Rackspace Hosting Reports Second Quarter 2013 Results

For the quarter ended June 30, 2013:

  • Net revenue of $376 million grew 18% year-over-year and 3.8% from Q1 2013
  • Adjusted EBITDA(1) of $123 million grew 10% year-over-year and declined 1.5% from Q1 2013
  • Achieved Adjusted EBITDA margin of 32.8%, compared to 35.1% in Q2 2012 and 34.5% in Q1 2013
  • Net income of $22 million declined 11% year-over-year and 18.0% from Q1 2013

SAN ANTONIO--()--Rackspace® Hosting, Inc. (NYSE: RAX), the open cloud company, announced financial results for the quarter ended June 30, 2013.

Net revenue for the second quarter of 2013 was $376 million, up 3.8% from the previous quarter and up 18% from the second quarter of 2012. Net revenue for the second quarter of 2013 was negatively impacted by currency exchange rates when compared to the previous quarter by $1.0 million and negatively impacted when compared to the second quarter of 2012 by $2.7 million.

Total server count increased to 98,884, up from 94,122 servers at the end of the previous quarter.

Adjusted EBITDA for the quarter was $123 million, a 1.5% decrease compared to the first quarter of 2013 and a 10% increase compared to the second quarter of 2012. The Adjusted EBITDA margin for the quarter was 32.8% compared to 34.5% in the previous quarter and 35.1% in the second quarter of 2012.

Consistent with prior periods, Adjusted EBITDA and Adjusted EBITDA margin were negatively impacted by a non-cash charge relating to data center operating leases. During the second quarter of 2013, the non-cash data center lease charge was $1.5 million.

Net income was $22 million for the quarter, down 18.0% from the previous quarter and down 11% from the second quarter of 2012. Net income margin for the quarter was 6.0% compared to 7.5% for the previous quarter and 7.9% in the second quarter of 2012.

Cash flow from operating activities was $106 million for the second quarter of 2013. Capital expenditures were $107 million, including $73 million for purchases of customer gear, $10 million for data center build outs, $2 million for office build outs and $22 million for capitalized software and other projects.

Adjusted Free Cash Flow(1) for the quarter was $11 million. Return on Capital(1) was 11.9% in the second quarter, compared to 15.1% in the prior quarter and 15.5% in the second quarter of 2012. Average monthly revenue per server was $1,298, compared to $1,308 in the prior quarter and $1,270 in the second quarter of 2012.

At the end of the second quarter of 2013, cash and cash equivalents were $263 million, and debt including capital lease obligations totaled $88 million.

On a worldwide basis, Rackspace employed 5,272 Rackers as of June 30, 2013, up from 5,043 in the previous quarter.

Rackspace Developments and Business Highlights

  • Rackspace ranks No. 56 on Computerworld’s “100 Best Places To Work in IT” list. For the sixth consecutive year, the Company's unique culture, training opportunities and dynamic work environments have earned Rackspace a spot on this prestigious list. Computerworld’s annual “Best Places to Work in IT” feature has ranked the top 100 work environments for technology professionals since 1994. The list is based on a comprehensive questionnaire regarding company offerings in categories like benefits, diversity, career development, training and retention. Computerworld also conducts extensive surveys of IT workers, and their responses are a factor in determining the rankings.
  • Rackspace launched the latest version of the OpenStack-powered Rackspace Private Cloud Software built on the most recent stable release of OpenStack, Grizzly. Grizzly is the seventh and latest version of OpenStack based on the alphabetical naming of releases. This latest version of Private Cloud Software adds more than 230 new features that empower users to support production operations at scale, integrate into enterprise environments, manage virtual networks, use single sign-on and leverage external storage arrays all in their private cloud environments.
  • Rackspace was recognized in Gartner’s first Magic Quadrant for European Managed Hosting, which reinforces our international ambitions. In the first ever European publication for Managed Hosting, Rackspace is featured as the market leader. Gartner assessed 15 providers of Managed Hosting for their “completeness of vision” and their “ability to execute.” Our position in the Leaders Quadrant shows that our focus on Fanatical Support® and hybrid cloud is giving customers what they need from a partner.
  • Todd Cione was hired to lead our Americas Acquisition Sales division, and he brings more than two decades of experience developing successful sales and support teams across broad geographies. He spent his last 15 years at Microsoft, most recently based in Singapore and responsible for $4 billion in annual revenue for software, cloud services and enterprise services. At Rackspace, Cione’s mission is to accelerate market-share gains and acquisition of new customers in the Americas, via both direct and channel sales.
  • Rick Jackson has joined Rackspace as our Chief Marketing Officer (CMO). Jackson will lead Rackspace’s global marketing strategy and execution as the Company works to strengthen its leadership position around hybrid cloud. Jackson brings with him over 25 years of IT industry experience. Most recently, Jackson served as CMO at VMware, where he was responsible for leading the company’s global marketing strategy. As an early advocate of hybrid cloud computing, Jackson shares Rackspace’s enthusiasm for open source-based cloud technologies and customer choice.

