reason of any Force Majeure event.

17.15No Partnership or Joint Venture; No Third Party Beneficiaries. Nothing contained in this Lease shall be deemed or construed to create the relationship of principal and agent, or partnership, or joint venturer, or any other relationship between Landlord and Tenant other than landlord and tenant. Except as otherwise expressly provided herein, Landlord shall have no obligations hereunder to any person or entity other than Tenant, and no other parties shall have any rights hereunder as against Landlord. Except as otherwise expressly provided herein, Tenant shall have no obligations hereunder to any person or entity other than Landlord, and no other parties shall have any rights hereunder as against Tenant.

17.16Access by Landlord. Subject to the terms and provisions of Article 7 of this Lease and this Section 17.16, Landlord and Landlord's agents and employees shall have the right to enter upon any and all parts of the Tenant Space: (a) at any reasonable time upon prior reasonable written notice* (except in the case of an emergency when no prior notice shall be required) to: (i) examine the condition thereof; (ii) make any repairs, alterations or additions required to be made by Landlord hereunder; (iii) determine whether Tenant is complying with all of its obligations under this Lease; and/or (iv) exercise any of Landlord's rights or remedies expressly provided for hereunder; and/or (b) to show the Tenant Space, only upon 48 hours' prior written notice, to: (i) prospective or current mortgage lenders of the Building, provided that any such prospective or current mortgage lender: (A) executes and delivers to Tenant a mutually acceptable, reasonable confidentiality/nondisclosure agreement prior to entering upon any portion of the Tenant Space; and (B) shall be prohibited from taking any photos or video of any portion of the Tenant Space, including without limitation any portion of Tenant's Personal Property and/or the Infrastructure; or (ii) prospective purchasers of the Building, provided that: (A) any such prospective purchaser: (I) executes and delivers to Tenant a mutually acceptable, reasonable confidentiality/nondisclosure agreement prior to entering upon any portion of the Tenant Space; and (II) shall be prohibited from taking any photos or video of any portion of the Tenant Space, including without limitation any portion of Tenant's Personal Property and/or the Infrastructure; and (B) notwithstanding anything to the contrary contained herein, Tenant shall have the right to prohibit any prospective purchaser that is a competitor of Tenant from entering upon any portion of the Tenant Space, with the determination as to which prospective purchasers qualify as competitors of Tenant to be made by Tenant in Tenant's reasonable discretion. For avoidance of doubt, Landlord and Landlord's agents and employees shall not be permitted at any time during the Term of this Lease to enter upon any portion of the Tenant Space to show the Tenant Space to prospective tenants, occupants and/or licensees of the Building and/or any other building owned, operated, managed and/or leased by Landlord and/or any member of the Landlord Group. In connection with Landlord's rights hereunder, Tenant agrees that Landlord shall at all times have and retain a key that will unlock all of the doors in, on or about the Tenant Space; and, in the absence of such a key, Landlord shall, in the event of emergency, have the right to use any reasonable means to open such doors to obtain entry to the Tenant Space. Notwithstanding anything herein to the contrary, in connection with any such entry, Landlord shall diligently endeavor to: (x) minimize the disruption to Tenant's use of the Tenant Space, and, in all events, shall not materially interfere with Tenant's use of, or access to, the Tenant Space for the Permitted Use; and (y) conduct such entry only during normal working hours (except in the event of an emergency). Tenant shall be permitted the opportunity to cause a representative of Tenant to accompany Landlord during any such entry (except in the case of emergency), provided that such representative of Tenant does not unreasonably interfere with or delay Landlord exercising its rights or satisfying its obligations hereunder.

*    The parties agree that such written notice (related to items (a)(i)-(iv)) need only be delivered by e-mail to Tenant's emergency e-mail notice address (i.e., dfw2notifications@lists.rackspace.com), and need not be followed up by a confirming copy by any other method of delivery.

17.17Rights Reserved by Landlord. Except as otherwise expressly provided to the contrary in this Lease, Landlord hereby expressly reserves all rights related to the Premises, the Building and the Property, including, but not limited to the right: (i) to change the name or street address of the Building and/or the Property; (ii) to install, affix and maintain all signs on the exterior and/or interior of the Building and/or the Property, provided that Landlord shall not install, affix, display or maintain any signs, advertisements or notices not required by Applicable Law that identify Tenant or any other member of the Tenant Group, on or within the Building and/or the Property without Tenant's prior written consent, which consent may be granted or withheld in Tenant's sole and absolute discretion; (iii) to change, from time to time, the dimensions, configurations and locations of the Common Areas, and/or to otherwise make such alterations to the Building as Landlord deems desirable; (iv) to install, operate and maintain systems which monitor, by closed circuit television or otherwise, all persons entering or leaving the Building and/or the Property; (v) to maintain pipes, ducts, conduits, wires and structural elements located in the Tenant Space as of the Commencement Date and which serve other parts or other tenants or occupants of the Building and/or the Property; (vi) to create any additional

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improvements to structural and/or mechanical systems, interior and exterior walls and/or glass; and (vii) to lease space in the Building and the Property, and to create such other tenancies in the Building and the Property as Landlord shall desire, provided that, in all such events, Landlord shall not: (a) unreasonably interfere with Tenant's use or occupancy of, or access to, the Tenant Space in accordance with the Permitted Use, or (b) otherwise materially increase Tenant obligations or materially decrease Tenant's rights under the Lease Documents.

17.18Counterparts; Delivery by Facsimile or E-mail. This Lease may be executed simultaneously in two or more counterparts each of which shall be deemed an original, but all of which shall constitute one and the same Lease. Landlord and Tenant agree that the delivery of an executed copy of this Lease by facsimile or e-mail shall be legal and binding and shall have the same full force and effect as if an original executed copy of this Lease had been delivered.

17.19Confidentiality. Each party agrees that: (i) the terms and provisions of this Lease are confidential and constitute proprietary information of the parties; and (ii) it shall not disclose, and it shall cause its partners, officers, directors, shareholders, employees, brokers and attorneys to not disclose any term or provision of this Lease to any other person without first obtaining the prior written consent of the other party, except that each party shall have the right to disclose such information for valid business, legal and accounting purposes and/or if required and/or advisable under any applicable securities laws regarding public disclosure of business information and/or as required by Applicable Laws and/or any court ruling. The sole remedy for a breach by either party hereto of any of the terms and provisions of this Section 17.19 shall be an action for specific performance, injunction or restraining order, and such a breach shall not otherwise be deemed to constitute a default under this Lease or give rise to any claim for damages or other relief.

17.20Incorporation of Schedules and Exhibits. All of the terms and conditions of all of the Schedules and Exhibits to this Lease are hereby incorporated into this Lease.

17.21Financial Statements. Within twenty (20) days after Landlord's written request therefor, which request shall be made only in the event that any actual or prospective lender, mortgagee or purchaser of the Building has required same, Tenant shall deliver Tenant's and Guarantor's Financial Statements to Landlord for the two (2) fiscal years immediately preceding Landlord's request. If Tenant or Guarantor does not then have its Financial Statements audited, Tenant must forward unaudited Financial Statements certified by Tenant's (or, as the case may be, Guarantor's) chief financial officer as true, complete and correct in all material respects. Tenant's failure to timely comply with this Section 17.21 beyond the applicable notice and cure period shall be an Event of Default by Tenant as specified under Section 15.1.4 of this Lease. Landlord hereby agrees to maintain Tenant's and Guarantor's Financial Statements as proprietary and confidential and agrees not to disclose, and to cause the other parties specified in this sentence not to disclose, Tenant's and/or Guarantor's Financial Statements to any third party other than any actual or prospective lender, mortgagee, or purchaser of the Building, and Landlord's attorneys, accountants and similar business advisors. Notwithstanding the foregoing, this Section 17.21 shall not apply with regard to Tenant's and Guarantor's Financial Statements, and Tenant shall have no duty or obligation to comply with the terms and provisions of this Section 17.21, for so long as (a) the entity named as “Tenant” or the entity that is named as “Guarantor” under this Lease is a publicly traded entity that is traded on a nationally recognized stock exchange, and (b) the applicable entity continues to make available the types of financial information for such entity that are, on the Effective Date, available online (at http://www.sec.gov/edgar.shtml) at no cost to Landlord.

17.22Intentionally Omitted.

17.23Re-Commissioning. Subject to the terms of this Section 17.23, Tenant shall have the right, at Tenant's sole cost and expense, to perform (or cause to be performed) a Re-Commissioning of Datacenter-A and/or Datacenter-B and the Infrastructure associated therewith. In order to exercise such right, Tenant must commence performance of Re-Commissioning of Datacenter-A (and its associated Infrastructure) and/or Datacenter-B (and its associated Infrastructure) within one hundred eighty (180) days after the Commencement Date that is applicable to the pertinent space. Any Re-Commissioning performed hereunder shall be subject to Landlord's prior written approval of the Re-Commissioning Agent(s) and the scripts and procedures therefor, which approval shall not be unreasonably withheld, conditioned or delayed. Tenant acknowledges and agrees that it shall not be unreasonable for Landlord to withhold its approval of any proposed Re-Commissioning Agent who fails or refuses to enter into a commercially reasonable confidentiality agreement with Landlord related to the performance of the Re-Commissioning. Re-Commissioning of each Datacenter (and its associated Infrastructure) shall conform to, and no element of Re-Commissioning shall be permitted to exceed, the design intent of the Infrastructure and other equipment for such Datacenter (and its associated Infrastructure). Landlord shall be permitted the opportunity to cause one (1) or more representatives of Landlord [utilizing Landlord's Commissioning Agent and/or any employee or other agent of Landlord] to observe any such Re-Commissioning, provided that no such representative of Landlord unreasonably interferes with or delays Tenant in performing any Re-

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Commissioning, and Tenant agrees to reimburse and/or pay, as applicable, Landlord in connection with any such observation in the manner set forth in the immediately succeeding sentence, up to but not exceeding [*****] in the aggregate. Subject to the limitation set forth in the immediately preceding sentence, (x) if Landlord employs its Commissioning Agent to observe all or any Re-Commissioning performed by or on behalf of Tenant hereunder, Tenant agrees to reimburse Landlord for any reasonable, out-of-pocket expenses actually incurred by Landlord in connection therewith, and/or (y) if Landlord's employees and/or other agents observe all or any Re-Commissioning performed by or on behalf of Tenant hereunder, Tenant agrees to pay to Landlord an amount equal to the product of [*****] times the actual number of hours (rounded to the nearest half-hour) any such employee(s) and/ or other agent(s) observe(s) any Re-Commissioning, with any such reimbursement and/or payment, as applicable, to be made by Tenant within thirty (30) days after receipt of written demand therefor, together with reasonable supporting documentation. Notwithstanding anything herein to the contrary, all Re-Commissioning shall be at Tenant's sole risk, and Tenant shall, subject to the terms and provisions of this Section 17.23 herein below, repair (including, without limitation, replacement of equipment, as necessary) any damage caused by, or as a result of, any Re-Commissioning. In connection therewith, Landlord and Tenant acknowledge and agree that, as part of Tenant's obligation to repair and/or replace such equipment, Tenant's replacement obligation shall be to replace (at Tenant's sole cost and expense) any equipment which cannot reasonably be repaired or restored to operate in accordance with its design intent, consistent with the terms and provisions of Section 8.2 above. Notwithstanding anything to the contrary contained herein, in the event the results of the Re-Commissioning, or any portion thereof, demonstrate or reflect that the Infrastructure for any Tenant Space, or any portion thereof, is not in good working order or does not perform in accordance with the specifications and/or design intent required by this Lease, then Landlord shall immediately repair, or, if necessary, replace, at Landlord's sole cost and expense and not subject to reimbursement as an Operating Expense under Article 3 above, any such portion of such Infrastructure, except for the extent to which, if at all, the need for such repair or replacement was caused by any Tenant Party and/or by any of the Re-Commissioning activities.

17.24[*****].

17.25Parking. During the Term, Tenant shall have the right to use up to [*****] parking spaces within parking areas located within the DPD Campus in reasonable proximity to the Building on an unreserved basis (the “Parking Spaces”). Landlord covenants that, throughout the Term, Landlord will maintain on the Land (or shall obtain the legal right to use on land in the vicinity of the Land), at a minimum, the number of parking spaces required by Applicable Laws. Landlord shall not be liable for any damage of any nature whatsoever to, or any theft of, vehicles, or contents therein, in or about such parking area (except for the extent caused by the willful misconduct of Landlord or any other member of the Landlord Group). During temporary periods of construction or repair, Landlord shall use commercially reasonable efforts to provide suitable substitute parking facilities in reasonable proximity to the Building; provided, however, if for any reason Landlord fails or is unable to provide suitable substitute parking facilities in reasonable proximity to the Building, Landlord shall not be liable therefor, nor be deemed to be in default hereunder.

17.26Reporting. Landlord agrees to provide Tenant, at Landlord's sole cost and expense (and without reimbursement from Tenant as part of Operating Expenses), but not more than one (1) time per report, any so-called “SAS70 Type II report” (or then-current equivalent) that Landlord causes to be performed for the Property. Furthermore, Landlord will cooperate with, and use commercially reasonable efforts to assist, Tenant, at Tenant's sole cost and expense, with respect to Tenant's compliance obligations and reporting, including, without limitation, (a) Tenant's preparation of independent SAS70 Type II reports (or then-current equivalent), (b) Tenant's PCI DSS compliance and (c) Tenant's ISO27001 compliance. Such cooperation shall include, without limitation, allowing Tenant and Tenant's auditors and consultants access to the Building or such other location reasonably agreed to by Landlord and Tenant, in order to review testing logs and information and maintenance logs, schedules and other information regarding the Base Building Systems.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, the parties hereto have duly executed this Lease on the respective dates set forth below to be effective as of the Effective Date.

LANDLORD:

COLLINS TECHNOLOGY PARK PARTNERS, LLC,

a Delaware limited liability company

By:    Digital Collins Technology Park Investor, LLC

a Delaware limited liability company,

its manager

By:    Digital Realty Trust, L. P.,

a Maryland limited partnership,

its manager

By:    Digital Realty Trust, Inc.,

a Maryland corporation,

its general partner

By: /s/ Glenn H. Benoist, Sr.

Name:    Glenn H. Benoist, Sr.

Title:    Vice President

Date: 12/29/2011

TENANT:

RACKSPACE US, INC.,

a Delaware corporation

By: /s/ Mark Roenigk

Name: Mark Roenigk

Title: COO

Date: 12/24/2011

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SCHEDULE “1”

SCHEDULE OF BASE RENT

Datacenter-A Base Rent Table

[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]

Datacenter-B Base Rent Table

[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]
[*****]	[*****]	[*****]	[*****]

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EXHIBIT “A”

DEPICTION OF SUITES, THE UPS ROOMS, THE MECHANICAL YARD SPACES; THE P-POP ROOM AND THE S-POP ROOM

[attached]

[*****]

EXHIBIT “A-1”

DESCRIPTION OF THE LAND

DESCRIPTION, of a 7.584 acre tract of land situated in the Baurch Cantrell Survey, Abstract No. 265, Dallas County, Texas; said tract being part of Lot 5A, Block 1, Collins Technology Park, an addition to the City of Richardson, Texas according to the plat recorded in Instrument No. 20080075596 of the Official Public Records of Dallas County, Texas and part of that certain tract of land described in Special Warranty Deed to Collins Technology Park Partners, LLC recorded in Instrument No. 200900264871 of said Official Public Records; said 7.584 acre tract being more particularly described as follows (bearing system is based on a bearing of North 00 degrees, 02 minutes, 37 seconds East for an east right-of-way line of Alma Road according to said plat of Collins Technology Park):

BEGINNING, at a “+” cut in concrete found for corner in the said east line of Alma Road (a variable width right-of-way, 80-feet wide at this point); said point being the southwest corner of Lot 1B, Block 1, Collins Technology Park, an addition to the City of Richardson, Texas according to the plat recorded in Instrument No. 201000017362 of said Official Public Records; said point also being South 00 degrees, 02 minutes, 37 seconds West, a distance of 871.54 feet from the intersection of the south right-of-way line of East Collins Boulevard (a variable width right-of-way) and the said east line of Alma Road;

THENCE, Due East, departing the said east line of Alma Road and along the south line of said Lot 1B, a distance of 765.85 feet to an “+” cut in concrete found for corner in the west line of Lot 6A, Block 1 of the first referenced Collins Technology Park; said point being the southeast corner of said Lot 1B;

THENCE, Due South, along the said west line of Lot 6A, a distance of 431.27 feet to a point for corner in the centerline of a 50-foot wide Firelane, Mutual Access and Public Utility Easement (as shown on the plat of Collins Technology Park an addition to the City of Richardson, Texas recorded in Volume 2001064 Page 4384 of the Deed Records of Dallas County, Texas, and commonly known as Alcatel Way, a private road);

THENCE, Due West, departing the said west line of Lot 6A and along the said centerline of the firelane, mutual access and public utility easement (and Alcatel Way), a distance of 766.18 feet to a point for corner in the said east line of Alma Road; said east line of Alma Road being the west terminus of said firelane, mutual access and public utility easement (and Alcatel Way);

THENCE, North 00 degrees, 02 minutes, 37 seconds East, departing the said centerline of the firelane, mutual access and public utility easement (and Alcatel Way) and along the said east line of Alma Road, a distance of 431.27 feet to the POINT OF BEGINNING;

CONTAINING, 330,360 square feet or 7.584 acres of land, more or less.

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EXHIBIT “B-1”

TENANT'S INSURANCE REQUIREMENTS

Policies

A.Commercial liability insurance (including contractual liability):	[*****] single limit; [*****] aggregate limit.*
B.“Special Peril Form” property insurance:	Full replacement value of Tenant's Personal Property and all equipment, items and/or materials that are part of Tenant's Repair Obligations.
C.Workers' compensation insurance:	In accordance with the laws of the state in which the Property is located, and Employer's Liability insurance with a limit not less than [*****] Bodily Injury Each Accident; [*****] Bodily Injury By Disease - Each Person; and [*****] Bodily Injury By Disease - Policy Limit.
D.Automobile liability insurance:	Primary auto liability insurance with limits of not less than [*****] per occurrence covering owned, hired and non-owned vehicles used by Tenant or any other member of the Tenant Group.
E.Business interruption insurance:	In such amount as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils insured against by the property insurance described above for a period of not less than twelve (12) months.

*some or all of which may be provided by umbrella coverage.

Requirements:

All insurance required of Tenant under this Lease shall be issued by insurers with a “General Policyholders Rating” of at least A-, VIII, as set forth in “Best's Insurance Guide.” Such insurers shall be authorized to do business in the State in which the Property is located. Tenant's commercial general liability policy shall be written to apply to all bodily injury (including death), property damage and personal injury losses, and shall include blanket contractual liability, broad form property damage, independent contractor's coverage, cross liability and severance of interest clauses. Tenant's insurance coverage shall be primary, as it relates to any damages to the Building or Landlord's equipment caused by Re-Commissioning, and as it relates to damages to the Infrastructure.

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EXHIBIT “B-2”

LANDLORD'S INSURANCE REQUIREMENTS

Policies

A.    Commercial liability insurance (including contractual liability):	[*****] single limit; [*****] aggregate limit.*
B.“Special Peril Form” property insurance:	Full replacement value of the Base Building and Landlord's personal property installed therein to the extent that such personal property is not part of Tenant's Repair Obligations.*
C.Workers' compensation insurance:	In accordance with the laws of the state in which the Property is located, and Employer's Liability insurance with a limit not less than [*****] Bodily Injury Each Accident; [*****] Bodily Injury By Disease - Each Person; and [*****] Bodily Injury By Disease - Policy Limit.
D.Automobile liability insurance:	Primary auto liability insurance with limits of not less than [*****] per occurrence covering owned, hired and non-owned vehicles used by Landlord or any other member of the Landlord Group.

*some or all of which may be provided by umbrella coverage.

Requirements:

All insurance required of Landlord under this Lease shall be issued by insurers with a “General Policyholders Rating” of at least A-, VIII, as set forth in “Best's Insurance Guide.” Such insurers shall be authorized to do business in the State in which the Property is located. Landlord's commercial general liability policy shall be written to apply to all bodily injury (including death), property damage and personal injury losses, and shall include blanket contractual liability, broad form property damage, independent contractor's coverage, cross liability and severance of interest clauses.

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EXHIBIT “C”

DESCRIPTION OF PATHWAY

• [*****].

During the entire Term of this Lease (as the same may be extended or reduced from time to time), the term “Pathway” shall be deemed to include the 1215-1232 Conduits.*

During the Suite A-1 Period, the term “Pathway” shall be deemed to include the Suite A-1 Pathway.

During the Suite A-2 Period and, if applicable, the portion of any Early Access Period applicable to Suite A-2, the term “Pathway” shall be deemed to include the Suite A-2 Pathway.

During the Suite A-3 Period and, if applicable, the portion of any Early Access Period applicable to Suite A-3, the term “Pathway” shall be deemed to include the Suite A-3 Pathway.

During the Suite B-1 Period, the term “Pathway” shall be deemed to include the Suite B-1 Pathway.

During the Suite B-2 Period and, if applicable, the portion of any Early Access Period applicable to Suite B-2, the term “Pathway” shall be deemed to include the Suite B-2 Pathway.

During the Suite B-3 Period and, if applicable, the portion of any Early Access Period applicable to Suite B-3, the term “Pathway” shall be deemed to include the Suite B-3 Pathway.

Tenant shall be permitted to pull and/or install Cables in the Pathway. Tenant shall be limited in the number of Cables that may be pulled through said Pathway only by Applicable Law and by the physical constructs of such Pathway. Tenant is responsible for the costs and installation of all such Cables.

*    Notwithstanding anything to the contrary contained herein, the 1215-1232 Conduits shall be deemed (a) to be part of Datacenter-A Pathway during the Datacenter-A Period; and (b) to also be part of Datacenter-B Pathway during the Datacenter-B Period. For the avoidance of doubt, in the event that Tenant extends the Term of this Lease with regard to one Tenant Space, but not the other, the 1215-1232 Conduits shall, during the extended Term, be deemed to exclusively be part of the Pathway for the Tenant Space for which the Term was extended.

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EXHIBIT “D”

TEXAS STATE LAW PROVISIONS

1.    REMEDIES FOR EVENTS OF DEFAULT.

1.1    Landlord's Right to Terminate Upon Tenant Event of Default. This Lease and the Term and estate hereby granted and the demise hereby made are subject to the limitation that if and whenever any Event of Default shall occur, Landlord may, at Landlord's option, in addition to all other rights and remedies given hereunder or by law or equity, do any one or more of the following without notice or demand, any such notice or demand being hereby waived:

1.1.1    Terminate this Lease, in which event Tenant shall immediately surrender possession of the Tenant Space to Landlord.

1.1.2    Enter upon and take possession of the Tenant Space and expel or remove Tenant and any other occupant therefrom, with or without having terminated this Lease.

1.1.3    Alter locks and other security devices at the Tenant Space.

1.1.4    Terminate any and all agreements, subleases, licenses, concessions or other consensual arrangements for possession entered into by and between Tenant and Landlord, and affecting the Tenant Space or any part of the POP Room or the Building.

1.2    No Surrender or Merger. Exercise by Landlord of any one or more remedies hereunder granted or otherwise available upon the occurrence of an Event of Default by Tenant shall not be deemed to be an acceptance of surrender of all or any part of the Tenant Space by Tenant, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Landlord and Tenant. No such alteration of security devices and no removal by Landlord of the property of Tenant or others on or about the Tenant Space as set forth herein upon the occurrence of an Event of Default shall be deemed unauthorized or constitute a conversion. All claims for damages by reason of such re-entry and/or possession and/or alteration of locks or other security devices are hereby waived, except to the extent caused by the gross negligence or willful misconduct of any member of the Landlord Group, as are all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceedings or other legal process. Tenant agrees that any re-entry by Landlord may be pursuant to judgment obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings, as Landlord may elect.

1.3    Damages Upon Default. If Landlord elects to terminate this Lease by reason of an Event of Default, then, notwithstanding such termination, Tenant shall be liable for and shall pay to Landlord the sum of all rental and other indebtedness accrued to the date of such termination, plus, as damages, an amount equal to the then present value of the rental reserved hereunder (including, without limitation, Rent and all other charges under this Lease) for the remaining portion of the Term of this Lease (had such Term not been terminated by Landlord prior to the expiration of the Term of this Lease), less the then present value of the fair rental value of the Tenant Space for such period, both discounted to present value at the Prime Rate then in effect.