Conference Call and Webcast

Management will host a conference call to discuss the results starting today at 4:30 p.m. ET.

To access the conference call, please dial 888-452-4005 from the United States and Canada or dial 719-457-2089 from abroad and reference pass code 1389877. A live webcast and a replay of the conference call will be available on Rackspace's website, located at http://ir.rackspace.com.

About Rackspace Hosting

Rackspace Hosting (NYSE: RAX) is the open cloud company, delivering open technologies and powering more than 200,000 customers worldwide. Rackspace provides its renowned Fanatical Support across a portfolio of IT products, including Public Cloud, Private Cloud, Hybrid Hosting and Dedicated Hosting. The company offers choice, flexibility and freedom from vendor lock-in. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company, is featured on Fortune's list of 100 Best Companies to Work For and is included on the Dow Jones Sustainability Index. Rackspace was positioned in the Leaders quadrant by Gartner Inc. in the 2013 “Magic Quadrant for Managed Hosting in North America” and “Magic Quadrant for European Managed Hosting.” Rackspace is headquartered in San Antonio with offices and data centers around the world. For more information, visit www.rackspace.com.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of Rackspace Hosting could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements concerning expected operational and financial results, long-term investment strategies, growth plans, expected results from the integration of technologies and acquired businesses, the performance or market share relating to products and services; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include infrastructure failures; the deterioration of economic conditions or fluctuations, disruptions, instability or downturns in the economy; the effectiveness of managing company growth; technological and competitive factors; regulatory factors; and other risks that are described in Rackspace Hosting's Form 10-K for the year ended March 31, 2013, filed with the SEC on March 1, 2013, and in Rackspace Hosting’s Form 10-Q for the quarter ended June 30, 2013, expected to be filed later this week. Except as required by law, Rackspace Hosting assumes no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

       
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended Six Months Ended
(In thousands, except per share data)

June 30,
2012

   

March 31,
2013

   

June 30,
2013

June 30,
2012

   

June 30,
2013

Net revenue $ 318,990 $ 362,200 $ 375,847 $ 620,345 $ 738,047
Costs and expenses:
Cost of revenue (1) 102,572 113,610 117,658 202,653 231,268
Research and development (1) 16,742 22,773 26,776 30,189 49,549
Sales and marketing (1) 41,310 49,814 52,269 81,596 102,083
General and administrative (1) 55,854 63,079 69,280 111,160 132,359
Depreciation and amortization   61,808     70,111     74,460     116,959     144,571  
Total costs and expenses   278,286     319,387     340,443     542,557     659,830  
Income from operations   40,704     42,813     35,404     77,788     78,217  
Other income (expense):
Interest expense (1,233 ) (940 ) (833 ) (2,505 ) (1,773 )
Interest and other income (expense)   (405 )   199     (303 )   (268 )   (104 )
Total other income (expense)   (1,638 )   (741 )   (1,136 )   (2,773 )   (1,877 )
Income before income taxes 39,066 42,072 34,268 75,015 76,340
Income taxes   13,932     14,811     11,901     26,701     26,712  
Net income $ 25,134   $ 27,261   $ 22,367   $ 48,314   $ 49,628  
 
Net income per share
Basic $ 0.19   $ 0.20   $ 0.16   $ 0.36   $ 0.36  
Diluted $ 0.18   $ 0.19   $ 0.16   $ 0.34   $ 0.34  
 
Weighted average number of shares outstanding
Basic   135,033     137,742     138,011     134,045     139,463  
Diluted   140,786     143,177     142,178     140,396     144,180  
 

(1) Certain reclassifications have been made to prior period amounts for the three and six months ended June 30, 2012 in order to conform to the current year’s presentation. For more information, refer to our Form 10-Q for the quarter ended June 30, 2013.

       

Consolidated Balance Sheets

 
(In thousands) December 31, 2012 June 30, 2013
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 292,061 $ 263,052
Accounts receivable, net of allowance for doubtful accounts and customer credits of $4,236 as of December 31, 2012 and $3,720 as of June 30, 2013 92,834 102,591
Deferred income taxes 10,320 20,770
Prepaid expenses 25,195 21,897
Other current assets   4,835     8,464  
Total current assets 425,245 416,774
 
Property and equipment, net 724,985 802,666
Goodwill 68,742 76,831
Intangible assets, net 23,802 26,100
Other non-current assets   52,777     55,557  
Total assets $ 1,295,551   $ 1,377,928  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 105,174 $ 113,421
Accrued compensation and benefits 48,404 49,673
Income and other taxes payable 21,550 15,458
Current portion of deferred revenue 17,265 17,803
Current portion of obligations under capital leases 61,302 50,245
Current portion of debt   1,744     1,808  
Total current liabilities 255,439 248,408
 
Non-current liabilities:
Deferred revenue 3,695 4,833
Obligations under capital leases 60,335 35,237
Debt 1,991 1,144
Deferred income taxes 71,081 83,423
Deferred rent 32,293 36,887
Other liabilities   27,070     34,099  
Total liabilities 451,904 444,031
 
COMMITMENTS AND CONTINGENCIES
 
Stockholders' equity:
Common stock 138 139
Additional paid-in capital 515,188 567,738
Accumulated other comprehensive loss (8,089 ) (20,018 )
Retained earnings   336,410     386,038  
Total stockholders’ equity   843,647     933,897  
Total liabilities and stockholders’ equity $ 1,295,551   $ 1,377,928  
 
       
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended Six Months Ended
(in thousands)

June 30,
2012

   

March 31,
2013

   

June 30,
2013

June 30,
2012

   

June 30,
2013

Cash Flows From Operating Activities
Net income $ 25,134 $ 27,261 $ 22,367 $ 48,314 $ 49,628
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 61,808 70,111 74,460 116,959 144,571
Loss (gain) on disposal of equipment, net 86 240 (15 ) 365 225
Provision for bad debts and customer credits 1,678 1,060 1,301 3,133 2,361
Deferred income taxes (1,602 ) 6,553 (8,444 ) 2,673 (1,891 )
Deferred rent 2,120 3,965 1,519 4,050 5,484
Share-based compensation expense 9,375 12,183 13,315 17,884 25,498
Excess tax benefits from share-based compensation arrangements (9,601 ) (4,299 ) (11,898 ) (29,836 ) (16,197 )
Changes in certain assets and liabilities
Accounts receivable (10,306 ) (6,268 ) (7,220 ) (19,314 ) (13,488 )
Prepaid expenses and other current assets 6,172 (5,637 ) 5,081 7,880 (556 )
Accounts payable and accrued expenses 19,321 3,062 12,473 26,179 15,535
Deferred revenue (791 ) 1,242 823 705 2,065
All other operating activities   1,534     4,320     2,437     714     6,757  
Net cash provided by operating activities 104,928 113,793 106,199 179,706 219,992
 