In the event that Landlord elects to terminate this Lease by reason of any Event of Default, in lieu of exercising the rights of Landlord under the preceding paragraph of this Section 1.3, Landlord may instead hold Tenant liable for all rental and other indebtedness accrued to the date of such termination, plus such rental and other indebtedness as would otherwise have been required to be paid by Tenant to Landlord during the period following termination of the Term of this Lease measured from the date of such termination by Landlord until the expiration of the Term of this Lease (had Landlord not elected to terminate this Lease on account of such Event of Default) diminished by any net sums thereafter received by Landlord through reletting the Tenant Space during said period (after deducting expenses incurred by Landlord as provided in Section 1.5 below). Actions to collect amounts due by Tenant provided for in this paragraph of this Section 1.3 may be brought from time to time by Landlord during the aforesaid period, on one or more occasions, without the necessity of Landlord's waiting until the expiration of such period, and in no event shall Tenant be entitled to any excess of rental (or rental plus other sums) obtained by reletting over and above the rental provided for in this Lease.

1.4    Repossession of Tenant Space. If Landlord elects to repossess the Tenant Space without terminating

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this Lease, Tenant shall be liable for and shall pay to Landlord all rental and other indebtedness accrued to the date of such repossession, plus Rent required to be paid by Tenant to Landlord during the remainder of the Term of this Lease when due until the expiration of the Term of this Lease, diminished by any net sums thereafter received by Landlord through reletting the Tenant Space during said period (after deducting expenses incurred by Landlord as provided in Section 1.5 below). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the rental herein reserved. Actions to collect amounts due by Tenant as provided in this Section 1.4 may be brought from time to time, on one or more occasions, without the necessity of Landlord's waiting until the expiration of the Term of this Lease.

1.5    Landlord's Expenses. Upon an Event of Default, Tenant shall also be liable for and shall pay to Landlord, in addition to any sum provided to be paid pursuant to this Lease: (i) the costs and expenses of securing new tenants, including expenses for refixturing, any reasonable or necessary alterations and other costs in connection with preparing the Tenant Space for the new tenant, to the extent reasonably allocable to the then-remaining Term of this Lease (determined as though the Lease were not terminated due to such Event of Default), (ii) the cost of removing and storing Tenant's or other occupant's property, and (iii) all reasonable expenses incurred by Landlord in enforcing Landlord's remedies, including actual attorneys' fees. Past due rental and other past due payments shall bear interest from maturity at the Default Rate (as defined in Section 3.5 of this Lease) until paid.

1.6    Cumulative Remedies; Equitable Relief.The specific remedies to which Landlord may resort under the provisions of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which it may be lawfully entitled upon the occurrence of an Event of Default by Tenant. In addition to the other remedies provided in this Lease, subject to Applicable Laws, Landlord shall be entitled to a restraint by injunction of the violation or attempted or threatened violation of any of the covenants, conditions or provisions of this Lease or to a decree compelling specific performance of any such covenants, conditions or provisions.

1.7    Reletting. Tenant acknowledges that Landlord has entered into this Lease in reliance upon, among other matters, Tenant's agreement and continuing obligation to pay all rental due throughout the Term. Upon termination of Tenant's right to possess the Tenant Space, Landlord shall, only to the extent required by Applicable Laws, use reasonable efforts to mitigate damages by reletting the Tenant Space. Notwithstanding Landlord's duty to mitigate damages as aforesaid, Tenant agrees that Landlord has no obligation to: (i) relet the Tenant Space prior to leasing any other space within the Building; or (ii) relet the Tenant Space: (A) at a rental rate or otherwise on terms below market, as then determined by Landlord in its sole but reasonable discretion; (B) to any entity not satisfying Landlord's then-standard financial credit risk criteria; (C) for a use (1) not consistent with Tenant's use prior to default; (2) which would violate then applicable law or any restrictive covenant or other lease affecting the Building; (3) which would impose a burden upon the Building's facilities greater than Tenant's Permitted Use; or (4) which would involve any use of Hazardous Materials not otherwise permitted hereunder; or (iii) make any alterations to the Tenant Space or the Building at Landlord's expense or otherwise incur any costs in connection with any such reletting without reimbursement, unless Tenant unconditionally delivers to Landlord, in good and sufficient funds, the full amount thereof in advance.

1.8    Landlord's Right to Cure. All covenants and agreements to be performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense. If Tenant should fail to make any payment (other than Base Rent) or cure any default hereunder within the time herein permitted (including, for avoidance of doubt, any applicable notice, cure and/or grace periods), Landlord, without being under any obligation to do so, without thereby waiving such default and in addition to and without prejudice to any other right or remedy of Landlord, may, subject to the terms and conditions regarding any specific self-help rights of Landlord included elsewhere in this Lease, make such payment and/or remedy such other default for the account of Tenant (and enter the Tenant Space for such purpose), and thereupon Tenant shall be obligated to, and hereby agrees to, pay to Landlord as Additional Rent, within thirty (30) days following Landlord's written demand therefor, together with reasonable supporting documentation, all reasonable costs, expenses and disbursements (including actual attorneys' fees) actually incurred by Landlord in taking such remedial action, plus an administrative fee of [*****] of such amount.

1.9    Landlord's Lockout of Tenant. Tenant agrees that after and during an Event of Default under this Lease, Landlord may enter the Premises under this provision by use of a master key, a duplicate key or any other means to the extent permitted by law and without breaching the peace, in order to change, alter or modify the door locks, elevators or other security devices on all entry doors of the Premises, thereby permanently excluding Tenant and its agents, employees, contractors, directors, invitees, licensees, and patrons from the Premises, and Landlord shall not be: (a) liable to Tenant for damages in connection therewith, except to the extent caused by the gross negligence or willful misconduct of any member of the Landlord Group; or (b) required to provide a new key or right of access to Tenant. Upon the occurrence of an Event of Default by Tenant, Tenant agrees that this provision of the Lease will override and control any conflicting provisions of Sections 93.002 and 93.003 of the Texas

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Property Code, as well as any successor statute governing the right of landlord to change the door locks of a commercial tenant, provided that this sentence shall not preclude Tenant from recovering damages caused by the gross negligence or willful misconduct of any member of the Landlord Group.

2.    Intentionally Deleted.

3.    CALCULATION OF CHARGES. Landlord and Tenant are knowledgeable and experienced in commercial transactions and agree that the provisions set forth in this Lease for determining charges, amounts and additional rent payable by Tenant (including, without limitation, payments under Section 3.4) are commercially reasonable and valid even though such methods may not state a precise mathematical formula for determining such charges. Accordingly, Tenant hereby voluntarily and knowingly waives all rights and benefits of Tenant under Section 93.012 of the Texas Property Code, as WELL AS ANY SUCCESSOR STATUTE.

4.    Tenant hereby waives its rights under the Deceptive Trade Practices-Consumer Protection Act, Section 17.41 et. seq., Business & Commerce Code, a law that gives consumers special rights and protections. After consultation with an attorney of Tenant's own selection, Tenant voluntarily consents to this waiver.

5.    OFAC. Neither Tenant nor any of its affiliates, nor any of their respective partners, members, shareholders or other equity owners, and none of their respective employees, officers, directors, representatives or agents, is a person or entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC's Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action.

6.    Waiver of Right to Protest. Tenant hereby waives any and all rights under Section 41.413 and 42.015 of the Texas Tax Code granting to tenant the right to contest appraised values, or to receive notice of reappraised values, on all or any portion of the Building irrespective of whether Landlord has elected to contest same. To the extent such waiver is prohibited by applicable law, Tenant hereby appoints Landlord as Tenant's attorney in fact, coupled with an interest, to appear and take all actions on behalf of Tenant which Tenant may have under said Section of the Code with respect to the Building, but not with respect to Tenant's personal property located within the Premises.

7.    Waiver of Lien. Tenant waives all lien rights under Section 91.004 of the Texas Property Code, as well as any successor statute granting Tenant a lien in Landlord's property.

8.    INTENTIONALLY DELETED.

9.    Express Negligence / Fair Notice. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS LEASE, THE INDEMNIFICATION, DEFENSE, WAIVER AND RELEASE PROVISIONS SET FORTH IN THIS LEASE SHALL APPLY EVEN IF THE LOSS OR DAMAGE IS CAUSED, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, BY THE ACTIVE OR PASSIVE, JOINT, CONCURRENT OR COMPARATIVE NEGLIGENCE OF THE INDEMNIFIED PARTY(IES).

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EXHIBIT “E”

INTENTIONALLY OMITTED

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EXHIBIT “E-1”

AS-BUILT DRAWINGS AND COMMISSIONING DOCUMENTATION

Subject to the terms of Section 2.2.3 of the Lease, Landlord agrees to cause copies of the following items to be delivered to Tenant:

1.    As-Built Drawings. As-built drawings of each Datacenter and its supporting Infrastructure within the Building that Landlord receives from the A&E Firm (collectively, the “As-Built Drawings”), which shall, to the extent received by Landlord, consist of:

a.    Datacenter-specific building management system drawings;

b.    Datacenter-specific civil drawings;

c.    Datacenter-specific electrical drawings (including UPS/generator equipment);

d.    Datacenter-specific mechanical, plumbing and fire protection drawings;

e.    Datacenter-specific access control system drawings; and

f.    Datacenter-specific structural drawings

2.    Commissioning Documentation. Documentation received from the Commissioning Agent describing the procedures and results of the Commissioning for each Datacenter (collectively, the “Commissioning Documentation”), which shall, to the extent received by Landlord, consist of:

a. Commissioning results (these include full testing report, factory test results, on-site start-up and acceptance documentation and punch list*);

b. Commissioning scripts documentation (these include a list of procedures intended to be performed during Level 5 Commissioning (see Commissioning Criteria, attached as Exhibit “E-2”) including the integrated systems test);

c. Daily Commissioning report (includes procedures performed during Commissioning, alterations to the test plan, items requiring repair/re-testing, items corrected, etc.);

d. Commissioning results executive summary; and

e. Commissioning Complete Letter - certifying that the mechanical and electrical systems supporting the particular Suite are fully operational in accordance with the design intent (in a form substantially similar to that which is attached as Exhibit “J”).

*    For the avoidance of doubt, Landlord's provision of the punch-lists to Tenant shall, in no event, be deemed to modify or otherwise increase the obligations of Landlord (with respect to the preparation and/or delivery of the respective Datacenter, or otherwise) that are set forth in this Lease.

EXHIBIT “E-2”

COMMISSIONING CRITERIA

Commissioning consists of five general levels of activities summarized as follows:

Level 1 - Factory Testing

Manufacturers' standard test reports will be reviewed prior to shipment of equipment to the site.

Level 2 - Component Verification

Individual system components are verified at the site upon delivery for compliance with the design specifications, drawings, and approved submittals or shop drawings.

Level 3 - System Construction Verification

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As the components are assembled into individual systems, the construction or installation of the overall system is verified. This includes an evaluation of interconnection between components, physical arrangement, support and anchoring, and access and clearance.

Level 4 - Individual System and Major Equipment Operation Verification

Subsequent to the completion of construction and assembly of each individual system or major equipment element, it is started-up and tested for proper functional operation and performance.

Level 5 - Integrated Systems Operation Verification

The test procedures that comprise Level 5 commissioning are designed to simulate the operation of the Infrastructure for a particular Datacenter during a full range of operational situations, including loss of utility services, single and multiple equipment failure, normal sequential changes to the equipment operation, and planned maintenance operations.

This effort is dependent upon the successful completion of all prior levels of commissioning. The assembly of appropriate documentation and certifications for the completion of Level Four commissioning will be a prerequisite.

Level 5 commissioning will typically be completed in four basic steps:

▪ Initial planning

▪ Preparation of test procedures

▪ Implementation of tests

▪ Issuance by Commissioning Agent of the Commissioning Complete Letter.

EXHIBIT “E-3”

INTENTIONALLY OMITTED

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EXHIBIT “E-4”

COMMENCEMENT DATE NOTICE

_________ __, 201__

VIA [FAX/E-MAIL]: [# OR E-MAIL ADDRESS]

AND FEDERAL EXPRESS

Rackspace US, Inc.

[INSERT TENANT'S ADDRESS

FOR NOTICES FROM BLI #3]

Re: That certain Datacenter Lease with an effective date of ______ __, 20__ (as amended and modified from time to time, the “Lease”), by and between Rackspace US, Inc. (“Tenant”), as tenant, and Collins Technology Park Partners, LLC (“Landlord”), as landlord, covering certain premises more particularly described in the Lease at that certain building located at 1215 Datacenter Park Boulevard, Richardson, Texas. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Lease.

Ladies and Gentlemen:

Please be advised that Landlord has caused each of the [Commencement Date Conditions (A)] [Commencement Date Conditions (B)] to be completed. Accordingly, Landlord confirms that the [Commencement Date (A)] [Commencement Date (B)] of the Lease is _______ ___, 20__.

Should you have any questions, please contact Sammy O'Brien at (214) 666-3473, who will be glad to assist you.

Sincerely,

COLLINS TECHNOLOGY PARK PARTNERS, LLC,

a Delaware limited liability company

By:                         

[NAME]

[TITLE]

On behalf of Landlord

[INSERT ADDITIONAL NOTICE ADDRESSES, IF APPLICABLE]

cc:

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EXHIBIT “F”

ELECTRICITY CONSUMPTION THRESHOLD

Table A.

Table A, Item 1 applies only to Datacenter-A and only applies during the Datacenter-A Period.

Table A, Item 2 applies only to Datacenter-B and only applies during the Datacenter-B Period.

Electricity Consumption Threshold-A:	[*****]
Electricity Consumption Threshold-B:	[*****]

EXHIBIT “G”

Building Rules and regulations

[*****]

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EXHIBIT “H”

EXCLUSIONS FROM OPERATING EXPENSES

Notwithstanding anything to the contrary contained in the Lease, the following shall be excluded from Operating Expenses:

(1)    Costs for capital improvements and capital expenditures, other than those specified in subparagraph (vii) of the definition of Operating Expenses set forth in Schedule “1”;

(2)    Costs for repair, replacements and general maintenance paid by proceeds of insurance (or that would have been paid by proceeds of insurance had Landlord maintained the insurance required under applicable terms and provisions of the Standard Lease Provisions), condemnation proceeds, or by Tenant, other tenants in the Building or other third parties, and costs for alterations attributable solely to tenants of the Building other than Tenant;

(3)     Costs for principal, interest, amortization or other payments on loans to Landlord and all refinancings thereof;

(4)     Costs for depreciation of the Building, Building equipment and Landlord's personal property, including without limitation the initial costs of the Infrastructure;

(5)    Costs and expenses incurred in connection with leasing space in the Building to tenants (including Tenant), including, without limitation, marketing costs, legal fees, leasing commissions and the costs of any inducements provided to tenants, including but not limited to tenant improvement work, tenant finish allowances, costs incurred for materials and labor in connection with the installation of multi-tenant floor corridor configurations, security systems, rent allowances, lease takeover costs, payment of moving costs and other similar costs and expenses;

(6)    Costs for legal expenses, other than those incurred for the general benefit of the Building's tenants (e.g., tax disputes);

(7)    Costs for renovating or otherwise improving space for occupants of the Building or vacant space in the Building;

(8)    Costs for correcting structural defects or defects in the construction of the Building;

(9)    Costs for overtime and other expenses of Landlord in curing defaults or performing work expressly provided in this Lease to be borne at Landlord's expense;

(10)    Federal income taxes, inheritance, estate, gift, franchise, corporation, or similar taxes assessed against or imposed on or measured by the income of Landlord from the operation of the Building, except to the extent imposed in lieu of all or any part of taxes, [*****];

(11)    Costs for alterations, maintenance, repair or replacements attributable solely to specific tenants or occupants of the Building or for building equipment or systems dedicated to premises of other tenants in the Building and not the Tenant Space;

(12)    Costs for fees for professional services including legal, architectural, engineering, accounting and appraisal that (a) are not directly related to the management, operation, repair and maintenance of the Building, or (b) are related to the purchase, sale or leasing of the Building;

(13)    Costs incurred by Landlord to the extent that Landlord is entitled to receive reimbursement for such costs from any source (including, but not limited to, insurance and tenants of the Building);

(14)    Costs for real estate commissions, attorneys' fees, other costs and expenses incurred in connection with negotiations with purchasers or potential purchasers of the Building, and any other costs and expenses incurred in connection with the sale, financing or refinancing of the Building;

(15)    Costs and expenses (including but not limited to attorneys' fees) incurred in connection with disputes with tenants or other occupants of the Building;

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(16)    Costs and expenses in connection with services, utilities or other benefits which are not provided to Tenant, but which are provided solely to other tenants or occupants of the Building [for example, in the event that the premises of tenants in the Building, other than the Premises, are modified so that such spaces are cooled by water-cooled chillers (resulting in a substantial increase in the amount of water used by the Building), Landlord would be obligated to make appropriate accounting of the costs of such water usage, so that the portion of the water costs that are passed-through as Operating Expenses does not include the cost of the water-cooled chiller water usage.];

(17)    Costs incurred by Landlord due to the violation by Landlord, or any other tenants of the Building, of the terms and conditions of any lease or other occupancy agreement or license of space in the Building;

(18)    Costs for Landlord's general overhead and general administrative expenses and organizational expenses associated with the operation of the entity constituting Landlord;

(19)    Costs for rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment or machinery ordinarily considered to be of a capital nature, if such machinery or equipment would constitute a capital expenditure if purchased by Landlord;

(20)    Costs for advertising and promotional expenditures and charitable and tenant-relations costs and expenses;

(21)    Costs for penalties or fines incurred by Landlord due to a violation by Landlord of any legal requirement, building codes or any other government rule or requirement;

(22)    Costs for salary, benefits and commissions of Landlord's officers, management supervisors and leasing agents;

(23)    Costs and expenses related to compliance with Environmental Laws;

(24)    Costs necessitated by or resulting from the gross negligence of Landlord, its agents, officers, or employees or Landlord's breach of its obligations under this Lease or any lease with other tenants in the Building;

(25)    Any amounts payable under any ground lease;

(26)    Costs of repairing or restoring any portion of the Building damaged or destroyed (a) as a result of condemnation or (b) by an casualty or peril, whether insured, uninsured or uninsurable, the amount of any insurance deductible and any item covered under warranty; and

(27)    Costs of any work or service performed for any facility other than the Building.

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EXHIBIT “I”

LANDLORD'S INSTALLATIONS; DESCRIPTION OF DATACENTER-SPECIFIC INFRASTRUCTURE

DATACENTER-A

Landlord shall cause the following to be installed for Datacenter-A: (collectively, “Landlord's Installations (A)”; from and after Commencement Date (A) such items shall also be referred to herein as “Infrastructure (A)”)

a.[*****]

DATACENTER-A AND DATACENTER-B (SHARED)

Also, as part of Landlord's Installations (A), Landlord shall cause the installation of the 1215-1232 Conduits. Notwithstanding anything to the contrary contained herein, the 1215-1232 Conduits shall be deemed (a) to be part of Infrastructure (A) during the Datacenter-A Period; and (b) to also be part of Infrastructure (B) during the Datacenter-B Period. For the avoidance of doubt, in the event that Tenant extends the Term of this Lease with regard to one Tenant Space, but not the other, the 1215-1232 Conduits shall, during the extended Term, be deemed to exclusively be part of the Infrastructure for the Tenant Space for which the Term was extended.

EXHIBIT “I-1”

SPECIFICATIONS FOR DATACENTER-A AND DATACENTER-B PRIMARY AND REDUNDANT GENERATORS

[*****]

EXHIBIT “I-2”

DEPICTION OF THE PROPOSED APPROXIMATE LOCATIONS OF INFRASTRUCTURE (A)

[*****]

EXHIBIT “J”

FORM OF COMMISSIONING COMPLETE LETTER

[attached]

[*****]

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EXHIBIT “K”

FORM OF GUARANTY

[attached]

Guaranty

THIS GUARANTY is made as of December 29, 2011, by RACKSPACE HOSTING, INC., a Delaware corporation, having an address at 5000 Walzem Road, San Antonio, Texas 78218 (“Guarantor”), to COLLINS TECHNOLOGY PARK PARTNERS, LLC, a Delaware limited liability company (“Landlord”), having an address at c/o Digital Realty Trust, L.P., 2323 Bryan Street, Suite 100, Dallas, Texas 75201.

WHEREAS, Landlord has leased to Rackspace US, Inc., a Delaware corporation (“Tenant”), certain space (the “Tenant Space”) in a data center facility located at 1215 Datacenter Park Boulevard, Richardson, Texas, pursuant to that certain Data Center Lease by and between Landlord and Tenant dated as of December 29, 2011 (the “Lease”);

WHEREAS, Guarantor is materially benefited by the Lease, and Guarantor's executing this Guaranty is a material inducement to Landlord to enter into the Lease.    

NOW THEREFORE, in consideration of the premises, and of other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Guarantor agrees with Landlord as follows:

1.    Guarantor unconditionally and irrevocably guarantees to Landlord that all sums stated in the Lease to be payable by Tenant shall be promptly paid in full when due in accordance with the Lease and that all covenants and obligations to be performed by Tenant shall be performed and observed in accordance with the Lease. If any such sum or covenant is not timely paid, performed or observed, then Guarantor shall, within fifteen (15) business days of receipt of written demand from Landlord, pay the same and/or cause the same to be performed (as applicable), regardless of (a) whether Landlord shall have taken any steps to enforce any rights against Tenant or any other person, (b) termination of the Lease as a result of Tenant's default, or (c) any other condition or contingency; provided that no such demand shall be made unless (i) with respect to payments of Base Rent, Additional Rent and/or any other sum due under the Lease, the payment was not timely received by Landlord by the actual due date therefore, in accordance with the terms of the Lease, or (ii) with respect to the performance of any non-monetary covenant, Tenant has failed to timely perform the same by the actual due date therefore, in accordance with the terms of the Lease (i.e., Landlord shall not be required to wait for an Event of Default to have occurred). Guarantor shall also pay all reasonable expenses of collecting such sum or any part thereof or of otherwise enforcing this Guaranty, including reasonable attorneys' fees. This Guaranty is irrevocable, unconditional and absolute.

2.    Guarantor's obligations and covenants under this Guaranty shall in no way be affected or impaired by reason of the happening from time to time of any of the following, whether or not Guarantor has been notified thereof or consented thereto: (i) Landlord's waiver of the performance or observance by Guarantor or any other party (other than Tenant) of any covenant or condition contained in the Lease or this Guaranty; (ii) any extension, in whole or in part, of the time for payment by Tenant or Guarantor of any sums owing or payable under the Lease or this Guaranty, or of any other sums or obligations under or arising out of or on account of the Lease or this Guaranty, or the renewal of the Lease or this Guaranty; (iii) any assignment of the Lease or subletting of the Tenant Space or any part thereof; provided that, in the event Tenant assigns all of its interest in the Lease or subleases its interest in the Tenant Space in its entirety, other than to a Tenant Affiliate, Guarantor shall not be liable hereunder for any modifications of the Lease negotiated or effected between Landlord and any such assignee/sublessee, unless Guarantor otherwise agrees in writing (for the avoidance of doubt, the parties' memorialization in an amendment to the Lease of such assignee's/sublessee's exercise of an option period, renewal, or extension that existed under the Lease at the time that the assignee/sublessee took over as “Tenant” shall not be deemed to be the type of “modification of the Lease” indicated by this part (iii)); (iv) any modification or amendment (whether material or otherwise) of any of the obligations of Tenant or Guarantor under the Lease or this Guaranty; (v) the doing or the omission of any act referred to in the Lease or this Guaranty (including the giving of any consent referred to in the Lease or this Guaranty); (vi) Landlord's failure or delay to exercise any right or remedy available to Landlord or any action on the part of Landlord granting indulgence or extension in any form whatsoever; (vii) the voluntary or involuntary liquidation, dissolution, sale of any or all of the assets, marshaling of assets and liabilities, receivership, conservatorship, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar

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proceeding affecting, Tenant or Guarantor or any of Tenant's or Guarantor's assets; or (viii) the release of Guarantor from the performance or observation of any covenant or condition contained in the Lease or this Guaranty by operation of law.

3.    To the extent not prohibited by law, Guarantor hereby expressly waives (a) any right Guarantor may now or hereafter have to any hearing prior to the attachment of any real or personal property to satisfy Guarantor's obligations, and (b) the benefits of any present or future constitution, statute or rule of law which exempts property from liability for debt.

4.    No rejection, disaffirmance or termination of the Lease by Tenant or Tenant's trustee in bankruptcy pursuant to bankruptcy law or any other law affecting creditors' rights, shall be effective to release and/or terminate the continuing liability of Guarantor to Landlord under this Guaranty. Guarantor agrees that this Guaranty is a continuing guaranty and shall remain in full force and effect until all obligations of “Tenant” under the Lease have been performed as set forth in the Lease (as the same may be modified, extended, renewed or amended, regardless of whether Guarantor has received notice of such modification or amendment, except as set forth in Section 2(iii), above).