Cash Flows From Investing Activities
Purchases of property and equipment (69,385 ) (105,541 ) (119,836 ) (134,006 ) (225,377 )
Acquisitions, net of cash acquired (6,203 ) (712 ) (6,203 )
All other investing activities   32     8     (380 )   39     (372 )
Net cash used in investing activities (69,353 ) (111,736 ) (120,216 ) (134,679 ) (231,952 )
 
Cash Flows From Financing Activities
Principal payments of capital leases (17,769 ) (18,938 ) (16,612 ) (35,042 ) (35,550 )
Principal payments of notes payable (440 ) (51 ) (846 ) (879 ) (897 )
Payments for deferred acquisition obligations (2,900 ) (1,179 ) (59 ) (4,726 ) (1,238 )
Receipt of Texas Enterprise Fund Grant 3,500
Proceeds from employee stock plans 5,462 1,714 4,686 17,843 6,400
Excess tax benefits from share-based compensation arrangements   9,601     4,299     11,898     29,836     16,197  
Net cash provided by (used in) financing activities (6,046 ) (14,155 ) (933 ) 10,532 (15,088 )
 
Effect of exchange rate changes on cash and cash equivalents (612 ) (1,336 ) (625 ) 33 (1,961 )
         
Increase (decrease) in cash and cash equivalents 28,917 (13,434 ) (15,575 ) 55,592 (29,009 )
 
Cash and cash equivalents, beginning of period 186,531 292,061 278,627 159,856 292,061
         
Cash and cash equivalents, end of period $ 215,448   $ 278,627   $ 263,052   $ 215,448   $ 263,052  
 
Supplemental cash flow information:
Non-cash purchases of property and equipment $ 12,583 $ 19,858 $ (13,311 ) $ 30,278 $ 6,547
 
   
Key Metrics - Quarter to Date
(Unaudited)
 
Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server)

June 30,
2012

   

September 30,
2012

   

December 31,
2012

   

March 31,
2013

   

June 30,
2013

Growth
Dedicated cloud, net revenue $ 246,417 $ 256,559 $ 265,585 $ 271,311 $ 276,845
Public cloud, net revenue $ 72,573   $ 79,426   $ 87,324   $ 90,889   $ 99,002  
Net revenue $ 318,990 $ 335,985 $ 352,909 $ 362,200 $ 375,847
Revenue growth (year over year) 29.0 % 27.0 % 24.6 % 20.2 % 17.8 %
 
Net upgrades (monthly average) 1.7 % 1.6 % 1.2 % 0.9 % 1.5 %
Churn (monthly average)   -0.8 %   -0.8 %   -0.7 %   -0.8 %   -0.8 %
Growth in installed base (monthly average) (2) 1.0 % 0.8 % 0.5 % 0.1 % 0.7 %
 
Number of employees (Rackers) at period end 4,528 4,596 4,852 5,043 5,272
Number of servers deployed at period end 84,978 89,051 90,524 94,122 98,884
Average monthly revenue per server $ 1,270 $ 1,287 $ 1,310 $ 1,308 $ 1,298
 
Profitability
Income from operations $ 40,704 $ 45,330 $ 49,623 $ 42,813 $ 35,404
Depreciation and amortization $ 61,808 $ 63,972 $ 68,914 $ 70,111 $ 74,460
Share-based compensation expense
Cost of revenue $ 2,068 $ 2,499 $ 2,759 $ 2,519 $ 2,735
Research and development $ 1,340 $ 1,677 $ 1,459 $ 1,747 $ 2,051
Sales and marketing $ 1,436 $ 2,021 $ 1,764 $ 1,658 $ 1,744
General and administrative $ 4,531   $ 6,221   $ 5,262   $ 6,259   $ 6,785  
Total share-based compensation expense $ 9,375   $ 12,418   $ 11,244   $ 12,183   $ 13,315  
Adjusted EBITDA (1) $ 111,887 $ 121,720 $ 129,781 $ 125,107 $ 123,179
 
Adjusted EBITDA margin 35.1 % 36.2 % 36.8 % 34.5 % 32.8 %
 
Operating income margin 12.8 % 13.5 % 14.1 % 11.8 % 9.4 %
 
Income from operations $ 40,704 $ 45,330 $ 49,623 $ 42,813 $ 35,404
Effective tax rate   35.7 %   38.3 %   38.8 %   35.2 %   34.7 %
Net operating profit after tax (NOPAT) (1) $ 26,173 $ 27,969 $ 30,369 $ 27,743 $ 23,119
NOPAT margin 8.2 % 8.3 % 8.6 % 7.7 % 6.2 %
 
Capital efficiency and returns
Interest bearing debt $ 149,226 $ 150,112 $ 125,372 $ 105,807 $ 88,434
Stockholders' equity $ 714,819 $ 781,934 $ 843,647 $ 879,035 $ 933,897
Less: Excess cash $ (177,169 ) $ (217,333 ) $ (249,712 ) $ (235,163 ) $ (217,950 )
Capital base $ 686,876 $ 714,713 $ 719,307 $ 749,679 $ 804,381
Average capital base $ 674,461 $ 700,795 $ 717,010 $ 734,493 $ 777,030
Capital turnover (annualized) 1.89 1.92 1.97 1.97 1.93
 
Return on capital (annualized) (1) 15.5 % 16.0 % 16.9 % 15.1 % 11.9 %
Capital expenditures
Cash purchases of property and equipment $ 69,385 $ 53,449 $ 82,919 $ 105,541 $ 119,836
Non-cash purchases of property and equipment $ 12,583   $ 31,934   $ 5,096   $ 19,858   $ (13,311 )
Total capital expenditures $ 81,968 $ 85,383 $ 88,015 $ 125,399 $ 106,525
 
Customer gear $ 53,746 $ 51,026 $ 60,099 $ 85,690 $ 73,022
Data center build outs $ 3,285 $ 5,767 $ 7,768 $ 13,228 $ 10,085
Office build outs $ 4,015 $ 3,413 $ 2,288 $ 7,860 $ 1,683
Capitalized software and other projects $ 20,922   $ 25,177   $ 17,860   $ 18,621   $ 21,735  
Total capital expenditures $ 81,968 $ 85,383 $ 88,015 $ 125,399 $ 106,525
 
Infrastructure capacity and utilization
Megawatts under contract at period end 58.0 58.0 61.1 59.4 59.6
Megawatts available for use at period end 32.7 33.7 36.9 38.8 44.4
Megawatts utilized at period end 22.7 23.5 24.0 24.7 26.0
Annualized net revenue per average Megawatt of power utilized $ 57,867 $ 58,179 $ 59,437 $ 59,499 $ 59,305
 

(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.

   
Consolidated Quarterly Statements of Income
(Unaudited)
 
Three Months Ended
(In thousands)

June 30,
2012

   

September 30,
2012

   

December 31,
2012

   

March 31,
2013

   

June 30,
2013

Net revenue $ 318,990 $ 335,985 $ 352,909 $ 362,200 $ 375,847
Costs and expenses:
Cost of revenue 102,572 107,348 109,012 113,610 117,658
Research and development 16,742 19,528 20,211 22,773 26,776
Sales and marketing 41,310 41,109 43,467 49,814 52,269
General and administrative 55,854 58,698 61,682 63,079 69,280
Depreciation and amortization   61,808     63,972     68,914     70,111     74,460  
Total costs and expenses   278,286     290,655     303,286     319,387     340,443  
Income from operations   40,704     45,330     49,623     42,813     35,404  
Other income (expense):
Interest expense (1,233 ) (1,253 ) (991 ) (940 ) (833 )
Interest and other income (expense)   (405 )   38     245     199     (303 )
Total other income (expense)   (1,638 )   (1,215 )   (746 )   (741 )   (1,136 )
Income before income taxes 39,066 44,115 48,877 42,072 34,268
Income taxes   13,932     16,918     18,970     14,811     11,901  
Net income $ 25,134   $ 27,197   $ 29,907   $ 27,261   $ 22,367  
 