5.    Guarantor hereby waives presentment, notice of dishonor, protest and notice of non-payment or non-performance. Notwithstanding anything to the contrary contained herein, the liability of Guarantor shall not be affected by (a) any defense based upon an election of remedies by Tenant that destroys or otherwise impairs the subrogation rights of Guarantor or the right of Guarantor to proceed against Tenant for reimbursement; (b) any duty on the part of Tenant to disclose to Guarantor any facts Tenant may know about any affiliate or subsidiary of Tenant, it being agreed that Guarantor is fully responsible for being and keeping informed of the financial condition of Tenant and each subsidiary and affiliate thereof, and of all circumstances bearing on the risk of non‑payment of the payment obligations; (c) any defense arising from the bankruptcy or insolvency of Tenant or any subsidiary or affiliate thereof; (d) any defense afforded guarantors based on suretyship or impairment of collateral under applicable law, other than payment and performance in full of Tenant's obligations under the Lease.

6.    This Guaranty shall be construed in accordance with the laws of the jurisdiction in which the Tenant Space is located, without giving reference to conflict of law principles.

7.    This Guaranty may not be modified or amended except by a written agreement duly executed by Guarantor and Landlord.

8.    Subject to Guarantor's right to avail itself of any defenses available to Tenant, Guarantor's liability shall be primary and joint and several with that of Tenant. The payment portion of this Guaranty is an absolute and unconditional guaranty of payment and not of collection. Landlord may proceed against Guarantor under this Guaranty without initiating or exhausting any remedy against Tenant, and may proceed against Tenant and Guarantor separately or concurrently. If Guarantor consists of more than one person or entity, the liability of each person or entity comprising Guarantor shall be joint and several with that of all other persons or entities comprising Guarantor, and Landlord may proceed separately or concurrently against any or all persons or entities comprising Guarantor.

9.    Within twenty (20) days after Landlord's written request, Guarantor agrees to execute and deliver to Landlord a written statement certifying any reasonable matter concerning this Guaranty or the Lease as Landlord may reasonably request.

10.    Any notice which Landlord may elect to send shall be binding upon Guarantor if delivered by overnight delivery by a nationally recognized carrier, or if sent by certified or registered mail, return receipt requested, postage prepaid, to Guarantor at the following address:

Rackspace Hosting, Inc.

5000 Walzem Road

San Antonio, Texas 78218

Attention: General Counsel

Telephone: (210) 312-4721

11.    All actions or proceedings arising in connection with this Guaranty shall be litigated only in a court of competent jurisdiction in the jurisdiction in which the Tenant Space is located. Each person or entity comprising Guarantor consents to the jurisdiction of the courts of such jurisdiction, waives any objection to the venue of any action filed in any court situated in such jurisdiction, and waives any right under the doctrine of forum non-conveniens, or otherwise, to transfer any such action filed

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in any such court to any other court.

12.    This Guaranty shall be binding upon, and inure to the benefit of, the parties hereto and their respective heirs, personal representatives, successors and assigns.

13.    Capitalized terms not otherwise defined herein shall have the same meaning as set forth in the Lease.

14.    THE UNDERSIGNED HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT EITHER BY LANDLORD OR THE UNDERSIGNED (OR ANY OF THEM) AGAINST THE OTHER WITH RESPECT TO ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED TO THE LEASE OR THIS GUARANTY.

IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed effective as of the date first above written.

WITNESS:	GUARANTOR:
Jacques Greyling	RACKSPACE HOSTING, INC., a Delaware corporation
	By: /s/ Mark Roenigk Name: Mark Roenigk Title: COO

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EXHIBIT “L”

ROOFTOP RIGHTS

1.    Rooftop Equipment. Landlord hereby grants to Tenant, during the Term, the non-exclusive right to install, maintain and operate, at Tenant's sole cost and expense, [*****] satellite dish antennae (together and singly the “antenna”), together with the cables extending from such antenna to the Tenant Space through plenums, risers, electrical closets, ducts or pipes on or serving the floor on which the Tenant Space is located (other than those installed for another tenant's exclusive use), in locations (collectively, the “Rooftop Area”), number, size, weight, height and all other features and specifications of the antenna, and the manner of the initial installation of the same, as are approved in writing by Landlord, such approval not to be unreasonably withheld, conditioned or delayed (the antennae, satellite dishes and related equipment being collectively referred to as the “Rooftop Equipment”). Notwithstanding anything herein to the contrary, Tenant's right to install, maintain and operate the Rooftop Equipment is subject to such Rooftop Equipment and/or any other part of Tenant's Rooftop Facilities (as defined in Section 4, below), (i) not adversely affecting, in any material manner, the structure of the Building, the roof of the Building, the warranty for the roof of the Building or the safety of the Building; (ii) not adversely affecting, in any material manner, the electrical, mechanical or any other system of the Building or the functioning thereof; (iii) not adversely interfering, in any material manner, with the operation of the Building or the provision of services or utilities to other current or future tenants and/or occupants of the Building; and (iv) being otherwise approved by Landlord in writing (which approval shall not be unreasonably, withheld, conditioned or delayed). No additional rental shall be payable with respect to the rooftop rights granted Tenant under this Exhibit, except in the event Tenant permits the use of any portion of the Rooftop Equipment by a party (including, without limitation, a Colocation Party) who derives revenues from the use thereof. Tenant shall not permit the use of any of the Rooftop Equipment by such party without Landlord's consent, which consent may be conditioned upon the payment of additional rental in accordance with market rates.

2.    Compliance with Law. Tenant shall install, maintain and operate the Rooftop Equipment in compliance with (i) all Applicable Laws, including all present and future governmental laws, codes, rules and regulations applicable to the Rooftop Equipment and the Building (the “Rooftop Applicable Laws”), including, without limitation, the rules and regulations of the Federal Communications Commission (“FCC”) and the Federal Aviation Administration (“FAA”) and any other governmental and quasi-governmental authorities having jurisdiction with respect to the Building or Tenant's installation, maintenance and/or operation of the Rooftop Equipment, and (ii) the conditions of any bond or warranty maintained by Landlord on the roof.

3.    Installation Procedures.

(i)Prior to installation of Tenant's Rooftop Facilities and any modifications or changes thereto, Tenant shall submit to Landlord in writing all plans for Landlord's approval, and may only commence the installation after having obtained Landlord's written approval, which shall not be unreasonably withheld, conditioned, or delayed. The size, weight, style, type, materials, exact location, method of installation and other matters related to Tenant's Rooftop Facilities shall be subject to the prior written approval of Landlord, which shall not be unreasonably withheld, conditioned, or delayed. Landlord may supervise any roof work, provided Landlord does not unreasonably interfere with or delay Tenant exercising its rights or satisfying its obligations hereunder.

(ii)In the event Tenant requires a supplemental electric power supply and/or usage in connection with Tenant's Rooftop Facilities, Tenant shall, at its sole cost and expense, obtain such supplemental power supply and pay any and all recurring charges associated with such supplemental power supply at the actual cost charged by the utility without mark-up by Landlord. Any work performed in connection therewith shall comply with the provisions of the Lease.

(iii)Landlord shall provide to Tenant reasonable access to the roof of the Building and other affected Common Areas of the Building to permit Tenant's maintenance and operation of Tenant's Rooftop Facilities as provided for herein. Access to the roof of the Building or other areas of the Building will be available by Tenant requesting access from Landlord according to the Building Rules and Regulations, and Landlord agrees to cooperate reasonably with Tenant in connection therewith. Tenant shall reimburse Landlord for all reasonable and actual costs and expenses incurred by Landlord with respect to any such access occurring at times other than the normal business hours of the Building. All such access to the roof of the Building and/or other Common Areas of the Building shall be subject to the continuing control of, and reasonable security and safety procedures established by, Landlord.

(iv)Tenant's Rooftop Facilities (in particular, the antenna) shall not be more than [*****] in height above the parapet wall and not more than the weight that Landlord shall reasonably determine is appropriate for the roof (which Landlord

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shall specify to Tenant promptly upon Tenant's written request).

4.    Maintenance and Removal of the Rooftop Equipment. Tenant shall, at its sole cost and expense, be responsible for the maintenance of the Rooftop Equipment and any cable, wiring, connecting lines, conduit, and other installations, equipment or property installed or placed by or on behalf of Tenant anywhere on the rooftop of the Building (collectively, “Tenant's Rooftop Facilities”) in accordance with all Rooftop Applicable Laws and the terms of the Lease. At the expiration or earlier termination of the Lease or termination of Tenant's right to possess the Tenant Space, Tenant shall remove Tenant's Rooftop Facilities from the Building and restore the roof and any other affected areas of the Building to the condition existing prior to the installation of Tenant's Rooftop Facilities, reasonable wear and tear, Casualty and Taking excepted, all at Tenant's sole cost and expense. The removal shall be performed in a good and workmanlike manner without causing any material interference or damage to the Building, structures, equipment, or operations of Landlord and/or any of the other tenants and/or occupants of the Building. Should any such interference, damage or destruction occur, it shall be immediately remedied by Tenant, at Tenant's sole cost and expense, reasonable wear and tear, Casualty and Taking excepted. If Tenant fails to remove Tenant's Rooftop Facilities within thirty (30) days after the expiration or earlier termination of the Term of this Lease or the termination of Tenant's right to possess the Tenant Space, Landlord shall have the right, but not the obligation, to elect either (i) to remove Tenant's Rooftop Facilities at Tenant's cost and expense, plus a [*****] administrative fee, and Landlord shall, except as otherwise expressly provided herein, have no liability for the return of, or damage to, Tenant's Rooftop Facilities, or (ii) to treat Tenant's Rooftop Facilities as abandoned by Tenant. Tenant shall indemnify and hold Landlord harmless from and against any and all demands, liability, liens, claims, losses, costs and expenses (including reasonable attorney's fees) relating to or arising from the design, construction, installation, operation, maintenance, existence and/or removal of Tenant's Rooftop Facilities, except to the extent caused by the gross negligence or willful misconduct of any member of the Landlord Group.

49

EX-21.1

Subsidiaries of the Registrant

The following is a list of subsidiaries of the Company, omitting subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 2011.

Subsidiary	Jurisdiction
Rackspace US, Inc.	DE
Rackspace Limited	U.K.
Rackspace Benelux B.V.	Netherlands
Rackspace Asia Limited	Hong Kong

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Rackspace Hosting, Inc.:

We consent to the incorporation by reference in the registration statement (No. 333-153009) on Form S-8 of Rackspace Hosting, Inc. and subsidiaries of our reports dated February 17, 2012, with respect to the consolidated balance sheets of Rackspace Hosting, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011, and related financial statement schedule II, and the effectiveness of internal control over financial reporting as of December 31, 2011, which reports appear in the December 31, 2011 Annual Report on Form 10-K of Rackspace Hosting, Inc.

/s/ KPMG LLP

San Antonio, Texas

February 17, 2012

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES

EXCHANGE

ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, A. Lanham Napier, certify that:

1. I have reviewed this Annual Report on Form 10-K of Rackspace Hosting, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	February 17, 2012	By:	/s/ A. Lanham Napier
			A. Lanham Napier
			Chief Executive Officer and Director
			(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES

EXCHANGE

ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Karl Pichler, certify that:

1. I have reviewed this Annual Report on Form 10-K of Rackspace Hosting, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	February 17, 2012	By:	/s/ Karl Pichler
			Karl Pichler
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Rackspace Hosting, Inc. for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), A. Lanham Napier, as Principal Executive Officer of Rackspace Hosting, Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge, the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Rackspace Hosting, Inc.

Date:	February 17, 2012	By:	/s/ A. Lanham Napier
			A. Lanham Napier
			Chief Executive Officer and Director
			(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Rackspace Hosting, Inc. for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Karl Pichler, as Principal Financial Officer of Rackspace Hosting, Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge, the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Rackspace Hosting, Inc.

Date:	February 17, 2012	By:	/s/ Karl Pichler
			Karl Pichler
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)

XML

Taxes (Tables)

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Provision for Income Taxes

The provision for income taxes consisted of:

	Year Ended December 31,
(In thousands)	2009			2010			2011
Current:
Federal	$	(5,911	)	$	691		$	18,372
Foreign	10,243			16,994			14,976
State	2,509			3,658			4,011
Total current	6,841			21,343			37,359
Deferred:
Federal	10,497			6,933			4,345
Foreign	(826		)	(2,908		)	(877		)
State	(184		)	(315		)	(809		)
Total deferred	9,487			3,710			2,659
Total provision for income taxes	$	16,328		$	25,053		$	40,018

Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate

A reconciliation of the statutory federal tax rate to the effective tax rate is as follows:

	Year Ended December 31,
	2009		2010		2011
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	3.3	%	3.0	%	1.9	%
Tax rate differentials for international jurisdictions	-3.2	%	-4.0	%	-4.1	%
Permanent differences	0.3	%	0.8	%	1.8	%
Other, net	-0.3	%	0.3	%	-0.2	%
Effective tax rate	35.1	%	35.1	%	34.4	%

Significant Components of Deferred Tax Assets and Liabilities

Significant components of our deferred tax assets and liabilities are as follows:

(In thousands)	December 31, 2010			December 31, 2011
Deferred tax assets:
Share-based compensation	$	16,096		$	15,927
Accounts receivable	948			1,079
State income taxes	901			455
Vacation accruals	1,493			2,159
Deferred revenue	2,650			2,591
Deferred rent	4,277			7,188
Accruals not currently deductible	4,476			6,508
Net operating loss carryforwards	9,321			2,843
Charitable contribution carryforward	284			560
Foreign tax credit	72			955
Research and development credits	1,369			3,142
Other	521			14
Total gross deferred tax assets	42,408			43,421
Deferred tax liabilities:
Depreciation	64,072			96,758
Share-based compensation	—			476
Prepaids	1,488			824
Total gross deferred tax liabilities	65,560			98,058
Net deferred tax assets (liabilities)	$	(23,152	)	$	(54,637	)

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. A valuation allowance was not established or deemed necessary based upon the determination that future profits are anticipated.

Reconciliation of Unrecognized Tax Benefits, Excluding Accrued Interest

A reconciliation of our unrecognized tax benefits, excluding accrued interest, for 2010 and 2011 is as follows:

(In thousands)	2010		2011
Balance, beginning of year	$	356	$	2,456
Additions based on tax positions related to the current year	199		13,045
Additions for tax positions of prior years	1,901		1,228
Reductions for tax positions of prior years	—		—
Settlements	—		—
Balance, end of year	$	2,456	$	16,729

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Debt (Details 2) - Revolving Credit Facility (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Line of Credit Facility:
Initiation date of revolving credit facility	September 26, 2011
Total commitment of credit facility	$ 200,000,000
Maturity date of credit facility	September 2016
Financial covenant under facility - Maximum leverage ratio	3.00
Financial covenant under facility - Minimum interest coverage ratio	3.00
Total commitment of credit facility allowed under accordion feature, subject to credit approval of the banking syndicate	400,000,000
Loan origination fees	1,114,000	0	367,000
Duration of credit facility term	5 years
Maximum amount borrowed under the credit facility at any time during the period	0
Amount outstanding under revolving credit facility, excluding any outstanding letters of credit	0
Amount of outstanding letter of credit	400,000
Amount available for future borrowings	$ 199,600,000
Status of compliance with covenants under the credit facility	in compliance
Minimum
Line of Credit Facility:
Margin spread added to interest rate	1.25%
Commitment fee percentage on unused capacity of credit facility	0.25%
Maximum
Line of Credit Facility:
Margin spread added to interest rate	2.00%
Commitment fee percentage on unused capacity of credit facility	0.40%

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Property and Equipment, net (Details) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Property, Plant and Equipment, Net, by Type
Property and equipment, at cost	$ 1,147,544,000	$ 849,197,000
Less accumulated depreciation and amortization	(582,794,000)	(422,716,000)
Work in process	62,740,000	68,747,000
Total property and equipment, net	627,490,000	495,228,000
Property Plant and Equipment Income Statement Disclosures
Depreciation and leasehold amortization expense	189,800,000	149,900,000	118,800,000
Capitalized interest	0	600,000	800,000
Computer software costs
Property, Plant and Equipment, Net, by Type
Property and equipment, minimum estimated useful life (in years)	1
Property and equipment, maximum estimated useful life (in years)	5
Property and equipment, at cost	39,900,000	31,700,000
Work in process	31,200,000	11,700,000
Property Plant and Equipment Income Statement Disclosures
Depreciation and leasehold amortization expense	26,200,000	17,900,000	12,700,000
Computers, software and equipment
Property, Plant and Equipment, Net, by Type
Property and equipment, minimum estimated useful life (in years)	1	1
Property and equipment, maximum estimated useful life (in years)	5	5
Property and equipment, at cost	898,045,000	668,691,000
Furniture and fixtures
Property, Plant and Equipment, Net, by Type
Property and equipment, estimated useful life (in years)	7	7
Property and equipment, at cost	34,000,000	25,140,000
Buildings and leasehold improvements
Property, Plant and Equipment, Net, by Type
Property and equipment, minimum estimated useful life (in years)	2	2
Property and equipment, maximum estimated useful life (in years)	30	30
Property and equipment, at cost	201,639,000	141,506,000
Land
Property, Plant and Equipment, Net, by Type
Property and equipment, at cost	13,860,000	13,860,000
Office facility build outs
Property, Plant and Equipment, Net, by Type
Work in process	28,000,000	35,700,000
Data center build outs
Property, Plant and Equipment, Net, by Type
Work in process	3,600,000	21,300,000
Capitalized vendor fee for data center design services, included in data center build outs
Property, Plant and Equipment, Net, by Type
Work in process		$ 13,300,000

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Comprehensive Income (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Comprehensive Income (Loss), Net of Tax, Attributable to Parent [Abstract]
Net income	$ 25,047	$ 19,982	$ 17,561	$ 13,821	$ 13,539	$ 11,809	$ 11,198	$ 9,812	$ 76,411	$ 46,358	$ 30,218
Derivative instrument, net of deferred taxes of $(379), $(636), and $0 for the years ended December 31, 2009, 2010 and 2011									0	1,182	704
Foreign currency cumulative translation adjustment, net of taxes of $(1,393), $266 and $51 for the years ended December 31, 2009, 2010 and 2011									(2,316)	(3,341)	5,066
Total other comprehensive income (loss)									(2,316)	(2,159)	5,770
Total comprehensive income									74,095	44,199	35,988
Other Comprehensive Income (Loss), Tax, Portion Attributable to Parent [Abstract]
Deferred taxes on derivative instrument									0	636	379
Taxes on foreign currency cumulative translation adjustment									(51)	(266)	1,393
Changes in accumulated other comprehensive income (loss) [Line Items]
Changes in fair value									0	1,182	704
Cumulative translation adjustment									(2,316)	(3,341)	5,066
Balance at end of period	(14,732)				(12,416)				(14,732)	(12,416)
Derivative Instrument
Changes in accumulated other comprehensive income (loss) [Line Items]
Balance at end of period	0				0				0	0	(1,182)
Translation Adjustment
Changes in accumulated other comprehensive income (loss) [Line Items]
Balance at end of period	(14,732)				(12,416)				(14,732)	(12,416)	(9,075)
Accumulated other comprehensive income (loss)
Comprehensive Income (Loss), Net of Tax, Attributable to Parent [Abstract]
Derivative instrument, net of deferred taxes of $(379), $(636), and $0 for the years ended December 31, 2009, 2010 and 2011										1,182	704
Foreign currency cumulative translation adjustment, net of taxes of $(1,393), $266 and $51 for the years ended December 31, 2009, 2010 and 2011									(2,316)	(3,341)	5,066
Changes in accumulated other comprehensive income (loss) [Line Items]
Changes in fair value										1,182	704
Cumulative translation adjustment									(2,316)	(3,341)	5,066
Balance at end of period	$ (14,732)				$ (12,416)				$ (14,732)	$ (12,416)	$ (10,257)

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Debt (Details 3) - Interest Rate Swap (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Interest Rate Swap:
Notional amount of expired interest rate swap		$ 50,000,000
Maturity date of expired interest rate swap		Dec. 31, 2010
Fixed interest rate used to calculate payments to counterparty under expired interest rate swap		4.135%
Hedge ineffectiveness recognized in earnings due to interest rate swap		0
Unrealized gain on derivative instrument, net of tax effect	$ 0	$ 1,182,000	$ 704,000

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Cash and Cash Equivalents (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Cash and Cash Equivalents [Abstract]
Cash deposits	$ 119,115				$ 64,201
Money market funds	40,741				40,740
Cash and cash equivalents	$ 159,856	$ 124,680	$ 132,025	$ 133,868	$ 104,941	$ 166,557	$ 148,496	$ 131,297	$ 125,425	$ 238,407

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Business Combinations and Goodwill (Tables)

12 Months Ended

Dec. 31, 2011

Business Combinations and Goodwill [Abstract]

Roll Forward of Goodwill Balance

The following table provides a roll forward of our goodwill balance.

(In thousands)
December 31, 2009	$	22,329
Earn-out payment for acquisition	1,000
Acquisition	33,818
December 31, 2010	$	57,147
Measurement period adjustments	149
Acquisition	2,697
December 31, 2011	$	59,993

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Supplementary Financial Data (Unaudited) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2008
Selected Quarterly Financial Information [Abstract]
Net revenue	$ 283,261	$ 264,572	$ 247,229	$ 230,002	$ 214,726	$ 199,710	$ 187,314	$ 178,805	$ 1,025,064	$ 780,555	$ 628,987
Cost of revenue	82,851	82,445	74,057	69,742	66,747	64,616	61,470	57,007	309,095	249,840	200,943
Gross margin	200,410	182,127	173,172	160,260	147,979	135,094	125,844	121,798
Net income	25,047	19,982	17,561	13,821	13,539	11,809	11,198	9,812	76,411	46,358	30,218
Earnings Per Share, Basic	$ 0.19	$ 0.15	$ 0.14	$ 0.11	$ 0.11	$ 0.09	$ 0.09	$ 0.08	$ 0.59	$ 0.37	$ 0.25
Earnings Per Share, Diluted	$ 0.18	$ 0.14	$ 0.13	$ 0.10	$ 0.10	$ 0.09	$ 0.08	$ 0.07	$ 0.55	$ 0.35	$ 0.24
Cash and cash equivalents	$ 159,856	$ 124,680	$ 132,025	$ 133,868	$ 104,941	$ 166,557	$ 148,496	$ 131,297	$ 159,856	$ 104,941	$ 125,425	$ 238,407

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Leases (Details) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Future capital lease payments under non-cancelable leases
2012	$ 69,840,000
2013	48,638,000
2014	23,269,000
2015	2,537,000
Total minimum capital lease payments	144,284,000
Less amount representing interest	(6,037,000)
Present value of net minimum lease payments	138,247,000
Less current portion of obligations under capital leases	(66,031,000)	(59,763,000)
Non-current obligations under capital leases	72,216,000	69,173,000
Future operating lease payments under non-cancelable leases
2012	35,426,000
2013	42,549,000
2014	46,846,000
2015	48,262,000
2016	50,243,000
Thereafter	519,396,000
Total minimum operating lease payments	742,722,000
Operating leases rent expense
Rent expense	34,100,000	26,600,000	22,100,000
Minimum
Capital Leased Assets
Capital lease interest rate	1.70%
Capital lease term	2 years
Maximum
Capital Leased Assets
Capital lease interest rate	6.00%
Capital lease term	4 years
Computers, software and equipment
Capital Leased Assets
Capital Leased Assets, Gross	330,256,000	253,687,000
Less: Accumulated depreciation and amortization	(201,109,000)	(132,795,000)
Capital Leased Assets, Net	$ 129,147,000	$ 120,892,000

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011 segments	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011 segments	Dec. 31, 2010	Dec. 31, 2009
Segment Reporting [Abstract]
Number of operating segments	2								2
Number of reportable segments	1								1
Total net revenue by geographic region:
United States									$ 767,752	$ 583,546	$ 467,901
International									257,312	197,009	161,086
Total net revenue	283,261	264,572	247,229	230,002	214,726	199,710	187,314	178,805	1,025,064	780,555	628,987
Property and equipment, net by geographic region:
United States	485,608				395,318				485,608	395,318
International	141,882				99,910				141,882	99,910
Total property and equipment, net	$ 627,490				$ 495,228				$ 627,490	$ 495,228

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Risks and Uncertainties

12 Months Ended

Dec. 31, 2011

Risks and Uncertainties [Abstract]

Risks and Uncertainties

Risks and Uncertainties

Our future results of operations involve a number of risks and uncertainties. Factors that could affect our future operating results and cause actual results to vary materially from expectations include, but are not limited to: current economic conditions, uncertainty in the potential market for our services, increasing competition, dependence on our existing management and key personnel, and protection of our intellectual property rights.