Three Months Ended
(Percent of net revenue)

June 30,
2012

September 30,
2012

December 31,
2012

March 31,
2013

June 30,
2013

Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 32.2 % 32.0 % 30.9 % 31.4 % 31.3 %
Research and development 5.2 % 5.8 % 5.7 % 6.3 % 7.1 %
Sales and marketing 13.0 % 12.2 % 12.3 % 13.8 % 13.9 %
General and administrative 17.5 % 17.5 % 17.5 % 17.4 % 18.4 %
Depreciation and amortization   19.4 %   19.0 %   19.5 %   19.4 %   19.8 %
Total costs and expenses   87.2 %   86.5 %   85.9 %   88.2 %   90.6 %
Income from operations   12.8 %   13.5 %   14.1 %   11.8 %   9.4 %
Other income (expense):
Interest expense (0.4 )% (0.4 )% (0.3 )% (0.3 )% (0.2 )%
Interest and other income (expense)   (0.1 )%   0.0 %   0.1 %   0.1 %   (0.1 )%
Total other income (expense)   (0.5 )%   (0.4 )%   (0.2 )%   (0.2 )%   (0.3 )%
Income before income taxes 12.2 % 13.1 % 13.8 % 11.6 % 9.1 %
Income taxes   4.4 %   5.0 %   5.4 %   4.1 %   3.2 %
Net income   7.9 %   8.1 %   8.5 %   7.5 %   6.0 %
 
Due to rounding, totals may not equal the sum of the line items in the table above.
 

(1) Non-GAAP Financial Measures

Adjusted EBITDA (Non-GAAP financial measure)

We use Adjusted EBITDA as a supplemental measure to review and assess our performance. We define Adjusted EBITDA as Net income, plus income taxes, total other (income) expense, depreciation and amortization, and non-cash charges for share-based compensation.

Adjusted EBITDA is a metric that is used in our industry by the investment community for comparative and valuation purposes. We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.

Note that Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States (GAAP) and should not be considered a substitute for operating income, which we consider to be the most directly comparable GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

See our reconciliation of Adjusted EBITDA to net income in the table below:

    Three Months Ended
(Dollars in thousands)

June 30,
2012

   

September 30,
2012

   

December 31,
2012

   

March 31,
2013

   

June 30,
2013

Net revenue $ 318,990 $ 335,985 $ 352,909 $ 362,200 $ 375,847
 
Income from operations $ 40,704 $ 45,330 $ 49,623 $ 42,813 $ 35,404
 
Net income $ 25,134 $ 27,197 $ 29,907 $ 27,261 $ 22,367
Plus: Income taxes 13,932 16,918 18,970 14,811 11,901
Plus: Total other (income) expense 1,638 1,215 746 741 1,136
Plus: Depreciation and amortization 61,808 63,972 68,914 70,111 74,460
Plus: Share-based compensation expense   9,375     12,418     11,244     12,183     13,315  
Adjusted EBITDA $ 111,887 $ 121,720 $ 129,781 $ 125,107 $ 123,179
 
Operating income margin 12.8 % 13.5 % 14.1 % 11.8 % 9.4 %
 
Adjusted EBITDA margin 35.1 % 36.2 % 36.8 % 34.5 % 32.8 %
 

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

We define Return on Capital (ROC) as follows:

ROC = Net operating profit after tax (NOPAT)
Average capital base

NOPAT = Income from operations x (1 – Effective tax rate)

Average capital base = Average of (Interest bearing debt + stockholders’ equity – excess cash) = Average of (Total assets – excess cash – accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable – deferred revenue – other non-current liabilities, deferred income taxes, and deferred rent); calculated on a quarterly basis.