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Business Combinations and Goodwill (Details 2) - Goodwill (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Goodwill Roll Forward
Goodwill at beginning of period	$ 57,147,000	$ 22,329,000
Earn-out payment for acquisition		1,000,000
Measurement period adjustments	149,000
Acquisition	2,697,000	33,818,000
Goodwill at end of period	59,993,000	57,147,000
Business Acquisition, Purchase Price Allocation, Goodwill
Goodwill deductible for tax purposes	$ 2,700,000

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Supplementary Financial Data (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2011

Selected Quarterly Financial Information [Abstract]

Supplementary Financial Data

SUPPLEMENTARY FINANCIAL DATA

	Quarters Ended
(In thousands, except per share amounts)	March 31, 2010		June 30, 2010		September 30, 2010		December 31, 2010
	(Unaudited)
Net revenue	$	178,805	$	187,314	$	199,710	$	214,726
Cost of revenue	$	57,007	$	61,470	$	64,616	$	66,747
Gross margin	$	121,798	$	125,844	$	135,094	$	147,979
Net income	$	9,812	$	11,198	$	11,809	$	13,539
Earnings per share - basic	$	0.08	$	0.09	$	0.09	$	0.11
Earnings per share - diluted	$	0.07	$	0.08	$	0.09	$	0.10
Cash and cash equivalents	$	131,297	$	148,496	$	166,557	$	104,941

	Quarters Ended
(In thousands, except per share amounts)	March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
	(Unaudited)
Net revenue	$	230,002	$	247,229	$	264,572	$	283,261
Cost of revenue	$	69,742	$	74,057	$	82,445	$	82,851
Gross margin	$	160,260	$	173,172	$	182,127	$	200,410
Net income	$	13,821	$	17,561	$	19,982	$	25,047
Earnings per share - basic	$	0.11	$	0.14	$	0.15	$	0.19
Earnings per share - diluted	$	0.10	$	0.13	$	0.14	$	0.18
Cash and cash equivalents	$	133,868	$	132,025	$	124,680	$	159,856

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Leases (Tables)

12 Months Ended

Dec. 31, 2011

Leases [Abstract]

Property and equipment under capital leases

Amounts in property and equipment under capital leases consisted of:

(In thousands)	December 31, 2010			December 31, 2011
Computers, software and equipment	$	253,687		$	330,256
Less: accumulated depreciation and amortization	(132,795		)	(201,109		)
	$	120,892		$	129,147

Future capital lease payments under non-cancelable leases

Future capital lease payments under non-cancelable leases as of December 31, 2011 were as follows:

(In thousands)
Year ending:	Amount
2012	$	69,840
2013	48,638
2014	23,269
2015	2,537
Total minimum capital lease payments	144,284
Less amount representing interest	(6,037		)
Present value of net minimum lease payments	138,247
Less current portion of obligations under capital leases	(66,031		)
Non-current obligations under capital leases	$	72,216

Future operating lease payments under non-cacelable leases

Future operating lease payments under non-cancelable leases with an initial term in excess of one year as of December 31, 2011 were as follows:

(In thousands)
Year ending:	Amount
2012	$	35,426
2013	42,549
2014	46,846
2015	48,262
2016	50,243
Thereafter	519,396
Total minimum operating lease payments	$	742,722

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Accounts Payable and Accrued Expenses (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Accounts Payable and Accrued Liabilities, Current [Abstract]
Trade payables	$ 51,097	$ 30,603
Accrued compensation and benefits	41,767	26,855
Income and other taxes payable	16,778	19,814
Vendor accruals	32,458	22,503
Other liabilities	13,904	11,870
Accounts payable and accrued expenses	$ 156,004	$ 111,645

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Taxes (Details 2) - Deferred Taxes (USD $)	Dec. 31, 2011	Dec. 31, 2010
Deferred tax assets:
Share-based compensation	$ 15,927,000	$ 16,096,000
Accounts receivable	1,079,000	948,000
State income taxes	455,000	901,000
Vacation accruals	2,159,000	1,493,000
Deferred revenue	2,591,000	2,650,000
Deferred rent	7,188,000	4,277,000
Accruals not currently deductible	6,508,000	4,476,000
Net operating loss carryforwards	2,843,000	9,321,000
Charitable contribution carryforward	560,000	284,000
Foreign tax credit	955,000	72,000
Research and development credits	3,142,000	1,369,000
Other	14,000	521,000
Total gross deferred tax assets	43,421,000	42,408,000
Deferred tax liabilities:
Depreciation	96,758,000	64,072,000
Share-based compensation	476,000	0
Prepaids	824,000	1,488,000
Total gross deferred tax liabilities	98,058,000	65,560,000
Net deferred tax assets (liabilities)	(54,637,000)	(23,152,000)
Valuation allowance on deferred tax asset	0	0
Deferred tax liability recognized for undistributed earnings of foreign subsidiaries	0	0
Undistributed earnings of the company's foreign subsidiaries considered indefinitely invested	124,100,000
Federal
Operating Loss and Federal Tax Credit Carryforwards
Net operating loss carryforwards	147,600,000
Federal tax credit carryforwards	4,100,000
Gross windfall tax benefits from stock option exercises that have not been recorded	147,600,000
Foreign
Operating Loss and Federal Tax Credit Carryforwards
Net operating loss carryforwards	$ 17,500,000

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Commitments and Contingencies (Details 4) - Guarantees and Indemnifications (USD $)	Dec. 31, 2011	Dec. 31, 2010
Guarantees
Guarantees and Indemnifications
Liabilities related to guarantees accrued in financial statements	$ 0
Service Level Commitments
Guarantees and Indemnifications
Balance for credits within allowances for doubtful accounts and customer credits, resulting from our service level agreements	$ 600,000	$ 500,000

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Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011		Dec. 31, 2010
Assets:
Money market funds	$ 40,741		$ 40,740
Fair Value, Measurements, Recurring | Level 1 - Observable Inputs such as Quoted Prices in Active Markets for Identical Assets
Assets:
Money market funds	40,741	[1]	40,740	[1]
Rabbi trust	293	[2]	795	[2]
Total	41,034		41,535
Liabilities:
Deferred compensation	187	[3]	754	[3]
Total	187		754
Fair Value, Measurements, Recurring | Level 2 - Significant Other Observable Inputs
Assets:
Money market funds	0	[1]	0	[1]
Rabbi trust	0	[2]	0	[2]
Total	0		0
Liabilities:
Deferred compensation	0	[3]	0	[3]
Total	0		0
Fair Value, Measurements, Recurring | Level 3 - Significant Unobservable Inputs
Assets:
Money market funds	0	[1]	0	[1]
Rabbi trust	0	[2]	0	[2]
Total	0		0
Liabilities:
Deferred compensation	0	[3]	0	[3]
Total	0		0
Fair Value, Measurements, Recurring | Total Assets/Liabilities at Fair Value
Assets:
Money market funds	40,741	[1]	40,740	[1]
Rabbi trust	293	[2]	795	[2]
Total	41,034		41,535
Liabilities:
Deferred compensation	187	[3]	754	[3]
Total	$ 187		$ 754

[1] Money market funds are classified in cash and cash equivalents.

[2] Investments in marketable securities held in a Rabbi Trust associated with a non-qualified deferred compensation plan are classified in other non-current assets.

[3] Obligations to pay benefits under a non-qualified deferred compensation plan are classified in other non-current liabilities.

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Earnings Per Share

12 Months Ended

Dec. 31, 2011

Earnings Per Share, Basic and Diluted [Abstract]

Earnings Per Share

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

	Year Ended December 31,
(In thousands except per share data)	2009		2010		2011
Basic net income per share:
Net income	$	30,218	$	46,358	$	76,411
Weighted average shares outstanding:
Common stock	120,570		125,097		129,922
Number of shares used in per share computations	120,570		125,097		129,922
Earnings per share	$	0.25	$	0.37	$	0.59
Diluted net income per share:
Net income	$	30,218	$	46,358	$	76,411
Weighted average shares outstanding:
Common stock	120,570		125,097		129,922
Stock options, awards and employee share purchase plan	6,850		8,332		8,142
Number of shares used in per share computations	127,420		133,429		138,064
Earnings per share	$	0.24	$	0.35	$	0.55

We excluded 3.8 million, 3.0 million and 1.2 million potential common shares from the computation of dilutive earnings per share for the periods ended December 31, 2009, 2010 and 2011, respectively, because the effect would have been anti-dilutive.

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Commitments and Contingencies (Details 5) - Incentive Arrangements (USD $)				12 Months Ended				12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Aug. 01, 2007 State of Texas employees	Dec. 31, 2011 Master Economic Incentives Agreement	Dec. 31, 2011 Master Economic Incentives Agreement City of Windcrest, Texas Median	Dec. 31, 2011 Master Economic Incentives Agreement City of Windcrest, Texas Original Requirement employees	Dec. 31, 2011 Master Economic Incentives Agreement City of Windcrest, Texas Amended Requirement employees	Dec. 31, 2011 Texas Enterprise Fund Grant number	Dec. 31, 2011 Texas Enterprise Fund Grant Additional incentives that may be received, provided that we meet requirements	Dec. 31, 2011 Texas Enterprise Fund Grant State of Texas	Dec. 31, 2011 Texas Enterprise Fund Grant State of Texas Average	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 1	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 1 Incentives received	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 1 Additional incentives that may be received, provided that we meet requirements	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 1 State of Texas employees	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 1 City of Windcrest, Texas	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranches Excluding Tranche 1 number	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranches Excluding Tranche 1 Additional incentives that may be received, provided that we meet requirements	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 2 Additional incentives that may be received, provided that we meet requirements	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 2 State of Texas employees	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 3 Additional incentives that may be received, provided that we meet requirements	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 3 State of Texas employees	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 4 Additional incentives that may be received, provided that we meet requirements	Dec. 31, 2011 Texas Enterprise Fund Grant, Tranche 4 State of Texas employees
Incentive Arrangements
Number of tranches in incentive arrangement								4									3
Ultimate employee base requirement						4,500	1,774								2,661
Fraction of total jobs in Texas that must be located in the city of Windcrest																0.67
Jobs in place in Texas as of August 1, 2007			1,436
Job target (new jobs in addition to the 1,436 Texas jobs in place as of August 1, 2007)															1,225					2,100		3,000		4,000
Minimum payroll amount per employee per year, as required by the incentive arrangement					$ 51,000						$ 56,000
Per year increase in minimum average payroll of employees, commencing in 2012										2.00%
Duration of exemption from most property taxes associated with the Windcrest Corporate headquarters facility				14 years
Incentive for meeting job target									17,000,000			8,500,000	5,000,000	3,500,000				13,500,000	5,500,000		5,250,000		2,750,000
Interest, per year, on amounts subject to a clawback if we eliminate jobs for which we have drawn funds								3.40%
Other non-current liabilities	$ 21,524,000	$ 10,760,000						$ 5,000,000

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Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies (Details 1) - Nature of Operations, Basis of Consolidation, Use of Estimates, & Concentrations of Risk	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2011 Credit Concentration Risk Total Accounts Receivable	Dec. 31, 2010 Credit Concentration Risk Total Accounts Receivable
Nature of Operations
Date of incorporation	Mar. 07, 2000
Date operations commenced	1998
Date of corporate reorganization	Aug. 21, 2001
Date of initial public offering (IPO)	August 7, 2008
Concentrations of Risk
Credit concentration risk as a percentage of total accounts receivable		5.00%	5.00%

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Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2011

Earnings Per Share, Basic and Diluted [Abstract]

Computation of Basic and Diluted Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

	Year Ended December 31,
(In thousands except per share data)	2009		2010		2011
Basic net income per share:
Net income	$	30,218	$	46,358	$	76,411
Weighted average shares outstanding:
Common stock	120,570		125,097		129,922
Number of shares used in per share computations	120,570		125,097		129,922
Earnings per share	$	0.25	$	0.37	$	0.59
Diluted net income per share:
Net income	$	30,218	$	46,358	$	76,411
Weighted average shares outstanding:
Common stock	120,570		125,097		129,922
Stock options, awards and employee share purchase plan	6,850		8,332		8,142
Number of shares used in per share computations	127,420		133,429		138,064
Earnings per share	$	0.24	$	0.35	$	0.55

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2011

Accounting Policies [Abstract]

Basis of Consolidation

Basis of Consolidation

The consolidated financial statements include the accounts of Rackspace Hosting and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Certain reclassifications have been made to prior year balances in order to conform to the current year's presentation.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and customer credits, property and equipment, fair values of intangible assets and goodwill, useful lives of intangible assets, fair value of stock options, contingencies, and income taxes, among others. We base our estimates on historical experience and on other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We engaged third-party valuation consultants to assist management in the purchase price allocation of significant acquisitions.

Concentrations of Risk

Concentrations of Risk

Our revenue is primarily derived from cloud computing, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying behavior could adversely impact our operating results. See the Segment Information footnote for information concerning operations located outside of the U.S.

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents in money market accounts with high credit quality financial institutions; however, the balance may exceed Federal Deposit Insurance Corporation “FDIC” insurance limits or may not be insured. While we monitor the balances in our accounts and adjust these balances as appropriate, they could be impacted if the underlying depository institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no material loss or lack of access to our invested cash and cash equivalents; however, we can provide no assurances that access to our funds will not be impacted by adverse conditions in the financial markets.

We perform ongoing credit evaluations, and collateral is generally not required for trade receivables. At December 31, 2010 and 2011, no customer, reseller or strategic partner comprised more than 5% of total accounts receivable.

We rely on equipment and software purchased from third parties to provide our services. This equipment and software may not continue to be available on commercially reasonable terms, and equipment may not be available in quantities sufficient to meet our business needs. Any errors or defects in third-party equipment and software could result in errors or a failure of our service, which could harm our business. Indemnification from equipment and software providers, if any, would likely be insufficient to cover any damage to our business or our customers resulting from such failures.

Cash and Cash Equivalents

Cash and Cash Equivalents

For the purposes of the consolidated financial statements, we consider all highly liquid investments with original maturities of three months or less when acquired to be cash equivalents. Our available cash and cash equivalents are held in bank deposits, overnight sweep accounts, and money market funds. Gains and losses are included in interest and other income in our accompanying consolidated statements of income.

Accounts Receivable, Net

Accounts Receivable, Net

We classify as trade accounts receivable amounts due within twelve months, arising from the provision of services in the normal course of business. We assess collectability based on a number of factors, including customer payment history and creditworthiness. We generally do not request collateral from our customers, although in certain cases we may require the customer to prepay for services. When evaluating the adequacy of allowances, we analyze accounts receivable, current economic conditions and trends, historical bad debt write-offs, customer creditworthiness, and changes in customer payment terms. We write off customer accounts receivable balances to the allowance for doubtful accounts when it becomes likely that we will not collect from the customer.

In addition, at the end of a given period, we estimate customer service level credits based on historical data and known credits yet to be issued to our customers. Customer credits reduce revenue and accounts receivable in the period the estimate is recorded.

Prepaid Expense and Other Assets

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist primarily of software and equipment maintenance contracts and prepaid operating expenses. Software maintenance contracts are amortized over the agreement period, generally one to three years. Prepaid operating expenses are expensed in the period in which services are received.

Property and Equipment, Net

Property and Equipment, Net

Property and equipment is stated at cost, net of accumulated depreciation. Property and equipment is depreciated on a straight-line basis over the estimated useful life of the asset. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Goodwill and Intangible Assets

Goodwill and Intangible Assets

Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is evaluated for impairment at a reporting unit level on an annual basis at the beginning of the fourth quarter or whenever events or circumstances indicate that impairment may have occurred.

Intangible assets, including purchased technology, customer contracts and relationships, certain tradenames, license agreements, and non-compete agreements arising principally from acquisitions are recorded at cost less accumulated amortization, and the definite-lived intangibles are amortized using a method that reflects the pattern in which the economic benefits of the related intangible asset are consumed or utilized.

Leases

Leases

We lease certain property and equipment under capital lease agreements. The assets held under capital lease and related obligations are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets held under capital lease. Such assets and the related leasehold improvements are amortized over the shorter of the terms of the leases or the estimated useful lives of the assets, which typically range from three to five years for software and equipment and 30 years for property. For assets for which the lease agreement includes a bargain purchase option or transfer of ownership at the completion of the lease and the lease term is shorter than the estimated useful life of the asset, the asset is amortized over its estimated useful life.

We also lease property and equipment under operating lease agreements. The lease terms typically range from two to five years for equipment and one to twenty years for property, including office space and data center facilities. Rent increases, rent holidays, leasehold incentives or any other unusual provisions or conditions are considered with total rent payments and are expensed on a straight-line basis over the lease period.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset in conjunction with its asset group compared to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the assets.

Revenue and Deferred Revenue

Revenue and Deferred Revenue

We provide cloud computing services to our customers and generally do not sell individual hardware and software products. Our customers pay us a monthly recurring charge based upon the size and complexity of the IT systems we manage, the type of technology used and the level of support we provide. Some customers also pay a non-refundable installation fee. We recognize revenue when persuasive evidence of an arrangement exists, service has been provided to the customer, the amount of fees to be paid by the customer is fixed or determinable, and collectibility is reasonably assured.

We recognize cloud computing revenue, including installation fees, on a monthly basis, beginning on the date the customer commences use of our services. Cloud computing revenue is recognized over the contractual term of the customer contract. For cloud computing services that are billed according to customer usage, revenue is recognized in the month in which the usage is recorded. Our customers generally continue to utilize our services beyond the initial contract term, which typically ranges from several months to three years. As a result, installation fees are recognized ratably over the estimated average life of a customer relationship. Amounts that have been invoiced are recorded in accounts receivable and either deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Therefore, deferred revenue primarily consists of amounts that have been prepaid or deferred installation fees. As of December 31, 2011, of the total $18.3 million in deferred revenue recorded on our balance sheet (the majority of which related to prepaid amounts), $14.8 million, $2.8 million, and $0.7 million will be amortized to revenue in 2012, 2013 and 2014, respectively.

Revenue is recorded net of sales and use tax.

Our hosting arrangements contain service level commitments with our customers. To the extent that such service levels are not achieved or are otherwise disputed due to third-party power or service issues, unfavorable weather, or other service interruptions or conditions, we are required to issue service credits for a portion of the hosting service fees paid by our customers. At each reporting period, we estimate the amount of credits to be issued and record a reduction to revenue. To estimate service credits, we utilize historical data and known credits yet to be issued to our customers.

Cost of Revenue

Cost of Revenue

Cost of revenue consists primarily of expenses related to our data center facilities and personnel costs. These costs typically include uncapitalized infrastructure costs, including software licenses, rental fees, replacement components, bandwidth, and power costs. Personnel expenses include the salaries, share-based compensation and related expenses of our support teams and data center employees.

Installation Costs

Installation Costs

Setup and other direct installation activities are performed at the inception of a specific arrangement with each customer to enable us to perform under the terms of the arrangement. These setup or installation costs are expensed as incurred.

Advertising Costs

Advertising Costs

We charge advertising costs to expense in the period incurred. Advertising expenses for the years ended December 31, 2009, 2010 and 2011 were approximately $23.5 million, $26.3 million and $37.8 million, respectively.

Research and Development Costs

Research and Development Costs

Our research and development efforts are focused on the deployment of new technologies to address emerging trends, development and evolution of proprietary tools, and enhancement of systems and processes for sales and support. We expense costs related to preliminary project assessment, research and development, re-engineering, training, and application maintenance as incurred in general and administrative expenses or cost of revenue. These costs primarily include compensation costs for employees and consultants dedicated to research and development efforts. Administrative and other infrastructure expenses attributable to research and development are reported in general and administrative expense. For the years ended December 31, 2009, 2010 and 2011, we recognized $12.6 million, $18.8 million and $25.0 million of research and development expense, respectively.

Internally Developed Software

Internally Developed Software

We capitalize certain costs of computer software developed or obtained for internal use. Capitalized computer software costs consist of purchased software licenses, implementation costs, and salaries and related compensation costs of employees and consultants for certain projects that qualify for capitalization. The capitalized software costs are being amortized on a straight-line basis, which is generally over periods ranging from 12 to 60 months.

Share-Based Compensation

Share-Based Compensation

The Black-Scholes valuation model that we use to determine the fair value of share-based compensation requires us to make assumptions and judgments about variables related to our common stock and the related awards. These variables and assumptions include the fair value of our common stock, expected term, the expected volatility, the risk-free interest rate, expected dividends, and the estimated rate of forfeitures of unvested stock options.

We used the following assumptions when determining the fair value of our stock options:

• Fair Value of our Common Stock—For valuations prior to our IPO on August 7, 2008, the fair value of our common stock was determined using both a market and discounted cash flow approach. The aggregate equity valuation was allocated between our various securities using the treasury stock method. Subsequent to the IPO, the end of day market price on the grant date was used to determine fair value.

• Expected Term—The expected term represents the period that our share-based awards are expected to be outstanding. In order to compute the expected term, we have elected to use the simplified method because we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time our equity shares have been publicly traded. We have been a public company since August 2008 and our options generally vest over four years and expire seven to ten years from the grant date.

• Expected Volatility—Management estimates volatility for option grants by evaluating the average historical volatility of a peer group, as well as the volatility of the company’s stock since the IPO. Management believes historical volatility of the identified peer group (while incorporating the company’s historical volatility) to be the best estimate of future volatility.

• Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation model is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.

• Expected Dividend—We have not issued dividends to date and do not anticipate issuing dividends.

• Estimated Rate of Forfeitures—We estimate expected forfeitures based on our historical experience. If actual forfeitures differ from our estimates, we will record the difference as an adjustment in the period we revise our estimates.

We also grant restricted stock units (RSUs), a portion of which have vesting conditions dependent upon the performance of the company’s total shareholder return (TSR) on its common stock compared to certain market indices. Additionally, the company’s TSR must be positive for vesting to occur. We use a Monte Carlo simulation to estimate the fair value of these awards. For all other RSUs granted that vest ratably over the requisite service period, we measure fair value based on the closing fair market value of the company’s common stock on the date of grant, and we recognize expense straight-line over the vesting period.

Income Taxes

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences in recognizing certain income, expense, and credit items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences.

We are not currently under income tax audit in any jurisdiction in which we operate. However, due to the complexity involved with certain tax matters, there is the possibility that the various taxing authorities may disagree with certain tax positions filed on our income tax returns. We have considered all relevant facts and circumstances believe that we have made adequate provision for all income tax uncertainties. For a further discussion of the impact of uncertain tax positions, see Note 14, "Taxes."

We do not provide for a U.S. income tax liability on undistributed earnings of our foreign subsidiaries. The earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are currently indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax.

Derivative Financial Instruments

Derivative Financial Instruments

In order to limit our exposure to interest rate risk, we entered into an interest rate swap contract in 2007 that expired in 2010. We recognize derivative instruments as either assets or liabilities on the balance sheet at fair value. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of “other comprehensive income” and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The fair values of certain financial instruments, including cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. The fair value of our debt approximates the carrying value as of December 31, 2010 and 2011.

Foreign Currency

Foreign Currency

We have assessed the functional currency of each of our international subsidiaries and have generally designated the local currency to be their respective functional currencies. The financial statements of these foreign subsidiaries are translated into the U.S. dollar. All assets and liabilities are translated to the U.S. dollar at the end-of-period exchange rates. Capital accounts are determined to be of a permanent nature and are therefore translated using historical exchange rates. Revenue and expenses are translated using average exchange rates. Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated comprehensive income (loss) of stockholders’ equity. Transaction gains or losses in currencies other than the functional currency are included as a component of other income (expense) in the consolidated statements of income.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We had previously adopted the guidance in 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which became effective for us at the beginning of this year. This new guidance did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued guidance on revenue recognition that eliminates the requirement that all undelivered elements in a multiple-element revenue arrangement have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered.  In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements.  The overall arrangement fee should be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price.  Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements is no longer be permitted.  The guidance became effective for us at the beginning of this year. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Recent Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued guidance to amend the requirements related to fair value measurement that changes the wording used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB's intent about the application of existing fair value measurement requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied prospectively. The company will adopt this guidance at the beginning of its first quarter of 2012. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In June 2011, the FASB issued guidance that eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements.  The guidance is effective for fiscal years, including interim periods, beginning after December 15, 2011.  We will adopt this standard in the first quarter of 2012.

In September 2011, the FASB issued guidance that is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for annual periods beginning after December 15, 2011, with early adoption permitted.  We will adopt this standard in the first quarter of 2012, and we do not expect adoption to have a material impact on our financial statements.

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Debt (Details 4) - Notes Payable (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Notes Payable:
Total amount financed under financing arrangements with equipment and software vendors	879	2,791
Notes Payable, Vendors
Notes Payable:
Notes Payable, Maturity Date Range, End	June 2012
Minimum stated interest rate on notes payable	0.00%
Maximum stated interest rate on notes payable	6.00%
Weighted average effective interest rate on notes payable	4.03%	3.91%

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Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies (Details 2) - Significant Accounting Policies (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Revenue and Deferred Revenue
Deferred revenue	$ 18,300,000
Current portion of deferred revenue	14,835,000	15,822,000
Non-current deferred revenue	3,446,000	2,927,000
Advertising Costs
Advertising expenses	37,800,000	26,300,000	23,500,000
Research and Development Costs
Research and development expense	25,000,000	18,800,000	12,600,000
Stock Options
Share-Based Compensation
Stock options vesting period	4 years
Deferred revenue to be amortized to revenue in 2012
Revenue and Deferred Revenue
Current portion of deferred revenue	14,800,000
Deferred revenue to be amortized to revenue in 2013
Revenue and Deferred Revenue
Non-current deferred revenue	2,800,000
Deferred revenue to be amortized to revenue in 2014
Revenue and Deferred Revenue
Non-current deferred revenue	$ 700,000
Software and equipment
Leases & Internally Developed Software
Property and equipment, minimum estimated useful life (in years)	1	1
Property and equipment, maximum estimated useful life (in years)	5	5
Software and equipment | Assets held under capital leases
Leases & Internally Developed Software
Property and equipment, minimum estimated useful life (in years)	3
Property and equipment, maximum estimated useful life (in years)	5
Property
Leases & Internally Developed Software
Property and equipment, minimum estimated useful life (in years)	2	2
Property and equipment, maximum estimated useful life (in years)	30	30
Property | Assets held under capital leases
Leases & Internally Developed Software
Property and equipment, estimated useful life (in years)	30
Capitalized software costs
Leases & Internally Developed Software
Property and equipment, minimum estimated useful life (in years)	1
Property and equipment, maximum estimated useful life (in years)	5
Minimum
Prepaid Expenses and Other Assets
Agreement period of software maintenance contracts	1 year
Minimum | Stock Options
Share-Based Compensation
Period after grant date when stock options expire	7 years
Minimum | Property
Leases & Internally Developed Software
Operating lease term	1 year
Minimum | Equipment
Leases & Internally Developed Software
Operating lease term	2 years
Maximum
Prepaid Expenses and Other Assets
Agreement period of software maintenance contracts	3 years
Revenue and Deferred Revenue
Customer contract term	3 years
Maximum | Stock Options
Share-Based Compensation
Period after grant date when stock options expire	10 years
Maximum | Property
Leases & Internally Developed Software
Operating lease term	20 years
Maximum | Equipment
Leases & Internally Developed Software
Operating lease term	5 years

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Cash and Cash Equivalents (Tables)

12 Months Ended

Dec. 31, 2011

Cash and Cash Equivalents [Abstract]

Schedule of Cash and Cash Equivalents

Cash and cash equivalents consisted of:

(In thousands)	December 31, 2010		December 31, 2011
Cash deposits	$	64,201	$	119,115
Money market funds	40,740		40,741
Cash and cash equivalents	$	104,941	$	159,856

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Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized by level below.  The table does not include assets and liabilities that are measured at historical costs or any other basis other than fair value.

	December 31, 2010
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Assets/Liabilities at Fair Value
Assets:
Money market funds (1)	$	40,740	$	—	$	—	$	40,740
Rabbi trust (2)	795		—		—		795
Total	$	41,535	$	—	$	—	$	41,535
Liabilities:
Deferred compensation (3)	$	754	$	—	$	—	$	754
Total	$	754	$	—	$	—	$	754

	December 31, 2011
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Assets/Liabilities at Fair Value
Assets:
Money market funds (1)	$	40,741	$	—	$	—	$	40,741
Rabbi trust (2)	293		—		—		293
Total	$	41,034	$	—	$	—	$	41,034
Liabilities:
Deferred compensation (3)	$	187	$	—	$	—	$	187
Total	$	187	$	—	$	—	$	187

(1) Money market funds are classified in cash and cash equivalents.

(2) Investments in marketable securities held in a Rabbi Trust associated with a non-qualified deferred compensation plan are classified in other non-current assets.

(3) Obligations to pay benefits under a non-qualified deferred compensation plan are classified in other non-current liabilities.

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Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Company Overview and Summary of Significant Accounting Policies [Abstract]

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies

Nature of Operations

As used in this report, the terms “Rackspace,” “Rackspace Hosting,” “we,” “our company,” “the company,” “us,” or “our” refer to Rackspace Hosting, Inc. and its subsidiaries.  Rackspace Hosting, Inc., through its operating subsidiaries, is a provider of cloud computing services, managing web-based IT systems for small and medium-sized businesses as well as large enterprises.  We focus on providing a service experience for our customers, which we call Fanatical Support^®.

Rackspace Hosting, Inc. was incorporated in Delaware on March 7, 2000. However, our operations began in 1998 as a limited partnership which became our subsidiary through a corporate reorganization completed on August 21, 2001.

We operate consolidated subsidiaries which include, among others, Rackspace US, Inc., our domestic operating entity, and Rackspace Limited, our United Kingdom operating entity.

Basis of Consolidation

The consolidated financial statements include the accounts of Rackspace Hosting and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Certain reclassifications have been made to prior year balances in order to conform to the current year's presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and customer credits, property and equipment, fair values of intangible assets and goodwill, useful lives of intangible assets, fair value of stock options, contingencies, and income taxes, among others. We base our estimates on historical experience and on other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We engaged third-party valuation consultants to assist management in the purchase price allocation of significant acquisitions.

Concentrations of Risk

Our revenue is primarily derived from cloud computing, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying behavior could adversely impact our operating results. See the Segment Information footnote for information concerning operations located outside of the U.S.

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents in money market accounts with high credit quality financial institutions; however, the balance may exceed Federal Deposit Insurance Corporation “FDIC” insurance limits or may not be insured. While we monitor the balances in our accounts and adjust these balances as appropriate, they could be impacted if the underlying depository institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no material loss or lack of access to our invested cash and cash equivalents; however, we can provide no assurances that access to our funds will not be impacted by adverse conditions in the financial markets.

We perform ongoing credit evaluations, and collateral is generally not required for trade receivables. At December 31, 2010 and 2011, no customer, reseller or strategic partner comprised more than 5% of total accounts receivable.

We rely on equipment and software purchased from third parties to provide our services. This equipment and software may not continue to be available on commercially reasonable terms, and equipment may not be available in quantities sufficient to meet our business needs. Any errors or defects in third-party equipment and software could result in errors or a failure of our service, which could harm our business. Indemnification from equipment and software providers, if any, would likely be insufficient to cover any damage to our business or our customers resulting from such failures.

Significant Accounting Policies

The accompanying financial statements reflect the application of certain significant accounting policies. There have been no material changes to our significant accounting policies that are disclosed in our audited consolidated financial statements and notes thereof during 2011.

Cash and Cash Equivalents

For the purposes of the consolidated financial statements, we consider all highly liquid investments with original maturities of three months or less when acquired to be cash equivalents. Our available cash and cash equivalents are held in bank deposits, overnight sweep accounts, and money market funds. Gains and losses are included in interest and other income in our accompanying consolidated statements of income.

Accounts Receivable, Net

We classify as trade accounts receivable amounts due within twelve months, arising from the provision of services in the normal course of business. We assess collectability based on a number of factors, including customer payment history and creditworthiness. We generally do not request collateral from our customers, although in certain cases we may require the customer to prepay for services. When evaluating the adequacy of allowances, we analyze accounts receivable, current economic conditions and trends, historical bad debt write-offs, customer creditworthiness, and changes in customer payment terms. We write off customer accounts receivable balances to the allowance for doubtful accounts when it becomes likely that we will not collect from the customer.

In addition, at the end of a given period, we estimate customer service level credits based on historical data and known credits yet to be issued to our customers. Customer credits reduce revenue and accounts receivable in the period the estimate is recorded.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist primarily of software and equipment maintenance contracts and prepaid operating expenses. Software maintenance contracts are amortized over the agreement period, generally one to three years. Prepaid operating expenses are expensed in the period in which services are received.

Property and Equipment, Net

Property and equipment is stated at cost, net of accumulated depreciation. Property and equipment is depreciated on a straight-line basis over the estimated useful life of the asset. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Goodwill and Intangible Assets

Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is evaluated for impairment at a reporting unit level on an annual basis at the beginning of the fourth quarter or whenever events or circumstances indicate that impairment may have occurred.

Intangible assets, including purchased technology, customer contracts and relationships, certain tradenames, license agreements, and non-compete agreements arising principally from acquisitions are recorded at cost less accumulated amortization, and the definite-lived intangibles are amortized using a method that reflects the pattern in which the economic benefits of the related intangible asset are consumed or utilized.

Leases

We lease certain property and equipment under capital lease agreements. The assets held under capital lease and related obligations are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets held under capital lease. Such assets and the related leasehold improvements are amortized over the shorter of the terms of the leases or the estimated useful lives of the assets, which typically range from three to five years for software and equipment and 30 years for property. For assets for which the lease agreement includes a bargain purchase option or transfer of ownership at the completion of the lease and the lease term is shorter than the estimated useful life of the asset, the asset is amortized over its estimated useful life.

We also lease property and equipment under operating lease agreements. The lease terms typically range from two to five years for equipment and one to twenty years for property, including office space and data center facilities. Rent increases, rent holidays, leasehold incentives or any other unusual provisions or conditions are considered with total rent payments and are expensed on a straight-line basis over the lease period.

Impairment of Long-Lived Assets

Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset in conjunction with its asset group compared to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the assets.

Revenue and Deferred Revenue

We provide cloud computing services to our customers and generally do not sell individual hardware and software products. Our customers pay us a monthly recurring charge based upon the size and complexity of the IT systems we manage, the type of technology used and the level of support we provide. Some customers also pay a non-refundable installation fee. We recognize revenue when persuasive evidence of an arrangement exists, service has been provided to the customer, the amount of fees to be paid by the customer is fixed or determinable, and collectibility is reasonably assured.

We recognize cloud computing revenue, including installation fees, on a monthly basis, beginning on the date the customer commences use of our services. Cloud computing revenue is recognized over the contractual term of the customer contract. For cloud computing services that are billed according to customer usage, revenue is recognized in the month in which the usage is recorded. Our customers generally continue to utilize our services beyond the initial contract term, which typically ranges from several months to three years. As a result, installation fees are recognized ratably over the estimated average life of a customer relationship. Amounts that have been invoiced are recorded in accounts receivable and either deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Therefore, deferred revenue primarily consists of amounts that have been prepaid or deferred installation fees. As of December 31, 2011, of the total $18.3 million in deferred revenue recorded on our balance sheet (the majority of which related to prepaid amounts), $14.8 million, $2.8 million, and $0.7 million will be amortized to revenue in 2012, 2013 and 2014, respectively.

Revenue is recorded net of sales and use tax.

Our hosting arrangements contain service level commitments with our customers. To the extent that such service levels are not achieved or are otherwise disputed due to third-party power or service issues, unfavorable weather, or other service interruptions or conditions, we are required to issue service credits for a portion of the hosting service fees paid by our customers. At each reporting period, we estimate the amount of credits to be issued and record a reduction to revenue. To estimate service credits, we utilize historical data and known credits yet to be issued to our customers.

Cost of Revenue

Cost of revenue consists primarily of expenses related to our data center facilities and personnel costs. These costs typically include uncapitalized infrastructure costs, including software licenses, rental fees, replacement components, bandwidth, and power costs. Personnel expenses include the salaries, share-based compensation and related expenses of our support teams and data center employees.

Installation Costs

Setup and other direct installation activities are performed at the inception of a specific arrangement with each customer to enable us to perform under the terms of the arrangement. These setup or installation costs are expensed as incurred.

Advertising Costs

We charge advertising costs to expense in the period incurred. Advertising expenses for the years ended December 31, 2009, 2010 and 2011 were approximately $23.5 million, $26.3 million and $37.8 million, respectively.

Research and Development Costs

Our research and development efforts are focused on the deployment of new technologies to address emerging trends, development and evolution of proprietary tools, and enhancement of systems and processes for sales and support. We expense costs related to preliminary project assessment, research and development, re-engineering, training, and application maintenance as incurred in general and administrative expenses or cost of revenue. These costs primarily include compensation costs for employees and consultants dedicated to research and development efforts. Administrative and other infrastructure expenses attributable to research and development are reported in general and administrative expense. For the years ended December 31, 2009, 2010 and 2011, we recognized $12.6 million, $18.8 million and $25.0 million of research and development expense, respectively.

Internally Developed Software

We capitalize certain costs of computer software developed or obtained for internal use. Capitalized computer software costs consist of purchased software licenses, implementation costs, and salaries and related compensation costs of employees and consultants for certain projects that qualify for capitalization. The capitalized software costs are being amortized on a straight-line basis, which is generally over periods ranging from 12 to 60 months.

Share-Based Compensation

The Black-Scholes valuation model that we use to determine the fair value of share-based compensation requires us to make assumptions and judgments about variables related to our common stock and the related awards. These variables and assumptions include the fair value of our common stock, expected term, the expected volatility, the risk-free interest rate, expected dividends, and the estimated rate of forfeitures of unvested stock options.

We used the following assumptions when determining the fair value of our stock options:

• Fair Value of our Common Stock—For valuations prior to our IPO on August 7, 2008, the fair value of our common stock was determined using both a market and discounted cash flow approach. The aggregate equity valuation was allocated between our various securities using the treasury stock method. Subsequent to the IPO, the end of day market price on the grant date was used to determine fair value.

• Expected Term—The expected term represents the period that our share-based awards are expected to be outstanding. In order to compute the expected term, we have elected to use the simplified method because we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time our equity shares have been publicly traded. We have been a public company since August 2008 and our options generally vest over four years and expire seven to ten years from the grant date.

• Expected Volatility—Management estimates volatility for option grants by evaluating the average historical volatility of a peer group, as well as the volatility of the company’s stock since the IPO. Management believes historical volatility of the identified peer group (while incorporating the company’s historical volatility) to be the best estimate of future volatility.

• Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation model is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.

• Expected Dividend—We have not issued dividends to date and do not anticipate issuing dividends.

• Estimated Rate of Forfeitures—We estimate expected forfeitures based on our historical experience. If actual forfeitures differ from our estimates, we will record the difference as an adjustment in the period we revise our estimates.

We also grant restricted stock units (RSUs), a portion of which have vesting conditions dependent upon the performance of the company’s total shareholder return (TSR) on its common stock compared to certain market indices. Additionally, the company’s TSR must be positive for vesting to occur. We use a Monte Carlo simulation to estimate the fair value of these awards. For all other RSUs granted that vest ratably over the requisite service period, we measure fair value based on the closing fair market value of the company’s common stock on the date of grant, and we recognize expense straight-line over the vesting period.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences in recognizing certain income, expense, and credit items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences.

We are not currently under income tax audit in any jurisdiction in which we operate. However, due to the complexity involved with certain tax matters, there is the possibility that the various taxing authorities may disagree with certain tax positions filed on our income tax returns. We have considered all relevant facts and circumstances believe that we have made adequate provision for all income tax uncertainties. For a further discussion of the impact of uncertain tax positions, see Note 14, "Taxes."

We do not provide for a U.S. income tax liability on undistributed earnings of our foreign subsidiaries. The earnings of non-U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are currently indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional tax.

Derivative Financial Instruments

In order to limit our exposure to interest rate risk, we entered into an interest rate swap contract in 2007 that expired in 2010. We recognize derivative instruments as either assets or liabilities on the balance sheet at fair value. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of “other comprehensive income” and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred.

Fair Value of Financial Instruments

The fair values of certain financial instruments, including cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. The fair value of our debt approximates the carrying value as of December 31, 2010 and 2011.

Foreign Currency

We have assessed the functional currency of each of our international subsidiaries and have generally designated the local currency to be their respective functional currencies. The financial statements of these foreign subsidiaries are translated into the U.S. dollar. All assets and liabilities are translated to the U.S. dollar at the end-of-period exchange rates. Capital accounts are determined to be of a permanent nature and are therefore translated using historical exchange rates. Revenue and expenses are translated using average exchange rates. Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated comprehensive income (loss) of stockholders’ equity. Transaction gains or losses in currencies other than the functional currency are included as a component of other income (expense) in the consolidated statements of income.

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We had previously adopted the guidance in 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which became effective for us at the beginning of this year. This new guidance did not have a material impact on our consolidated financial statements.

In October 2009, the FASB issued guidance on revenue recognition that eliminates the requirement that all undelivered elements in a multiple-element revenue arrangement have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered.  In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements.  The overall arrangement fee should be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price.  Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements is no longer be permitted.  The guidance became effective for us at the beginning of this year. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued guidance to amend the requirements related to fair value measurement that changes the wording used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB's intent about the application of existing fair value measurement requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied prospectively. The company will adopt this guidance at the beginning of its first quarter of 2012. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In June 2011, the FASB issued guidance that eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity.  Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements.  The guidance is effective for fiscal years, including interim periods, beginning after December 15, 2011.  We will adopt this standard in the first quarter of 2012.

In September 2011, the FASB issued guidance that is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for annual periods beginning after December 15, 2011, with early adoption permitted.  We will adopt this standard in the first quarter of 2012, and we do not expect adoption to have a material impact on our financial statements.

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Property and Equipment, net (Tables)

12 Months Ended

Dec. 31, 2011

Property, Plant and Equipment [Abstract]

Property and Equipment, net

Property and equipment consisted of: 

(In thousands)	Estimated Useful Lives				December 31, 2010			December 31, 2011
Computers, software and equipment	1	-	5	years	$	668,691		$	898,045
Furniture and fixtures	7	years			25,140			34,000
Buildings and leasehold improvements	2	-	30	years	141,506			201,639
Land					13,860			13,860
Property and equipment, at cost					849,197			1,147,544
Less accumulated depreciation and amortization					(422,716		)	(582,794		)
Work in process					68,747			62,740
Property and equipment, net					$	495,228		$	627,490

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Comprehensive Income (Tables)

12 Months Ended

Dec. 31, 2011

Comprehensive Income (Loss), Net of Tax, Attributable to Parent [Abstract]

Schedule of Comprehensive Income

Total comprehensive income was as follows: 

	Year Ended December 31,
(In thousands)	2009		2010			2011
Net income	$	30,218	$	46,358		$	76,411
Derivative instrument, net of deferred taxes of $(379), $(636) and $0 for the years ended December 31, 2009, 2010 and 2011	704		1,182			—
Foreign currency cumulative translation adjustment, net of taxes of $(1,393), $266 and $51 for the years ended December 31, 2009, 2010 and 2011	5,066		(3,341		)	(2,316		)
Total other comprehensive income (loss)	5,770		(2,159		)	(2,316		)
Total comprehensive income	$	35,988	$	44,199		$	74,095

Schedule of Accumulated Other Comprehensive Loss

(In thousands)	Derivative Instrument			Translation Adjustment			Accumulated other comprehensive income (loss)
Balance at December 31, 2009	$	(1,182	)	$	(9,075	)	$	(10,257	)
2010 changes in fair value	1,182			—			1,182
2010 translation adjustment	—			(3,341		)	(3,341		)
Balance at December 31, 2010	$	—		$	(12,416	)	$	(12,416	)
2011 translation adjustment	—			(2,316		)	(2,316		)
Balance at December 31, 2011	$	—		$	(14,732	)	$	(14,732	)

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Debt (Details 1) - Debt Outstanding (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Debt Outstanding:
Notes payable	$ 879	$ 2,791
Total debt	879	2,791
Less current portion of debt	(879)	(1,912)
Total non-current debt	$ 0	$ 879

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Employee Benefit Plans (Details) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
U.S. Defined Contribution Retirement Plan [Member]
Defined Contribution Plans [Line Items]
Defined Contribution Plan, Maximum Voluntary Tax-Deferred Contributions, as a Percentage of Gross Compensation	100.00%
Defined Contribution Plan, Cost Recognized	$ 3,900,000
Defined Contribution Plan, Company Match, Dollars Matched for Every Percentage of Earnings Contributed by the Employee	340
Defined Contribution Plan, Maximum Employer Contribution as a Percentage of Earnings, Per Employee	6.00%
Defined Contribution Plan, Maximum Employer Contribution Per Employee	2,040
Defined Contribution Plan, Vesting Period for Matching Contributions	3 years
U.K. Defined Contribution Plan [Member]
Defined Contribution Plans [Line Items]
Defined Contribution Plan, Cost Recognized	$ 1,900,000	$ 1,500,000	$ 1,200,000

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 159,856	$ 104,941
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	68,709	47,734
Income taxes receivable	0	4,397
Deferred income taxes	9,841	6,416
Prepaid expenses	22,006	16,738
Other current assets	2,953	5,219
Total current assets	263,365	185,445
Property and equipment, net	627,490	495,228
Goodwill	59,993	57,147
Intangible assets, net	26,034	9,675
Other non-current assets	49,600	14,082
Total assets	1,026,482	761,577
Current liabilities:
Accounts payable and accrued expenses	156,004	111,645
Current portion of deferred revenue	14,835	15,822
Current portion of obligations under capital leases	66,031	59,763
Current portion of debt	879	1,912
Total current liabilities	237,749	189,142
Non-current deferred revenue	3,446	2,927
Non-current obligations under capital leases	72,216	69,173
Non-current debt	0	879
Non-current deferred income taxes	68,781	35,238
Non-current deferred rent	23,343	14,595
Other non-current liabilities	21,524	10,760
Total liabilities	427,059	322,714
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Common stock, $0.001 par value per share: 300,000,000 shares authorized; 126,950,468 shares issued and outstanding as of December 31, 2010; 131,912,829 shares issued and outstanding as of December 31, 2011	132	127
Additional paid-in capital	383,031	296,571
Accumulated other comprehensive loss	(14,732)	(12,416)
Retained earnings	230,992	154,581
Total stockholders’ equity	599,423	438,863
Total liabilities and stockholders' equity	$ 1,026,482	$ 761,577

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010	Sep. 30, 2010	Jun. 30, 2010	Mar. 31, 2010	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Basic net income per share:
Net income	$ 25,047	$ 19,982	$ 17,561	$ 13,821	$ 13,539	$ 11,809	$ 11,198	$ 9,812	$ 76,411	$ 46,358	$ 30,218
Weighted average shares outstanding:
Common stock									129,922,000	125,097,000	120,570,000
Number of shares used in per share computations									129,922,000	125,097,000	120,570,000
Earnings per share	$ 0.19	$ 0.15	$ 0.14	$ 0.11	$ 0.11	$ 0.09	$ 0.09	$ 0.08	$ 0.59	$ 0.37	$ 0.25
Diluted net income per share:
Net income	$ 25,047	$ 19,982	$ 17,561	$ 13,821	$ 13,539	$ 11,809	$ 11,198	$ 9,812	$ 76,411	$ 46,358	$ 30,218
Weighted average shares outstanding:
Common stock									129,922,000	125,097,000	120,570,000
Stock options, awards and employee share purchase plan									8,142,000	8,332,000	6,850,000
Number of shares used in per share computations									138,064,000	133,429,000	127,420,000
Earnings per share	$ 0.18	$ 0.14	$ 0.13	$ 0.10	$ 0.10	$ 0.09	$ 0.08	$ 0.07	$ 0.55	$ 0.35	$ 0.24
Number of potential common shares excluded from the computation of dilutive earnings per share because the effect would have been anti-dilutive									1,200,000	3,000,000	3,800,000