We define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which is calculated as three percent of our annualized net revenue for the three months prior to 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 Comprehensive Income and the Balance Sheet. ROC measures how successfully capital is deployed within a company.

Note that ROC is not a measure of financial performance under GAAP and should not be considered a substitute for return on assets, which we calculate directly from amounts on the Statement of Comprehensive Income and the Balance Sheet. ROC has limitations as an analytical tool, and when assessing our operating performance, you should not consider ROC in isolation or as a substitute for other financial data prepared in accordance with GAAP. Other companies may calculate ROC differently than we do, limiting its usefulness as a comparative measure.

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

    Three Months Ended
(Dollars in thousands) June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
Income from operations $ 40,704 $ 45,330 $ 49,623 $ 42,813 $ 35,404
Effective tax rate   35.7 %   38.3 %   38.8 %   35.2 %   34.7 %
Net operating profit after tax (NOPAT) $ 26,173 $ 27,969 $ 30,369 $ 27,743 $ 23,119
 
Net income $ 25,134 $ 27,197 $ 29,907 $ 27,261 $ 22,367
 
Total assets at period end $ 1,138,728 $ 1,241,765 $ 1,295,551 $ 1,348,350 $ 1,377,928
Less: Excess cash (177,169 ) (217,333 ) (249,712 ) (235,163 ) (217,950 )
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable (148,091 ) (177,328 ) (175,128 ) (197,686 ) (178,552 )
Less: Deferred revenue (current and non-current) (19,227 ) (18,483 ) (20,960 ) (21,811 ) (22,636 )
Less: Other non-current liabilities, deferred income taxes, and deferred rent   (107,365 )   (113,908 )   (130,444 )   (144,011 )   (154,409 )
Capital base $ 686,876 $ 714,713 $ 719,307 $ 749,679 $ 804,381
 
Average total assets $ 1,114,061 $ 1,190,247 $ 1,268,658 $ 1,321,951 $ 1,363,139
Average capital base $ 674,461 $ 700,795 $ 717,010 $ 734,493 $ 777,030
 
Return on assets (annualized) 9.0 % 9.1 % 9.4 % 8.2 % 6.6 %
Return on capital (annualized) 15.5 % 16.0 % 16.9 % 15.1 % 11.9 %
 

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 non-cash purchases of property and equipment), cash payments for interest, net, and cash payments for income taxes, net.

We believe that Adjusted Free Cash Flow is a performance metric used by investors to evaluate the strength and performance of a company's ongoing business. 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 reconciliation of Adjusted Free Cash Flow to Adjusted EBITDA below, as well as our reconciliation of Adjusted EBITDA to net income provided above.

    Three Months Ended     Six Months Ended
(In thousands) June 30, 2013 June 30, 2013
Adjusted EBITDA $ 123,179 $ 248,286
Non-cash deferred rent 1,519 5,484
Total capital expenditures (106,525 ) (231,924 )
Cash payments for interest, net (775 ) (1,826 )
Cash payments for income taxes, net   (5,911 )   (9,750 )
Adjusted free cash flow $ 11,487   $ 10,270  

Contacts

Rackspace Hosting, Inc.
Investor Relations:
Jessica Drought, 210-312-4191
ir@rackspace.com
or
Corporate Communications:
Brandon Brunson, 210-312-1357
brandon.brunson@rackspace.com

Sharing

Contacts

Rackspace Hosting, Inc.
Investor Relations:
Jessica Drought, 210-312-4191
ir@rackspace.com
or
Corporate Communications:
Brandon Brunson, 210-312-1357
brandon.brunson@rackspace.com