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Consolidated Statements of Stockholders' Equity and Comprehensive Income (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock	Additional Paid-in Capital	Accumulated other comprehensive income (loss)	Retained Earnings
Balance ($) at Dec. 31, 2008	$ 269,684	$ 117	$ 207,589	$ (16,027)	$ 78,005
Balance (shares) at Dec. 31, 2008		117,154,094
Issuance of common stock
Exercise of stock options and release of stock awards (including excess tax benefit) ($)	14,029	6	14,023
Exercise of stock options and release of stock awards (including excess tax benefit) (shares)		5,723,772
Stock-based activity and issuance of common stock to board of directors ($)	462	0	462
Stock-based activity and issuance of common stock to board of directors (shares)		50,376
Issuance of common stock (earn-out) ($)	8,680	1	8,679
Issuance of common stock (earn-out) (shares)		818,899
Issuance of shares from Employee Stock Purchase Plan ($)	460	0	460
Issuance of shares from Employee Stock Purchase Plan (shares)		26,836
Total issuance of common stock ($)	23,631	7	23,624
Total issuance of common stock (shares)		6,619,883
Share-based compensation expense	20,124		20,124
Comprehensive income:
Net income	30,218				30,218
Unrealized gain on derivative instrument, net of tax effect	704			704
Cumulative translation adjustment	5,066			5,066
Total comprehensive income	35,988
Balance ($) at Dec. 31, 2009	349,427	124	251,337	(10,257)	108,223
Balance (shares) at Dec. 31, 2009		123,773,977
Issuance of common stock
Exercise of stock options and release of stock awards (including excess tax benefit) ($)	17,020	3	17,017
Exercise of stock options and release of stock awards (including excess tax benefit) (shares)		3,101,687
Stock-based activity and issuance of common stock to board of directors ($)	484	0	484
Stock-based activity and issuance of common stock to board of directors (shares)		21,021
Issuance of common stock (earn-out) ($)	510	0	510
Issuance of common stock (earn-out) (shares)		27,080
Issuance of shares from Employee Stock Purchase Plan ($)	599	0	599
Issuance of shares from Employee Stock Purchase Plan (shares)		26,703
Total issuance of common stock ($)	18,613	3	18,610
Total issuance of common stock (shares)		3,176,491
Share-based compensation expense	26,624		26,624
Comprehensive income:
Net income	46,358				46,358
Unrealized gain on derivative instrument, net of tax effect	1,182			1,182
Cumulative translation adjustment	(3,341)			(3,341)
Total comprehensive income	44,199
Balance ($) at Dec. 31, 2010	438,863	127	296,571	(12,416)	154,581
Balance (shares) at Dec. 31, 2010		126,950,468
Issuance of common stock
Exercise of stock options and release of stock awards (including excess tax benefit) ($)	55,863	5	55,858
Exercise of stock options and release of stock awards (including excess tax benefit) (shares)		4,913,504
Stock-based activity and issuance of common stock to board of directors ($)	779	0	779
Stock-based activity and issuance of common stock to board of directors (shares)		23,102
Issuance of common stock (earn-out) ($)	0
Issuance of shares from Employee Stock Purchase Plan ($)	1,050	0	1,050
Issuance of shares from Employee Stock Purchase Plan (shares)		25,755
Total issuance of common stock ($)	57,692	5	57,687
Total issuance of common stock (shares)		4,962,361
Share-based compensation expense	28,773		28,773
Comprehensive income:
Net income	76,411				76,411
Unrealized gain on derivative instrument, net of tax effect	0
Cumulative translation adjustment	(2,316)			(2,316)
Total comprehensive income	74,095
Balance ($) at Dec. 31, 2011	$ 599,423	$ 132	$ 383,031	$ (14,732)	$ 230,992
Balance (shares) at Dec. 31, 2011		131,912,829

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Commitments and Contingencies (Details 2) - Legal Proceedings (Plaintiff - Benjamin E. Rodriguez)	12 Months Ended
	Dec. 31, 2011
Plaintiff - Benjamin E. Rodriguez
Legal Proceedings
Lawsuit Filing Date	October 22, 2008
Name of Plaintiff	Benjamin E. Rodriguez D/B/A Management and Business Advisors
Name of Defendant	Rackspace Hosting, Inc. and Graham Weston
Domicile of Litigation	37th District Court in Bexar County Texas
Allegations	breach of an oral agreement to issue Mr. Rodriguez a 1% interest in our stock in the form of options or warrants for compensation for services he was engaged to perform for us
Management's Assessment and Process	We do not expect the results of this claim or any other current proceeding to have a material adverse effect on our business, results of operations or financial condition

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Accounts Payable and Accrued Expenses (Tables)

12 Months Ended

Dec. 31, 2011

Accounts Payable and Accrued Liabilities, Current [Abstract]

Schedule of Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of: 

(In thousands)	December 31, 2010		December 31, 2011
Trade payables	$	30,603	$	51,097
Accrued compensation and benefits	26,855		41,767
Income and other taxes payable	19,814		16,778
Vendor accruals	22,503		32,458
Other liabilities	11,870		13,904
Accounts payable and accrued expenses	$	111,645	$	156,004

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Share-Based Compensation (Details 2) - Allocation of share-based compensation expense to income statement line items (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	$ 28,773	$ 26,624	$ 20,124
Less: Income tax benefit	(9,890)	(9,340)	(7,059)
Total share-based compensation expense, net of tax	18,883	17,284	13,065
Cost of revenue
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	4,220	4,660	2,850
Sales and marketing
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	2,313	4,241	2,884
General and administrative
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	$ 22,240	$ 17,723	$ 14,390

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Comprehensive Income

12 Months Ended

Dec. 31, 2011

Comprehensive Income (Loss), Net of Tax, Attributable to Parent [Abstract]

Comprehensive Income

Comprehensive Income

Total comprehensive income was as follows: 

	Year Ended December 31,
(In thousands)	2009		2010			2011
Net income	$	30,218	$	46,358		$	76,411
Derivative instrument, net of deferred taxes of $(379), $(636) and $0 for the years ended December 31, 2009, 2010 and 2011	704		1,182			—
Foreign currency cumulative translation adjustment, net of taxes of $(1,393), $266 and $51 for the years ended December 31, 2009, 2010 and 2011	5,066		(3,341		)	(2,316		)
Total other comprehensive income (loss)	5,770		(2,159		)	(2,316		)
Total comprehensive income	$	35,988	$	44,199		$	74,095

The changes in accumulated other comprehensive income (loss) for the years ended December 31, 2010 and 2011 were as follows:

(In thousands)	Derivative Instrument			Translation Adjustment			Accumulated other comprehensive income (loss)
Balance at December 31, 2009	$	(1,182	)	$	(9,075	)	$	(10,257	)
2010 changes in fair value	1,182			—			1,182
2010 translation adjustment	—			(3,341		)	(3,341		)
Balance at December 31, 2010	$	—		$	(12,416	)	$	(12,416	)
2011 translation adjustment	—			(2,316		)	(2,316		)
Balance at December 31, 2011	$	—		$	(14,732	)	$	(14,732	)

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Debt (Tables)

12 Months Ended

Dec. 31, 2011

Debt Disclosure [Abstract]

Debt Outstanding

Debt outstanding consisted of:

(In thousands)	December 31, 2010			December 31, 2011
Notes payable	$	2,791		$	879
Total debt	2,791			879
Less current portion of debt	(1,912		)	(879		)
Total non-current debt	$	879		$	—

Impact of the Interest Rate Swap on the Consolidated Balance Sheets

The following table presents the impact of the interest rate swap on the consolidated balance sheets:

	Year Ended December 31,
(In thousands)	2009		2010		2011
Effective gain recognized in accumulated other comprehensive income, net of tax	$	704	$	1,182	$	—

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Employee Benefit Plans

12 Months Ended

Dec. 31, 2011

Defined Contribution Pension and Other Postretirement Plans Disclosure [Abstract]

Employee Benefit Plans

Employee Benefit Plans

We sponsor a defined contribution retirement plan ("the Plan"), which has been determined by the IRS to be qualified as a 401(k) plan. The Plan covers substantially all employees located in the U.S. and provides for voluntary tax-deferred contributions of up to 100% of gross compensation, subject to certain IRS limitations. Based on approval by the board of directors, we began making matching contributions in 2011. During 2011, $3.9 million of contribution expense was recognized. The Company matches $340 for every 1% of earnings that the employee contributes, up to a maximum of 6%, or $2,040 per employee. The matching contributions vest when the employee has been employed by Rackspace for three years.

We also sponsor a non-mandatory defined contribution plan for our employees located in the U.K. Pursuant to this plan, we contribute on a monthly basis a certain percentage of the employee’s salary. The plan is non-contributory; thus, the employee is not obligated to make any contribution to the plan, and contributions vest immediately. During 2009, 2010 and 2011, expense recognized was $1.2 million, $1.5 million and $1.9 million, respectively.

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Taxes (Details 3) - Uncertain Tax Positions (USD $)	12 Months Ended
	Dec. 31, 2011 number	Dec. 31, 2010	Dec. 31, 2009
Reconciliation of Unrecognized Tax Benefits
Balance, beginning of year	$ 2,456,000	$ 356,000
Additions based on tax positions related to the current year	13,045,000	199,000
Additions for tax positions of prior years	1,228,000	1,901,000
Reductions for tax positions of prior years	0	0
Settlements	0	0
Balance, end of year	16,729,000	2,456,000	356,000
Uncertain Tax Positions, Additional Disclosures
Unrecognized tax benefits that, if recognized, would favorably impact effective tax rate in any future period	2,300,000	1,000,000
Unrecognized tax benefits that, if recognized, would be recorded as an adjustment to other current and non-current assets	12,600,000
Accrued interest or penalties related to income tax matters on the consolidated balance sheets	0	0
Amount for interest or penalties related to unrecognized tax benefits recorded in the consolidated statements of income	0	0	0
Number of income tax examinations currently in process	0
U.S.
Uncertain Tax Positions, Additional Disclosures
Open tax years by major tax jurisdiction	2007 through 2011
U.K.
Uncertain Tax Positions, Additional Disclosures
Open tax years by major tax jurisdiction	2009 through 2011
Netherlands
Uncertain Tax Positions, Additional Disclosures
Open tax years by major tax jurisdiction	2007 through 2011
Hong Kong
Uncertain Tax Positions, Additional Disclosures
Open tax years by major tax jurisdiction	2008 through 2011
Federal
Uncertain Tax Positions, Additional Disclosures
Federal income tax refunds received	$ 4,500,000

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Consolidated Statements of Stockholders' Equity and Comprehensive Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Issuance of common stock
Excess tax benefit on exercise of stock options and release of stock awards	$ 20,627	$ 2,370	$ 0

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Current assets:
Allowance for doubtful accounts and customer credits	$ 3,420	$ 2,846
Stockholders' equity:
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	300,000,000	300,000,000
Common stock, shares issued	131,912,829	126,950,468
Common stock, shares outstanding	131,912,829	126,950,468

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Leases

12 Months Ended

Dec. 31, 2011

Leases [Abstract]

Leases

Leases

Capital Leases

We have master lease agreements with our primary vendors that supply us with servers and computer equipment. Currently, we finance most equipment purchases through their respective finance companies. The terms vary with each vendor but typically include a term of two to four years and interest rates ranging from 1.7% to 6.0%. A majority of these agreements allow us to purchase the equipment at the end of the lease for a nominal amount.

Amounts in property and equipment under capital leases consisted of:

(In thousands)	December 31, 2010			December 31, 2011
Computers, software and equipment	$	253,687		$	330,256
Less: accumulated depreciation and amortization	(132,795		)	(201,109		)
	$	120,892		$	129,147

Future capital lease payments under non-cancelable leases as of December 31, 2011 were as follows:

(In thousands)
Year ending:	Amount
2012	$	69,840
2013	48,638
2014	23,269
2015	2,537
Total minimum capital lease payments	144,284
Less amount representing interest	(6,037		)
Present value of net minimum lease payments	138,247
Less current portion of obligations under capital leases	(66,031		)
Non-current obligations under capital leases	$	72,216

Lease obligations for our foreign subsidiaries are denominated in foreign currencies, which have been converted to U.S. dollars at the exchange rate on December 31, 2011.

Operating Leases

We lease our data center facilities, certain office space and equipment under non-cancelable operating lease agreements. Facility leases generally include renewal options and may require us to pay a portion of the related operating expenses. Certain of these lease agreements have escalating rental payment provisions. We recognize rent expense for such arrangements on a straight-line basis.

Future operating lease payments under non-cancelable leases with an initial term in excess of one year as of December 31, 2011 were as follows:

(In thousands)
Year ending:	Amount
2012	$	35,426
2013	42,549
2014	46,846
2015	48,262
2016	50,243
Thereafter	519,396
Total minimum operating lease payments	$	742,722

Rent expense for the years ended December 31, 2009, 2010 and 2011 was $22.1 million, $26.6 million and $34.1 million, respectively.

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Feb. 14, 2012	Jun. 30, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	RACKSPACE HOSTING, INC.
Entity Central Index Key	0001107694
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Document Type	10-K
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Amendment Flag	false
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Common Stock, Shares Outstanding		131,960,849
Entity Public Float			$ 3,274,366,449

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Purchase Commitments

Non-cancelable purchase commitments primarily relate to costs associated with our data centers, including bandwidth, electricity and consulting services, as well as commitments to purchase hardware and to prepay for certain software licenses. The agreements vary from one to three years and provide for either penalties for early termination or may require minimum commitments for the remaining term. The minimum commitments for all of these agreements as of December 31, 2011 approximated $47.6 million, $4.4 million, $0.9 million and $0.1 million for the years ended December 31, 2012, 2013, 2014 and 2015, respectively.

We also have purchase orders and construction contracts primarily related to data center equipment and facility build-outs. We generally have the right to cancel these open purchase orders prior to delivery or terminate the contracts without cause.

Legal Proceedings

We are party to various legal and administrative proceedings, which we consider routine and incidental to our business. In addition, on October 22, 2008, Benjamin E. Rodriguez D/B/A Management and Business Advisors vs. Rackspace Hosting, Inc. and Graham Weston was filed in the 37th District Court in Bexar County Texas by a former consultant to the company, Benjamin E. Rodriguez. The suit alleges breach of an oral agreement to issue Mr. Rodriguez a 1% interest in our stock in the form of options or warrants for compensation for services he was engaged to perform for us. We believe that the plaintiff’s position is without merit and intend to vigorously defend this lawsuit. We do not expect the results of this claim or any other current proceeding to have a material adverse effect on our business, results of operations or financial condition.

We are subject to other legal proceedings, claims and litigation arising in the ordinary course of business, and we defend ourselves vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are incurred as a result of these matters, which are in excess of amounts already accrued in its consolidated balance sheet, would not be material to the financial statements as a whole.

Contingent Liability

As of December 31, 2011, the fair value of the contingent consideration related to our January 2011 acquisition was $1.2 million. The earn-out can be paid in cash or our common stock at our discretion.

Guarantees

We have identified certain guarantees. When evaluating estimated losses for guarantees, we consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such guarantees in our financial statements.

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of the insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. We have no significant liabilities recorded for these agreements as of December 31, 2010 or 2011.

We have service level commitment obligations with most of our customers. As a result, service interruptions or significant equipment damage in our data centers, whether or not within our control, could result in us not achieving service level commitments to these customers, resulting in an obligation to pay a service level credit. Our liability insurance does not cover ordinary service interruptions. In addition, any loss of services, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenue and our operating results. We generally have the ability to determine such service level credits prior to the associated revenue being recognized and record an estimate for potential unrecorded amounts. The balance for credits resulting from our service level agreements within allowances for doubtful accounts and customer credits as of December 31, 2010 and 2011 was $0.5 million and $0.6 million, respectively.

Indemnifications

In the normal course of business, we indemnify certain parties, including customers, vendors and lessors, with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. We have no significant liabilities recorded for these agreements as of December 31, 2010 or 2011.

Incentive Arrangements

In August 2007, we entered into a lease for our corporate headquarters. In connection with this lease, we also entered into a Master Economic Incentives Agreement ("MEIA") with the Cities of Windcrest and San Antonio, Texas; Bexar County; and certain other parties, pursuant to which we agreed to locate existing and future employees at the new facility location. The agreement requires that we meet certain employment levels each year, with an ultimate employee base requirement of 4,500 jobs in Windcrest by December 31, 2012; however, if the job requirement in any grant agreement with the State of Texas is lower, then the job requirement under the MEIA is automatically adjusted downward. Consequently, because the Texas Enterprise Fund Grant agreement discussed below has been amended to reduce the state job requirement, we believe the job requirement under the MEIA has been reduced to 1,774. In addition, the agreement requires that the median payroll of those employees be no less than $51 thousand per year. In exchange for meeting these employment obligations, we will receive a 14-year exemption from most of the property taxes associated with the property. If we fail to meet these job creation requirements, we could lose a portion or all of the tax exemption provided during the 14-year period and would then be obligated to repay the exemption amount. We have met the requirements for the employment level and median payroll for the year ended December 31, 2011, and we believe that it is probable that we will meet the requirements throughout the exemption period. We elected to begin the exemption period in 2009.

Further, we entered into an agreement with the State of Texas, under which we received $5.0 million in 2007 and may receive up to an additional $17.0 million from the Texas Enterprise Fund in multiple installments, provided that we meet certain new job levels in the State of Texas paying an average of at least $56 thousand per year (subject to a 2.0% per year increase commencing in 2012), beginning December 31, 2008, and sustain these jobs through December 31, 2021. On July 27, 2009, the Texas Enterprise Fund Grant agreement was amended to modify the job creation requirements. Under the amendment, the grant has been divided into four separate tranches. The first tranche, called “Basic Fund” in the amendment, is $8.5 million with a Job Target of 1,225 new jobs by December 2012 (in addition to the 1,436 jobs in place as of August 1, 2007 for a total of 2,661 jobs in Texas, two thirds of which must be located in Windcrest, Texas). We already have drawn $5.0 million of this grant and, since we have achieved the Job Target as of December 31, 2011, we intend to request the additional $3.5 million that is available to us. The remaining three tranches are at our option. We can draw an additional $13.5 million based on the following amounts and milestones: $5.5 million if we create a total of 2,100 new jobs in Texas, another $5.25 million if we create a total of 3,000 new jobs in Texas, and $2.75 million more if we create a total of 4,000 new jobs in Texas. We are responsible for maintaining the jobs until January 2022. If we eliminate jobs for which we have drawn funds, we are subject to a clawback on the amounts we have drawn plus 3.4% interest on such amounts per year. As of December 31, 2011, the $5.0 million received was deferred and recorded as other non-current liabilities. Amounts will be recognized into income upon the achievement of the performance criteria and the determination that the cash is no longer refundable to the State of Texas.

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Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Net revenue	$ 1,025,064	$ 780,555	$ 628,987
Costs and expenses:
Cost of revenue	309,095	249,840	200,943
Sales and marketing	126,505	96,207	79,458
General and administrative	270,581	199,011	168,116
Depreciation and amortization	195,412	155,895	125,229
Total costs and expenses	901,593	700,953	573,746
Income from operations	123,471	79,602	55,241
Other income (expense):
Interest expense	(5,848)	(7,984)	(8,950)
Interest and other income (expense)	(1,194)	(207)	255
Total other income (expense)	(7,042)	(8,191)	(8,695)
Income before income taxes	116,429	71,411	46,546
Income taxes	40,018	25,053	16,328
Net income	$ 76,411	$ 46,358	$ 30,218
Net income per share
Basic	$ 0.59	$ 0.37	$ 0.25
Diluted	$ 0.55	$ 0.35	$ 0.24
Weighted average number of shares outstanding
Basic	129,922	125,097	120,570
Diluted	138,064	133,429	127,420

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Property and Equipment, net

12 Months Ended

Dec. 31, 2011

Property, Plant and Equipment [Abstract]

Property and Equipment, net

Property and Equipment, net

Property and equipment consisted of: 

(In thousands)	Estimated Useful Lives				December 31, 2010			December 31, 2011
Computers, software and equipment	1	-	5	years	$	668,691		$	898,045
Furniture and fixtures	7	years			25,140			34,000
Buildings and leasehold improvements	2	-	30	years	141,506			201,639
Land					13,860			13,860
Property and equipment, at cost					849,197			1,147,544
Less accumulated depreciation and amortization					(422,716		)	(582,794		)
Work in process					68,747			62,740
Property and equipment, net					$	495,228		$	627,490

Depreciation and leasehold amortization expense, not including amortization expense for intangible assets, was $118.8 million, $149.9 million and $189.8 million for the years ended December 31, 2009, 2010 and 2011, respectively.

At December 31, 2010, the work in process balance consisted of build-outs of $35.7 million for office facilities, $21.3 million for data centers (of which $13.3 million related to a vendor fee for data center design services), and $11.7 million for capitalized software and other projects.  At December 31, 2011, the work in process balance consisted of build-outs of $28.0 million for office facilities, $3.6 million for data centers, and $31.2 million for capitalized software and other projects.

Capitalized interest was $0.8 million and $0.6 million for the years ended December 31, 2009 and 2010, respectively. There has been no interest capitalized in 2011. 

The unamortized balance of computer software costs on our balance sheets was $31.7 million and $39.9 million as of December 31, 2010 and 2011, respectively. Amortization expense for capitalized computer software costs was $12.7 million, $17.9 million and $26.2 million for the years ended December 31, 2009, 2010 and 2011, respectively.

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Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 – Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.

We measure our financial instruments at fair value. Our money market funds are classified within Level 1 because these funds are valued using quoted market prices.

The carrying values of cash deposits and accounts receivable are reasonable estimates of their fair values due to the short maturity of these financial instruments.

Assets and liabilities measured at fair value on a recurring basis are summarized by level below.  The table does not include assets and liabilities that are measured at historical costs or any other basis other than fair value.

	December 31, 2010
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Assets/Liabilities at Fair Value
Assets:
Money market funds (1)	$	40,740	$	—	$	—	$	40,740
Rabbi trust (2)	795		—		—		795
Total	$	41,535	$	—	$	—	$	41,535
Liabilities:
Deferred compensation (3)	$	754	$	—	$	—	$	754
Total	$	754	$	—	$	—	$	754

	December 31, 2011
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Assets/Liabilities at Fair Value
Assets:
Money market funds (1)	$	40,741	$	—	$	—	$	40,741
Rabbi trust (2)	293		—		—		293
Total	$	41,034	$	—	$	—	$	41,034
Liabilities:
Deferred compensation (3)	$	187	$	—	$	—	$	187
Total	$	187	$	—	$	—	$	187

(1) Money market funds are classified in cash and cash equivalents.

(2) Investments in marketable securities held in a Rabbi Trust associated with a non-qualified deferred compensation plan are classified in other non-current assets.

(3) Obligations to pay benefits under a non-qualified deferred compensation plan are classified in other non-current liabilities.

Our Rabbi Trust was established in 2009, and we elected the fair value option, which allows for the recognition of gains and losses to be recorded in the statement of income in the same period as the gains and losses are incurred as part of the non-qualified deferred compensation plan. During 2009, 2010, and 2011, we recognized minimal net gains as interest and other income.

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Segment Information

12 Months Ended

Dec. 31, 2011

Segment Reporting [Abstract]

Segment Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker is our chief executive officer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information by reporting unit and geographic region for purposes of evaluating financial performance and allocating resources.  We are organized as and operate two operating segments based around our products and services.  The company's service offerings all provide computing power to similar types of customers. Furthermore, the service offerings have similar production processes, deliver their services in a similar manner and use the same data centers and similar technologies. As a result of our evaluation of the criteria for aggregation by products and services, we determined we have one reportable segment, which we describe as Cloud Computing.

Revenue is attributed to geographic location based on the Rackspace operating location that enters into the contractual relationship with the customer, either the U.S. or International, primarily the U.K. Total net revenue by geographic region was as follows: 

	Year Ended December 31,
(In thousands)	2009		2010		2011
United States	$	467,901	$	583,546	$	767,752
International	161,086		197,009		257,312
Total net revenue	$	628,987	$	780,555	$	1,025,064

Our long-lived assets are primarily located in the U.S. and the U.K., and to a lesser extent Hong Kong.  Property and equipment, net by geographic region was as follows: 

(In thousands)	December 31, 2010		December 31, 2011
United States	$	395,318	$	485,608
International	99,910		141,882
Total property and equipment, net	$	495,228	$	627,490

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Stockholders' Equity

12 Months Ended

Dec. 31, 2011

Stockholders' Equity Note [Abstract]

Stockholders' Equity

Stockholders' Equity

Common Stock

At December 31, 2010 and 2011, we had 126,950,468 and 131,912,829 shares of our common stock legally issued and outstanding, respectively.

We have one class of authorized common stock. The rights and privileges provided to our common stockholders are as follows:

•Dividend Rights—Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of our common stock are entitled to receive dividends, at the discretion of our board of directors.

•Voting Rights—All holders of common stock are entitled to one vote per share on all matters to be voted on by Rackspace Hosting's stockholders.

•Right to Receive Liquidation Distributions—Upon liquidation, dissolution or winding-up, the holders of our common stock are entitled to share equally in all of our assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock.

Common Stock Issuances

In 2009, per the terms of the merger agreements with Jungle Disk and Slicehost and product integration milestones, we issued 140,935 shares of our common stock at a price of $5.428 per share as the first earn-out for Jungle Disk in March 2009, resulting in an aggregate recorded amount of $765 thousand. In April 2009, we issued 200,000 shares of our common stock at a price of $5.574 per share as the first earn-out for Slicehost, resulting in an aggregate recorded amount of $1.1 million. In August 2009, we issued 477,964 shares of our common stock at a price of $14.227 per share as the second earn-out for Slicehost, resulting in an aggregate recorded amount of $6.8 million. In April 2010, we issued 27,080 shares of our common stock at a price of $18.833 per share as the second earn-out for Jungle Disk, resulting in an aggregate recorded amount of $510 thousand.

In each of the years 2009, 2010 and 2011, we had two employee stock purchases under the 2008 Employee Stock Purchase Plan (ESPP), under which we issued a total of 26,836, 26,703 and 25,755 shares of common stock, respectively. No expense associated with these shares issued was recorded, and the shares were fully vested and unrestricted as of year-end.

In 2009, 2010 and 2011, we issued 5,723,772, 3,101,687 and 4,913,504 shares, respectively, related to employee stock options and restricted stock units. See Note 13 for additional disclosures related to the share-based compensation.

In 2009, 2010 and 2011, each of our non-employee board of directors was compensated with shares of common stock. We granted a total of 50,376, 21,021 and 23,102 shares of common stock as a portion of director’s fees to non-employee members of our board of directors in 2009, 2010 and 2011, respectively. The shares are fully vested and unrestricted as of December 31, 2011. Additionally, in 2010, we issued restricted stock units (RSUs) to certain members of our board of directors. We recorded total expense of $462 thousand, $484 thousand, and $779 thousand related to these shares and RSUs in 2009, 2010 and 2011, respectively. These amounts have been recorded as a component of general and administrative expense.

Preferred Stock

As of December 31, 2010 and 2011, there were 50 million authorized shares of preferred stock, of which none was issued or outstanding.

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Accounts Payable and Accrued Expenses

12 Months Ended

Dec. 31, 2011

Accounts Payable and Accrued Liabilities, Current [Abstract]

Accounts Payable and Accrued Expenses

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of: 

(In thousands)	December 31, 2010		December 31, 2011
Trade payables	$	30,603	$	51,097
Accrued compensation and benefits	26,855		41,767
Income and other taxes payable	19,814		16,778
Vendor accruals	22,503		32,458
Other liabilities	11,870		13,904
Accounts payable and accrued expenses	$	111,645	$	156,004

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Commitments and Contingencies (Details 3) - Contingent Liability (Company Acquired in January 2011, USD $) In Millions, unless otherwise specified	Dec. 31, 2011
Company Acquired in January 2011
Contingent Liability
Fair value of the contingent consideration related to our acquisition	$ 1.2

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Business Combinations and Goodwill

12 Months Ended

Dec. 31, 2011

Business Combinations and Goodwill [Abstract]

Business Combinations and Goodwill

Business Combinations and Goodwill

In January 2011, we acquired a company to bolster our service delivery capabilities around OpenStack. The acquisition, which was accounted for using the acquisition method, included an initial cash payment, additional cash payments due on the first and second anniversaries of the closing date and cash or stock to be paid upon the achievement of certain earn-out provisions. The composition of the payment of the earn-out provisions between cash and stock is at our discretion. The purchase price was allocated based on the estimated fair values of the individual assets acquired and liabilities assumed at the date of acquisition, and after the completion of our final tax review during the three months ended September 30, 2011, we determined the allocation of the purchase price was final. The fair value of the contingent consideration of $2.1 million was recorded as a liability as of the date of acquisition. The first two earn-out provisions were met in 2011, resulting in a cash payment of $1.0 million. The fair value of the remaining contingent consideration as of December 31, 2011 was $1.2 million, all of which is classified as short-term within accounts payable and accrued expenses. The consolidated statements of income include the results of operations for the acquired company commencing on January 26, 2011.

In December 2010, we acquired a company and accounted for the transaction using the acquisition method. During the three months ended March 31, 2011, we recorded a measurement period adjustment to reflect changes in the estimated fair value of deferred tax assets related to the acquisition. This adjustment resulted from our final review of certain tax matters relating to the transaction and did not result from intervening events subsequent to the acquisition date. Upon the final completion of an independent appraisal and all other evaluations during the three months ended March 31, 2011, we determined the allocation of the purchase price was final. Beginning in the second quarter of 2011, the associated earn-out payments were no longer contingent upon achievement of certain provisions, and the full amount was scheduled to be paid in six equal installments, with the composition of the payout between cash and stock at our discretion. We made the the first three payments in cash totaling $5.0 million, in 2011. As of December 31, 2011, the amount of the liability recorded was $4.9 million.

In April 2010, the final $1.0 million earn-out in connection with an acquisition made in 2008 was paid in a combination of cash and stock. The earn-out was accounted for as additional goodwill.

The following table provides a roll forward of our goodwill balance.

(In thousands)
December 31, 2009	$	22,329
Earn-out payment for acquisition	1,000
Acquisition	33,818
December 31, 2010	$	57,147
Measurement period adjustments	149
Acquisition	2,697
December 31, 2011	$	59,993

The $2.7 million of goodwill recorded for the acquisition in January 2011 is deductible for tax purposes.

We test goodwill at the reporting unit level using a fair value approach. Our annual testing did not result in an impairment of goodwill for the year ended December 31, 2011 as the fair value of each reporting unit with goodwill was determined to be in excess of its carrying value. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests. There were no such changes during the year ended December 31, 2011, and as of December 31, 2011, there were no indicators that our goodwill was impaired.

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Intangible Assets

12 Months Ended

Dec. 31, 2011

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Intangible Assets

Intangible Assets

The following tables provide information regarding our intangible assets, other than goodwill:

	December 31, 2010
(In thousands)	Gross carrying amount		Accumulated amortization			Net carrying amount
Intangible assets:
Licenses	$	11,571	$	(10,356	)	$	1,215
Purchased technologies	7,145		(2,970		)	4,175
Domain name purchases	459		(440		)	19
Non-compete agreements	1,534		(382		)	1,152
Customer relationships	5,240		(2,389		)	2,851
Trademarks, tradenames and patents	887		(657		)	230
Other	631		(598		)	33
Total	$	27,467	$	(17,792	)	$	9,675

	December 31, 2011
(In thousands)	Gross carrying amount		Accumulated amortization			Net carrying amount
Intangible assets:
Licenses	$	12,582	$	(11,676	)	$	906
Purchased technologies	7,145		(4,277		)	2,868
Domain name purchases	468		(453		)	15
Non-compete agreements	1,734		(786		)	948
Customer relationships	6,540		(3,561		)	2,979
Trademarks, tradenames and patents	2,789		(1,176		)	1,613
Other	18,108		(1,403		)	16,705
Total	$	49,366	$	(23,332	)	$	26,034

The increase in Other is primarily due to a transfer from work in process and represents a vendor fee for data center design services. The useful life of this asset is five years.

Amortization expense on intangibles was $6.5 million, $6.0 million and $5.6 million in 2009, 2010 and 2011, respectively. Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives, which range from one to six years. The only intangible assets amortized over six years are related to business acquisitions. As of December 31, 2011, amortization expense on intangible assets for the next five years was expected to be as follows:

(In thousands)
Year ending:	Amount
2012	$	6,744
2013	6,124
2014	4,995
2015	4,305
2016	3,331
Thereafter	535
Total	$	26,034

As of December 31, 2011, there were no indicators that our intangible assets were impaired.

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Debt

12 Months Ended

Dec. 31, 2011

Debt Disclosure [Abstract]

Debt

Debt

Debt outstanding consisted of:

(In thousands)	December 31, 2010			December 31, 2011
Notes payable	$	2,791		$	879
Total debt	2,791			879
Less current portion of debt	(1,912		)	(879		)
Total non-current debt	$	879		$	—

Revolving Credit Facility

On September 26, 2011, we entered into a revolving credit facility with a syndicate of seven banks led by JPMorgan Chase. This facility replaces our previous credit facility, which was due to expire in August 2012.  The new credit facility has a total commitment of $200 million and matures in September 2016.  The facility is governed by financial and non-financial covenants, including a leverage ratio of not greater than 3.00 to 1.00, an interest coverage ratio of not less than 3.00 to 1.00, and a requirement to maintain a certain level of tangible assets in our U.S. entities. Our marginal borrowing costs on this facility are based on a floating base rate (LIBOR) plus a spread, which ranges from 1.25% to 2.00%, depending on our degree of financial leverage. We also pay an unused fee on the committed, but unused amount of the facility, which ranges from 0.25% to 0.40%, also depending on our degree of financial leverage. The agreement further includes an accordion feature, which allows for an increase in the commitments to a total of $400 million under the same terms and conditions, subject to credit approval of the banking syndicate.

In entering into the new facility, we incurred loan origination fees of $1.1 million, which were included in other assets and will be amortized as a component of interest expense over the five-year term of the agreement.

In December 2010, we repaid the entire outstanding balance of our previous credit facility and have not had any borrowings under either the old or new facility since that time. Therefore, as of December 31, 2011, there was no amount outstanding under the facility except for an outstanding letter of credit of $0.4 million, resulting in $199.6 million being available for future borrowings. As of the same date, we were in compliance with all of the covenants under our facility.

Interest Rate Swap

Historically, we have used cash flow hedges to limit our exposure that may result from the variability of floating interest rates. Our previous interest rate swap, which had a notional amount of $50.0 million to hedge a portion of our outstanding floating-rate debt, expired in December 2010. Prior to its expiration, this swap converted floating-rate interest based on LIBOR into fixed-rate interest as part of the arrangement with our primary lender.

We were required to pay the counterparty a stream of fixed interest payments at a rate of 4.135%, and in turn, received variable interest payments based on 1-month LIBOR. The net receipts or payments from the swap were recorded as interest expense, and the swap was designated and qualified as a cash flow hedge. The swap was deemed to be highly effective, and there was no hedge ineffectiveness recognized in earnings during the years ended December 31, 2009 and 2010.

The following table presents the impact of the interest rate swap on the consolidated balance sheets:

	Year Ended December 31,
(In thousands)	2009		2010		2011
Effective gain recognized in accumulated other comprehensive income, net of tax	$	704	$	1,182	$	—

Notes Payable

We have entered into various financing arrangements with multiple equipment and software vendors. As of December 31, 2011 the total amount financed under these relationships was $0.9 million with various terms extending to June 2012 and stated rates ranging from 0.0% to 6.0%. For arrangements with below market interest rates, we impute an interest charge based on our average borrowing rate. The weighted average effective interest rate of the various arrangements with third-party vendors was 3.91% and 4.03% as of December 31, 2010 and 2011, respectively.

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Share-Based Compensation (Details 1) - Information by type of share-based payment award (USD $)	12 Months Ended									12 Months Ended	1 Months Ended			12 Months Ended
	Dec. 31, 2011 years		Dec. 31, 2010 years	Dec. 31, 2009	Dec. 31, 2011 Members of our Board of Directors	Dec. 31, 2011 2003 Stock Option Plan	Dec. 31, 2011 Non-Qualified 2005 Stock Option Plan	Dec. 31, 2011 Webmail.us, Inc. 2004 Stock Incentive Plan	Dec. 31, 2011 Amended and Restated 2007 Long-Term Incentive Plan	Dec. 31, 2011 Restricted Stock Units (RSUs) years	Feb. 28, 2009 Performance-based restricted stock units, dependent on the company's total shareholder return on its common stock compared to other companies in the Russell 2000 Index	Feb. 28, 2009 Performance-based restricted stock units dependent on the company's total shareholder return on its common stock for a 3-year performance period as compared to other companies in the Russell 2000 Index	Feb. 28, 2009 Performance-based restricted stock units dependent on the company's total shareholder return on its common stock for a 5-year performance period as compared to other companies in the Russell 2000 Index	Dec. 31, 2011 Service-based restricted stock units installments	Dec. 31, 2011 Performance-based restricted stock units, dependent on the company's total shareholder return on its common stock for a 3-year performance period as compared to the components of the NASDAQ Internet Index	Dec. 31, 2011 Stock Options installments years	Dec. 31, 2010 Stock Options years	Dec. 31, 2009 Stock Options years	Dec. 31, 2011 Stock Options Minimum	Dec. 31, 2011 Stock Options Maximum	Dec. 31, 2011 Stock Options, 7-year term	Dec. 31, 2011 Stock Options, 10-year term	Dec. 31, 2011 Stock Options, vest ratably over a 4-year period	Dec. 31, 2011 Stock Options, vest at the end of 3 years	Dec. 31, 2011 Stock options assumed through acquisitions	Dec. 31, 2011 Stock options assumed through acquisitions Minimum	Dec. 31, 2011 Stock options assumed through acquisitions Maximum
Share-based Compensation Arrangement by Share-based Payment Award
Minimum exercise price of stock option, as a percentage of the fair market value of a share of common stock as of the date of grant	100.00%								100.00%
Maximum number of additional shares that may be reserved each year for stock awards under the automatic share reserve provision of the Stock Plan									10,000,000
Maximum number of additional shares that may be reserved each year for stock awards under the automatic share reserve provision of the Stock Plan, as a percentage of the number of shares that were outstanding and issuable on the last day of the preceding fiscal year									4.00%
Number of additional shares that became available during the year for future stock award grants	5,800,000		5,700,000	5,500,000
Term of stock options awards																			7 years	10 years	7 years	10 years				7 years	10 years
Stock award vesting period												3 years	5 years		3 years	4 years							4 years	3 years
Number of equal installments in which the stock awards vest														4		4
Percentage of stock option award that vests in the first year after grant																									25.00%
Total unrecognized compensation cost related to non-vested stock awards that we have granted ($)										$ 37,000,000						$ 48,200,000
Remaining weighted average period over which the unrecognized compensation cost related to non-vested stock awards will be amortized on a straight line basis (measured in years)										1.8						2.3
Shares Authorized	43,013,180					2,511,255	11,639,580	101,180	28,761,165
Shares Outstanding	15,490,383		18,420,841			154,856	3,651,475	5,734	11,678,318
Shares Available for Future Grants	12,856,424					0	0	0	12,856,424
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested (Roll Forward)
Number of restricted stock units outstanding at beginning of year	2,869,832
Number of restricted stock units granted during period	873,185										2,000,000	1,050,000	950,000
Number of restricted stock units released during period	(203,141)	[1]			(5,358)
Number of restricted stock units cancelled during period	(92,906)
Number of restricted stock units outstanding at end of year	3,446,970		2,869,832
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Additional Disclosures
Weighted average grant date fair value of restricted stock units outstanding	$ 14.87		$ 9.23
Weighted average grant date fair value of restricted stock units granted during period	$ 36.22		$ 19.06	$ 5.45
Weighted average grant date fair value of restricted stock units released during period	$ 18.39	[1]
Weighted average grant date fair value of restricted stock units cancelled during period	$ 25.36
Number of restricted stock units expected to vest after December 31, 2011	3,240,268	[2]
Weighted average grant date fair value of restricted stock units expected to vest after December 31, 2011	$ 14.12	[2]
Pre-tax intrinsic value of the restricted stock units released during period	7,700,000		800,000	200,000
Grant date fair value of restricted stock unit awards											7,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding (Roll Forward)
Number of shares of stock options outstanding at beginning of year	15,551,009
Number of shares of stock options granted during period	2,006,619
Number of shares of stock options exercised during period	(4,715,721)
Number of shares of stock options cancelled during period	(798,494)
Number of shares of stock options outstanding at end of year	12,043,413		15,551,009
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures
Weighted average exercise price of stock options outstanding	$ 13.22		$ 8.45
Weighted average exercise price of stock options granted during period	$ 37.57
Weighted average exercise price of stock options exercised during period	$ 7.47
Weighted average exercise price of stock options cancelled during period	$ 15.67
Weighted average remaining contractual life of stock options outstanding (years)	5.93		6.84
Aggregate intrinsic value of stock options outstanding ($)	358,754,000		356,993,000
Number of shares of stock options vested and exercisable at December 31, 2011	6,613,338
Weighted average exercise price of stock options vested and exercisable at December 31, 2011	$ 6.25
Weighted average remaining contractual life of stock options vested and exercisable at December 31, 2011 (years)	5.23
Aggregate intrinsic value of stock options vested and exercisable at December 31, 2011 ($)	242,936,000
Total pre-tax intrinsic value of stock options exercised ($)	149,200,000		53,000,000	54,200,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest
Number of shares of stock options vested and exercisable at December 31, 2011 and expected to vest thereafter	11,330,648	[2]
Weighted average exercise price of stock options vested and exercisable at December 31, 2011 and expected to vest thereafter	$ 12.37	[2]
Weighted average remaining contractual life of stock options vested and exercisable at December 31, 2011 and expected to vest thereafter (years)	5.89	[2]
Aggregate intrinsic value of stock options vested and exercisable at December 31, 2011 and expected to vest thereafter ($)	$ 347,191,000	[2]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions and Methodology
Expected stock volatility (minimum)																56.00%	55.00%	57.00%
Expected volatility (maximum)																57.00%	56.00%	61.00%
Expected dividend yield																0.00%	0.00%	0.00%
Risk-free interest rate (minimum)																0.85%	1.35%	2.24%
Risk-free interest rate (maximum)																2.35%	2.79%	3.03%
Expected life																4.75		6.25
Expected life (minimum)																	4.75
Expected life (maximum)																	6.25
Weighted average grant date fair value of options granted during the period	$ 18.09		$ 10.55	$ 3.71

[1] Includes 5,358 shares of restricted stock units issued to certain members of our board of directors.

[2] Includes reduction of shares outstanding due to estimated forfeitures

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Taxes (Details 1) - Provision for Income Taxes & Tax Rate Reconciliation (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Current:
Federal	$ 18,372,000	$ 691,000	$ (5,911,000)
Foreign	14,976,000	16,994,000	10,243,000
State	4,011,000	3,658,000	2,509,000
Total current	37,359,000	21,343,000	6,841,000
Deferred:
Federal	4,345,000	6,933,000	10,497,000
Foreign	(877,000)	(2,908,000)	(826,000)
State	(809,000)	(315,000)	(184,000)
Total deferred	2,659,000	3,710,000	9,487,000
Total provision for income taxes	40,018,000	25,053,000	16,328,000
Income Before Income Taxes
Income from foreign operations that is included in consolidated income before income taxes	$ 51,700,000	$ 47,900,000	$ 31,200,000
Reconciliation of Statutory Federal Tax Rate to Effective Tax Rate
Statutory federal tax rate	35.00%	35.00%	35.00%
State taxes, net of federal benefit	1.90%	3.00%	3.30%
Tax rate differentials for international jurisdictions	(4.10%)	(4.00%)	(3.20%)
Permanent items, including non-deductible stock-based compensation and meals & entertainment	1.80%	0.80%	0.30%
Other, net	(0.20%)	0.30%	(0.30%)
Effective tax rate	34.40%	35.10%	35.10%

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Stockholders' Equity (Details) (USD $)	1 Months Ended				12 Months Ended
	Apr. 30, 2010	Aug. 31, 2009	Apr. 30, 2009	Mar. 31, 2009	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Common Stock
Shares of common stock legally issued					131,912,829	126,950,468
Shares of common stock outstanding					131,912,829	126,950,468
Number of classes of authorized common stock					1
Number of votes per share of common stock owned					1
Earn-outs related to previous business acquisitions
Stock Issued During Period, Value, Earn Out					$ 0	$ 510,000	$ 8,680,000
Employee Stock Purchase Plan
Number of Employee Stock Purchases Under the ESPP During the Year					2	2	2
Employee Stock Purchase Plan (ESPP), Compensation Expense					0	0	0
Share-based Compensation to Board of Directors
Stock Issued During Period, Value, Board of Directors					779,000	484,000	462,000
Preferred Stock
Authorized shares of preferred stock					50,000,000	50,000,000
Shares of preferred stock issued					0	0
Shares of preferred stock outstanding					0	0
Common Stock
Earn-outs related to previous business acquisitions
Stock Issued During Period, Shares, Earn Out	27,080	477,964	200,000	140,935
Stock Issued During Period, Price per Share, Earnout	$ 18.833	$ 14.227	$ 5.574	$ 5.428
Stock Issued During Period, Value, Earn Out	510,000	6,800,000	1,100,000	765,000
Employee Stock Purchase Plan
Stock Issued During Period, Shares, Employee Stock Purchase Plans					25,755	26,703	26,836
Employee stock options and restricted stock units
Stock Issued During Period, Shares, Options Exercised and Restricted Stock Awards Released					4,913,504	3,101,687	5,723,772
Share-based Compensation to Board of Directors
Stock Issued During Period, Shares, Board of Directors					23,102	21,021	50,376
Stock Issued During Period, Value, Board of Directors					$ 779,000	$ 484,000	$ 462,000

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Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2011

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Schedule of Finite-Lived Intangible Assets by Major Class

The following tables provide information regarding our intangible assets, other than goodwill:

	December 31, 2010
(In thousands)	Gross carrying amount		Accumulated amortization			Net carrying amount
Intangible assets:
Licenses	$	11,571	$	(10,356	)	$	1,215
Purchased technologies	7,145		(2,970		)	4,175
Domain name purchases	459		(440		)	19
Non-compete agreements	1,534		(382		)	1,152
Customer relationships	5,240		(2,389		)	2,851
Trademarks, tradenames and patents	887		(657		)	230
Other	631		(598		)	33
Total	$	27,467	$	(17,792	)	$	9,675

	December 31, 2011
(In thousands)	Gross carrying amount		Accumulated amortization			Net carrying amount
Intangible assets:
Licenses	$	12,582	$	(11,676	)	$	906
Purchased technologies	7,145		(4,277		)	2,868
Domain name purchases	468		(453		)	15
Non-compete agreements	1,734		(786		)	948
Customer relationships	6,540		(3,561		)	2,979
Trademarks, tradenames and patents	2,789		(1,176		)	1,613
Other	18,108		(1,403		)	16,705
Total	$	49,366	$	(23,332	)	$	26,034

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

As of December 31, 2011, amortization expense on intangible assets for the next five years was expected to be as follows:

(In thousands)
Year ending:	Amount
2012	$	6,744
2013	6,124
2014	4,995
2015	4,305
2016	3,331
Thereafter	535
Total	$	26,034

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Intangible Assets (Details) (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Intangible assets, other than goodwill
Gross carrying amount	$ 49,366,000	$ 27,467,000
Accumulated amortization	(23,332,000)	(17,792,000)
Net carrying amount	26,034,000	9,675,000
Amortization expense on intangibles	5,600,000	6,000,000	6,500,000
Amortization expense on intangible assets for the next five years
2012	6,744,000
2013	6,124,000
2014	4,995,000
2015	4,305,000
2016	3,331,000
Thereafter	535,000
Total	26,034,000
Licenses
Intangible assets, other than goodwill
Gross carrying amount	12,582,000	11,571,000
Accumulated amortization	(11,676,000)	(10,356,000)
Net carrying amount	906,000	1,215,000
Purchased technologies
Intangible assets, other than goodwill
Gross carrying amount	7,145,000	7,145,000
Accumulated amortization	(4,277,000)	(2,970,000)
Net carrying amount	2,868,000	4,175,000
Domain name purchases
Intangible assets, other than goodwill
Gross carrying amount	468,000	459,000
Accumulated amortization	(453,000)	(440,000)
Net carrying amount	15,000	19,000
Non-compete agreements
Intangible assets, other than goodwill
Gross carrying amount	1,734,000	1,534,000
Accumulated amortization	(786,000)	(382,000)
Net carrying amount	948,000	1,152,000
Customer relationships
Intangible assets, other than goodwill
Gross carrying amount	6,540,000	5,240,000
Accumulated amortization	(3,561,000)	(2,389,000)
Net carrying amount	2,979,000	2,851,000
Trademarks, tradenames and patents
Intangible assets, other than goodwill
Gross carrying amount	2,789,000	887,000
Accumulated amortization	(1,176,000)	(657,000)
Net carrying amount	1,613,000	230,000
Other
Intangible assets, other than goodwill
Gross carrying amount	18,108,000	631,000
Accumulated amortization	(1,403,000)	(598,000)
Net carrying amount	$ 16,705,000	$ 33,000
Capitalized vendor fee for data center design services, included in other intangible assets
Intangible assets, other than goodwill
Useful life of the intangible asset by asset class	5
Minimum
Intangible assets, other than goodwill
Estimated useful lives of intangible assets	1
Maximum
Intangible assets, other than goodwill
Estimated useful lives of intangible assets	6

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Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Taxes

Taxes

The provision for income taxes consisted of:

	Year Ended December 31,
(In thousands)	2009			2010			2011
Current:
Federal	$	(5,911	)	$	691		$	18,372
Foreign	10,243			16,994			14,976
State	2,509			3,658			4,011
Total current	6,841			21,343			37,359
Deferred:
Federal	10,497			6,933			4,345
Foreign	(826		)	(2,908		)	(877		)
State	(184		)	(315		)	(809		)
Total deferred	9,487			3,710			2,659
Total provision for income taxes	$	16,328		$	25,053		$	40,018

Income before income taxes included income from foreign operations of approximately $31.2 million, $47.9 million and $51.7 million for the years ended December 31, 2009, 2010 and 2011, respectively.

A reconciliation of the statutory federal tax rate to the effective tax rate is as follows:

	Year Ended December 31,
	2009		2010		2011
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	3.3	%	3.0	%	1.9	%
Tax rate differentials for international jurisdictions	-3.2	%	-4.0	%	-4.1	%
Permanent differences	0.3	%	0.8	%	1.8	%
Other, net	-0.3	%	0.3	%	-0.2	%
Effective tax rate	35.1	%	35.1	%	34.4	%

Deferred Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Significant components of our deferred tax assets and liabilities are as follows:

(In thousands)	December 31, 2010			December 31, 2011
Deferred tax assets:
Share-based compensation	$	16,096		$	15,927
Accounts receivable	948			1,079
State income taxes	901			455
Vacation accruals	1,493			2,159
Deferred revenue	2,650			2,591
Deferred rent	4,277			7,188
Accruals not currently deductible	4,476			6,508
Net operating loss carryforwards	9,321			2,843
Charitable contribution carryforward	284			560
Foreign tax credit	72			955
Research and development credits	1,369			3,142
Other	521			14
Total gross deferred tax assets	42,408			43,421
Deferred tax liabilities:
Depreciation	64,072			96,758
Share-based compensation	—			476
Prepaids	1,488			824
Total gross deferred tax liabilities	65,560			98,058
Net deferred tax assets (liabilities)	$	(23,152	)	$	(54,637	)

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. A valuation allowance was not established or deemed necessary based upon the determination that future profits are anticipated.

The company has not recognized a deferred tax liability for undistributed earnings of its foreign subsidiaries because such earnings are considered indefinitely invested in a foreign country. As of December 31, 2011, undistributed earnings of the company’s foreign subsidiaries considered indefinitely invested were approximately $124.1 million. We intend to reinvest these earnings in active non-U.S. business operations and do not currently intend to repatriate these earnings to fund U.S. operations.

We have $147.6 million of federal net operating loss carryforwards and $4.1 million of federal tax credit carryforwards expiring at various dates through 2031. The federal net operating loss carryforwards include approximately $147.6 million of gross windfall tax benefits from stock option exercises that have not been recorded as of December 31, 2011. We have $17.5 million of foreign net operating loss carryforwards with an indefinite expiration date.

Uncertain Tax Positions

We file income tax returns in each jurisdiction in which we operate, both domestically and internationally. Due to the complexity involved with certain tax matters, we have considered all relevant facts and circumstances for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. We believe that there are no other jurisdictions in which the outcome of uncertain tax matters is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.

A reconciliation of our unrecognized tax benefits, excluding accrued interest, for 2010 and 2011 is as follows:

(In thousands)	2010		2011
Balance, beginning of year	$	356	$	2,456
Additions based on tax positions related to the current year	199		13,045
Additions for tax positions of prior years	1,901		1,228
Reductions for tax positions of prior years	—		—
Settlements	—		—
Balance, end of year	$	2,456	$	16,729

Unrecognized tax benefits of $2.5 million and $16.7 million for 2010 and 2011, respectively, are included in other non-current liabilities on the balance sheet. At December 31, 2010 and 2011, respectively, approximately $1.0 million and $2.3 million of these unrecognized tax benefits, if recognized, would favorably impact our effective tax rate in any future period. Also included in the balance of unrecognized tax benefits at December 31, 2011 are liabilities of $12.6 million that, if recognized, would be recorded as an adjustment to other current and non-current assets. We do not expect the amount of unrecognized tax benefits disclosed above to change significantly over the next 12 months.

We recognize interest expense and penalties related to income tax matters in interest and penalties expense within other income (expense) on our consolidated statements of income and not as income tax expense. As of December 31, 2010 and 2011, we had no accrued interest or penalties on the consolidated balance sheets. For the years ended December 31, 2009, 2010 and 2011, no amount for interest or penalties related to unrecognized tax benefits was recorded in the consolidated statements of income.

We are subject to U.S. federal income tax and various state, local, and international income taxes in numerous jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. As such, our effective tax rate is impacted by the geographical distribution of income and mix of profits in the various jurisdictions.  Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file.

We currently file income tax returns in the U.S. and all foreign jurisdictions in which we have entities, which are periodically under audit by federal, state, and international tax authorities. These audits can involve complex matters that may require an extended period of time for resolution. We remain subject to U.S. federal and state income tax examinations for the tax years 2007 through 2011, U.K. income tax examinations for the years 2009 through 2011, Netherlands income tax examinations for the years 2007 through 2011, and Hong Kong income tax examinations for the years 2008 through 2011. There are no income tax examinations currently in process. Although the outcome of open tax audits is uncertain, in management’s opinion, adequate provisions for income taxes have been made. If actual outcomes differ materially from these estimates, they could have a material impact on our financial condition and results of operations. Differences between actual results and assumptions or changes in assumptions in future periods are recorded in the period they become known. To the extent additional information becomes available prior to resolution, such accruals are adjusted to reflect probable outcomes.

During 2011 we received federal income tax refunds totaling $4.5 million related to the 2007 and 2010 tax periods. We experienced a taxable profit in the U.S. and U.K. in 2011, and therefore we anticipate utilizing benefits of tax deductions related to stock compensation As a result, we have recognized an excess tax benefit in the U.S. and U.K.

During 2011, Rackspace US, Inc. sold certain intellectual property to a wholly-owned offshore subsidiary in a taxable transaction.  As a result of the transaction, there is an asset on the consolidated balance sheet as of December 31, 2011 of $38.3 million (of which $37.2 million was recorded in Other non-current assets) that will be amortized through income tax expense over the lives of the applicable intellectual property. Although the transaction was taxable, the resulting gain was entirely offset against existing net operating losses, including excess stock compensation deductions. Thus, there was no cash tax impact from the sale of the intellectual property.

Rackspace takes certain non-income tax positions in the jurisdictions in which it operates and may be subject to audit from these jurisdictions. Rackspace is also involved in related non-income tax matters. We believe our positions are supportable, and we have accrued for known exposure; however, significant judgment is required in determining the ultimate outcome of such matters. In the normal course of business, our position and conclusion related to these non-income taxes may be challenged and assessments may be made. To the extent new information is obtained and changes our views on our positions, probable outcome of assessments, or litigation, changes in estimates to accrued liabilities would be recorded in the period the determination is made.

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Supplementary Financial Data (Unaudited)

12 Months Ended

Dec. 31, 2011

Selected Quarterly Financial Information [Abstract]

Supplementary Financial Data

SUPPLEMENTARY FINANCIAL DATA

	Quarters Ended
(In thousands, except per share amounts)	March 31, 2010		June 30, 2010		September 30, 2010		December 31, 2010
	(Unaudited)
Net revenue	$	178,805	$	187,314	$	199,710	$	214,726
Cost of revenue	$	57,007	$	61,470	$	64,616	$	66,747
Gross margin	$	121,798	$	125,844	$	135,094	$	147,979
Net income	$	9,812	$	11,198	$	11,809	$	13,539
Earnings per share - basic	$	0.08	$	0.09	$	0.09	$	0.11
Earnings per share - diluted	$	0.07	$	0.08	$	0.09	$	0.10
Cash and cash equivalents	$	131,297	$	148,496	$	166,557	$	104,941

	Quarters Ended
(In thousands, except per share amounts)	March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
	(Unaudited)
Net revenue	$	230,002	$	247,229	$	264,572	$	283,261
Cost of revenue	$	69,742	$	74,057	$	82,445	$	82,851
Gross margin	$	160,260	$	173,172	$	182,127	$	200,410
Net income	$	13,821	$	17,561	$	19,982	$	25,047
Earnings per share - basic	$	0.11	$	0.14	$	0.15	$	0.19
Earnings per share - diluted	$	0.10	$	0.13	$	0.14	$	0.18
Cash and cash equivalents	$	133,868	$	132,025	$	124,680	$	159,856

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Business Combinations and Goodwill (Details 1) - Business Combinations (USD $)	12 Months Ended					12 Months Ended	1 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009	Dec. 31, 2011 Company Acquired in January 2011 Payments	Jan. 31, 2011 Company Acquired in January 2011	Dec. 31, 2011 Company Acquired in December 2010 installments Payments	Apr. 30, 2010 Company Acquired in 2008
Business Acquisitions
Fair value of the contingent consideration as of the date of acquisition ($)					$ 2,100,000
Total number of earn-out payment installments scheduled						6
Number of earn-out payments paid to acquiree to-date				2		3
Cash payments during period for earn-outs related to previous acquisitions ($)	0	490,000	6,822,000	1,000,000		5,000,000	1,000,000
Fair value of liabilities to former owners of acquirees, including contingent considerations, at balance sheet date ($)				$ 1,200,000		$ 4,900,000

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Segment Information (Tables)

12 Months Ended

Dec. 31, 2011

Segment Reporting [Abstract]

Schedule of net revenue by geographic region

Total net revenue by geographic region was as follows: 

	Year Ended December 31,
(In thousands)	2009		2010		2011
United States	$	467,901	$	583,546	$	767,752
International	161,086		197,009		257,312
Total net revenue	$	628,987	$	780,555	$	1,025,064

Schedule of property and equipment, net, by geographic region

Property and equipment, net by geographic region was as follows: 

(In thousands)	December 31, 2010		December 31, 2011
United States	$	395,318	$	485,608
International	99,910		141,882
Total property and equipment, net	$	495,228	$	627,490

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash Flows From Operating Activities
Net income	$ 76,411	$ 46,358	$ 30,218
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	195,412	155,895	125,229
Loss on disposal of equipment, net	247	758	1,027
Provision for bad debts and customer credits	5,913	4,330	10,347
Deferred income taxes	13,991	6,788	9,379
Deferred rent	9,471	7,064	4,378
Share-based compensation expense	28,773	26,624	20,124
Excess tax benefits from share-based compensation arrangements	(20,627)	(2,370)	0
Changes in certain assets and liabilities
Accounts receivable	(26,805)	(12,864)	(17,075)
Income taxes receivable	4,397	2,606	4,809
Prepaid expenses and other current assets	(2,597)	(10,125)	(2,313)
Accounts payable and accrued expenses	57,476	16,765	15,168
Deferred revenue	(482)	(488)	(1,163)
All other operating activities	1,405	2,894	(3,260)
Net cash provided by operating activities	342,985	244,235	196,868
Cash Flows From Investing Activities
Purchases of property and equipment, net	(269,804)	(144,778)	(117,292)
Acquisitions, net of cash acquired	(952)	(29,854)	0
Earn-out payments for acquisitions	0	(490)	(6,822)
All other investing activities	168	(75)	0
Net cash used in investing activities	(270,588)	(175,197)	(124,114)
Cash Flows From Financing Activities
Principal payments of capital leases	(65,778)	(52,129)	(44,680)
Principal payments of notes payable	(1,913)	(4,893)	(6,729)
Payments on line of credit	0	(50,000)	(150,000)
Payments for debt issuance costs	(1,114)	0	(367)
Payments of earn-out provisions for acquisitions	(5,299)	0	0
Proceeds from employee stock plans	36,287	15,250	14,489
Excess tax benefits from share-based compensation arrangements	20,627	2,370	0
Net cash used in financing activities	(17,190)	(89,402)	(187,287)
Effect of exchange rate changes on cash and cash equivalents	(292)	(120)	1,551
Increase (decrease) in cash and cash equivalents	54,915	(20,484)	(112,982)
Cash and cash equivalents, beginning of period	104,941	125,425	238,407
Cash and cash equivalents, end of period	159,856	104,941	125,425
Supplemental cash flow information:
Acquisition of property and equipment by capital leases	75,090	71,363	64,692
Acquisition of property and equipment by notes payable	0	0	3,690
Vendor financed equipment purchases	75,090	71,363	68,382
Shares issued in business combinations	0	510	8,680
Cash payments for interest, net of amount capitalized	5,577	7,743	8,213
Cash payments for income taxes	$ 19,088	$ 20,112	$ 8,651

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Cash and Cash Equivalents

12 Months Ended

Dec. 31, 2011

Cash and Cash Equivalents [Abstract]

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents consisted of:

(In thousands)	December 31, 2010		December 31, 2011
Cash deposits	$	64,201	$	119,115
Money market funds	40,740		40,741
Cash and cash equivalents	$	104,941	$	159,856

Our available cash and cash equivalents are held in bank deposits, overnight sweep accounts, and money market funds. We actively monitor the third-party depository institutions that hold our deposits. Our emphasis is primarily on safety of principal while secondarily maximizing yield on those funds.

Our money market mutual funds invest exclusively in high-quality, short-term securities that are issued or guaranteed by the U.S. government or by U.S. government agencies.

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Commitments and Contingencies (Details 1) - Purchase Commitments (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2011
Purchase Commitments
Minimum purchase commitments for the year ended December 31, 2012	47.6
Minimum purchase commitments for the year ended December 31, 2013	4.4
Minimum purchase commitments for the year ended December 31, 2014	0.9
Minimum purchase commitments for the year ended December 31, 2015	0.1
Minimum
Purchase Commitments
Duration of non-cancelable purchase agreements	1 year
Maximum
Purchase Commitments
Duration of non-cancelable purchase agreements	3 years

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Taxes (Details 4) - Taxable Transactions (USD $)			12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2011 Intercompany sale of intellectual property
Taxable Transactions
Asset recorded as a result of the intercompany sale of intellectual property			$ 38,300,000
Other non-current assets	49,600,000	14,082,000	37,200,000
Cash tax impact from the sale of intellectual property			$ 0

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Schedule of Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2011

Valuation and Qualifying Accounts [Abstract]

Schedule of Valuation and Qualifying Accounts Disclosure

Financial Statement Schedules

The following financial statement schedule is filed as a part of this Annual Report:

Schedule II - Valuation and Qualifying Accounts

All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.

(In thousands)	Beginning Balance		Additions Charged to Net Revenues, and Costs and Expenses		Write-offs of Accounts Receivable and Credit Memos Paid			Ending Balance
Allowance for doubtful accounts and customer credits for the years ending December 31:
2009	$	3,295	$	13,364	$	(12,361	)	$	4,298
2010	$	4,298	$	7,223	$	(8,675	)	$	2,846
2011	$	2,846	$	9,063	$	(8,489	)	$	3,420

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Schedule of Valuation and Qualifying Accounts (Details) (Allowance for Doubtful Accounts and Customer Credits [Member], USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Allowance for Doubtful Accounts and Customer Credits [Member]
Movement in Valuation Allowances and Reserves [Roll Forward]
Beginning Balance	$ 2,846	$ 4,298	$ 3,295
Additions Charged to Net Revenues, and Costs and Expenses	9,063	7,223	13,364
Write-offs of Accounts Receivable and Credit Memos Paid	(8,489)	(8,675)	(12,361)
Ending Balance	$ 3,420	$ 2,846	$ 4,298

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Share-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Total number of shares authorized, outstanding and available for future grants under the Stock Plans at period end

As of December 31, 2011, the total number of shares authorized, outstanding and available for future grants under the Stock Plans was as follows:

Plan Name	Shares Authorized	Shares Outstanding	Shares Available for Future Grants
2003 Stock Option Plan	2,511,255	154,856	—
Non-Qualified 2005 Stock Option Plan	11,639,580	3,651,475	—
Webmail.us, Inc. 2004 Stock Incentive Plan	101,180	5,734	—
Amended and Restated 2007 Long-Term Incentive Plan	28,761,165	11,678,318	12,856,424
Total	43,013,180	15,490,383	12,856,424

Outstanding stock awards

The composition of the shares outstanding as of December 31, 2010 and 2011 was as follows: 

	December 31, 2010	December 31, 2011
Restricted stock units	2,869,832	3,446,970
Stock options	15,551,009	12,043,413
Total outstanding awards	18,420,841	15,490,383

Restricted stock unit activity

The following table summarizes our restricted stock unit activity for the year ended December 31, 2011:

	Number of Units	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2010	2,869,832	$	9.23
Granted	873,185	$	36.22
Released (1)	(203,141)	$	18.39
Cancelled	(92,906)	$	25.36
Outstanding at December 31, 2011	3,446,970	$	14.87
Expected to vest after December 31, 2011*	3,240,268	$	14.12

 (1) Includes 5,358 shares of restricted stock units issued to certain members of our board of directors.

*Includes reduction of shares outstanding due to estimated forfeitures

Stock option activity

The following table summarizes the stock option activity for the year ended December 31, 2011: 

	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2010	15,551,009	$	8.45	6.84	$	356,993
Granted	2,006,619	$	37.57
Exercised	(4,715,721)	$	7.47
Cancelled	(798,494)	$	15.67
Outstanding at December 31, 2011	12,043,413	$	13.22	5.93	$	358,754
Vested and exercisable at December 31, 2011	6,613,338	$	6.25	5.23	$	242,936
Vested and exercisable at December 31, 2011 and expected to vest thereafter*	11,330,648	$	12.37	5.89	$	347,191

*Includes reduction of shares outstanding due to estimated forfeitures

Assumptions used to estimate the fair values of the stock options granted

The following table presents the assumptions used to estimate the fair values of the stock options granted in the periods presented:

	Years Ended December 31,
	2009	2010	2011
Expected stock volatility	57% - 61%	55% - 56%	56% - 57%
Expected dividend yield	0.0%	0.0%	0.0%
Risk-free interest rate	2.24% - 3.03%	1.35% - 2.79%	0.85% - 2.35%
Expected life	6.25 years	4.75 - 6.25 years	4.75 years
Weighted average grant date fair value of options granted during the year	$3.71	$10.55	$18.09

Allocation of share-based compensation expense to income statement line items

Share-based compensation expense was recognized as follows: 

	Year Ended December 31,
(in thousands)	2009			2010			2011
Cost of revenue	$	2,850		$	4,660		$	4,220
Sales and marketing	2,884			4,241			2,313
General and administrative	14,390			17,723			22,240
Pre-tax share-based compensation	20,124			26,624			28,773
Less: Income tax benefit	(7,059		)	(9,340		)	(9,890		)
Total share-based compensation expense, net of tax	$	13,065		$	17,284		$	18,883

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Share-Based Compensation

12 Months Ended

Dec. 31, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-Based Compensation

Share-Based Compensation

In December 2007, we adopted our 2007 Long Term Incentive Plan, or the 2007 Stock Plan. Under the 2007 Stock Plan, incentive and non-qualified stock options or rights to purchase common stock may be granted to eligible participants. In addition to stock options, we may grant other equity awards such as stock appreciation rights, restricted stock awards, restricted stock units, performance awards, cash-based awards, and dividend equivalents. All awards, excluding incentive stock options, may be granted under the plan to employees, officers, directors, or any other non-employee service provider to the company. Incentive stock options may be granted only to employees of the company or a subsidiary. The exercise price of a stock option granted under the 2007 Stock Plan will be determined by the Compensation Committee at the time the option is granted and generally may not be less than 100% of the fair market value of a share of common stock as of the date of grant. The 2007 Stock Plan has an automatic share reserve increase effective the first day of each fiscal year beginning in 2009 with an amount equal to the lesser of (i) 10,000,000 shares, (ii) four percent of the number of shares on the last day of the immediately preceding fiscal year that are (a) outstanding and (b) issuable pursuant to outstanding awards and awards under prior plans, or (iii) such lesser number of shares determined by our board of directors. For fiscal years 2009, 2010 and 2011, this resulted in an increase of approximately 5.5 million, 5.7 million and 5.8 million shares, respectively, available under our Stock Plans.

In addition to the 2007 Stock Plan, we also maintain the 2003 Stock Plan, the 2005 Stock Plan and plans assumed through acquisitions, collectively referred to as the Stock Plans. Options are priced to be at least 100% of our common stock’s fair market value at the date of grant. Options have generally been granted for terms of either seven or ten years. Options granted under the Stock Plans generally vest ratably over a four-year period, or at the end of three years. Stock options assumed through acquisitions have had seven to ten-year terms and vest 25% the first year and ratably over the remaining periods.

As of December 31, 2011, the total number of shares authorized, outstanding and available for future grants under the Stock Plans was as follows:

Plan Name	Shares Authorized	Shares Outstanding	Shares Available for Future Grants
2003 Stock Option Plan	2,511,255	154,856	—
Non-Qualified 2005 Stock Option Plan	11,639,580	3,651,475	—
Webmail.us, Inc. 2004 Stock Incentive Plan	101,180	5,734	—
Amended and Restated 2007 Long-Term Incentive Plan	28,761,165	11,678,318	12,856,424
Total	43,013,180	15,490,383	12,856,424

The composition of the shares outstanding as of December 31, 2010 and 2011 was as follows: 

	December 31, 2010	December 31, 2011
Restricted stock units	2,869,832	3,446,970
Stock options	15,551,009	12,043,413
Total outstanding awards	18,420,841	15,490,383

The following table summarizes our restricted stock unit activity for the year ended December 31, 2011:

	Number of Units	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2010	2,869,832	$	9.23
Granted	873,185	$	36.22
Released (1)	(203,141)	$	18.39
Cancelled	(92,906)	$	25.36
Outstanding at December 31, 2011	3,446,970	$	14.87
Expected to vest after December 31, 2011*	3,240,268	$	14.12

 (1) Includes 5,358 shares of restricted stock units issued to certain members of our board of directors.

*Includes reduction of shares outstanding due to estimated forfeitures

The weighted average grant date fair value of restricted stock units granted during fiscal years 2009 and 2010 was $5.45 and $19.06, respectively. The total pre-tax intrinsic value of the restricted stock units released during fiscal years 2009, 2010 and 2011 was $0.2 million, $0.8 million and $7.7 million, respectively.

In February 2009, our board approved grants of restricted stock units (RSUs) to our chief executive officer and another member of the executive team. A total of 2,000,000 RSUs were granted. The vesting of the RSUs is dependent on the company’s total shareholder return (TSR) on its common stock compared to other companies in the Russell 2000 Index. In addition, the company’s TSR must be positive for vesting to occur. Of the total RSUs granted, 1,050,000 have a measurement period at the end of three years, and the remainder have a measurement period at the end of five years. The grant date fair value of these awards was $7.0 million and is being amortized over the awards’ service periods. The fair value was calculated using a Monte Carlo pricing model.

The remaining RSUs that have been granted fall into the following two general categories:

• Service-based RSUs that vest, so long as the employee continues to be employed with us, in four equal installments, on each of the first, second, third and fourth anniversaries of the grant date. Stock-based compensation expense for these service-vesting RSUs is measured based on the closing fair market value of the company's common stock on the date of grant and is recognized ratably over the service period.

• Performance-based RSUs (accounted for as market condition awards) are granted to members of our executive team. The vesting of these RSUs is dependent on the company's TSR on its common stock for a 3-year performance period as compared to the components of the NASDAQ Internet Index over this same period. In addition, the company's TSR must be positive for vesting to occur. Stock-based compensation expense for this type of RSU is measured using a Monte Carlo pricing method and is recognized ratably over the vesting period. 

As of December 31, 2011, there was $37.0 million of total unrecognized compensation cost related to non-vested RSUs that we have granted, which will be amortized using the straight-line method over a remaining weighted average period of 1.8 years.

The following table summarizes the stock option activity for the year ended December 31, 2011: 

	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2010	15,551,009	$	8.45	6.84	$	356,993
Granted	2,006,619	$	37.57
Exercised	(4,715,721)	$	7.47
Cancelled	(798,494)	$	15.67
Outstanding at December 31, 2011	12,043,413	$	13.22	5.93	$	358,754
Vested and exercisable at December 31, 2011	6,613,338	$	6.25	5.23	$	242,936
Vested and exercisable at December 31, 2011 and expected to vest thereafter*	11,330,648	$	12.37	5.89	$	347,191

*Includes reduction of shares outstanding due to estimated forfeitures

The stock options granted in 2009, 2010 and 2011 vest as the employee continues to be employed with us, in four equal installments, on each of the first, second, third and fourth anniversaries of the grant date and have a term of 7 or 10 years.

The total pre-tax intrinsic value of the stock options exercised during fiscal 2009, 2010 and 2011 was $54.2 million, $53.0 million and $149.2 million, respectively.

The following table presents the assumptions used to estimate the fair values of the stock options granted in the periods presented:

	Years Ended December 31,
	2009	2010	2011
Expected stock volatility	57% - 61%	55% - 56%	56% - 57%
Expected dividend yield	0.0%	0.0%	0.0%
Risk-free interest rate	2.24% - 3.03%	1.35% - 2.79%	0.85% - 2.35%
Expected life	6.25 years	4.75 - 6.25 years	4.75 years
Weighted average grant date fair value of options granted during the year	$3.71	$10.55	$18.09

As of December 31, 2011, there was $48.2 million of total unrecognized compensation cost related to non-vested stock options that we have granted, which will be amortized using the straight line method over a weighted average period of 2.3 years.

Share-based compensation expense was recognized as follows: 

	Year Ended December 31,
(in thousands)	2009			2010			2011
Cost of revenue	$	2,850		$	4,660		$	4,220
Sales and marketing	2,884			4,241			2,313
General and administrative	14,390			17,723			22,240
Pre-tax share-based compensation	20,124			26,624			28,773
Less: Income tax benefit	(7,059		)	(9,340		)	(9,890		)
Total share-based compensation expense, net of tax	$	13,065		$	17,284		$	18,883