Exhibit 99.1
Rackspace Hosting Reports Second Quarter 2009 Results
For the quarter ended June 30, 2009:
| · | Record net revenue of $152.0 million grew 16.2% year-over-year and 4.8% sequentially |
| · | Record adjusted EBITDA(1) of $48.1 million grew 42.2% year-over-year and 6.8% sequentially |
| · | Achieved record adjusted EBITDA margin of 31.7%, up from 25.9% one year ago |
| · | Record net income of $7.0 million grew 67.2% year-over-year and 6.1% sequentially |
SAN ANTONIO – August 10, 2009 – Rackspace® Hosting, Inc. (NYSE: RAX), the world’s leader and specialist in hosting services, today reported financial results for the quarter ended June 30, 2009.
Net revenue for the second quarter ended June 30, 2009 was $152.0 million, up 4.8% from the first quarter of 2009 and up 16.2% from the quarter ended June 30, 2008. Revenue for the quarter was impacted by $2.4 million of service credits relating to service interruptions in a portion of the company’s DFW data center in June, offset by a sequential quarterly lift of $2.7 million in currency exchange rate fluctuation.
Managed hosting revenue increased to $138.9 million for the second quarter of 2009, up from $134.2 million in the first quarter of 2009. Cloud revenue increased to $13.1 million in the quarter, up from $10.9 million in the first quarter of 2009. Total customer count increased to 70,803, up from 62,078 customers in the first quarter of 2009. The 70,803 customer count includes 19,363 managed hosting customers and 51,440 cloud computing customers.
“We have made several improvements over the past few months that have made us a stronger, more profitable and tougher competitor as we position for another cycle of growth. Today, we believe we are even better positioned for profitable growth as the economy improves. We have been running the business to scale the profits and returns in our managed hosting offering while investing in the long-term, game changing offerings in our cloud business,” said Lanham Napier, president and chief executive officer. “Additionally, we have strengthened our pipeline by competing for larger opportunities and we are gaining traction in the enterprise space with several key customer wins.”
Adjusted EBITDA for the second quarter of 2009 was $48.1 million, a 6.8% increase compared to the first quarter of 2009 and a 42.2% increase compared to the second quarter of last year. Adjusted EBITDA margin for the second quarter of 2009 was 31.7% compared to 31.1% for the first quarter of 2009, and 25.9% for the second quarter of 2008.
“We delivered solid revenue growth and adjusted EBITDA margins this quarter,” said Bruce Knooihuizen, chief financial officer. “With our focus on operational discipline, we successfully continued on our path to improve the cost side of our business for enhanced profitability. We posted a company record adjusted EBITDA margin this quarter showing that great companies can differentiate during challenging times.”
Net income was $7.0 million for the second quarter of 2009, a 6.1% increase compared to the first quarter of 2009 and a 67.2% increase compared to the second quarter of last year. Net income margin for the second quarter of 2009 was 4.6% compared to 4.5% for the first quarter of 2009, and 3.2% for the second quarter of 2008.
Cash flow from operating activities was $58.0 million for the second quarter of 2009. Capital expenditures were $54.7 million, including $32.4 million for purchases of customer gear, $13.9 million for data center build outs, $1.7 million for office build outs, and $6.7 million for capitalized software and other expenditures.
For the full year of 2009, the company expects to have total capital expenditures of $165 million to $185 million, including $100 million to $115 million dollars for customer gear, approximately $30 million to $35 million for data centers, approximately $15 million for office space, and $20 million for capitalized software and other. Previous expectations for 2009 capital expenditures were between $120 million to $160 million. The increased spend is based on improved expectations for growth for the next twelve months.
At the end of the second quarter, cash and cash equivalents were $147.9 million. Included in that amount are investments in money market funds in the amount of $100.7 million. Debt obligations totaled $210.3 million. Of those, $106.2 million were related to current and non-current debt, primarily $100.0 million of borrowings on the company’s line of credit, and $104.1 million were related to obligations under capital and finance method leases. In July 2009, the company repaid $50.0 million on its line of credit, reducing outstanding debt under the line of credit to $50.0 million, thus increasing the amount available for future borrowings to $194.3 million.
On a worldwide basis, Rackspace employed 2,648 Rackers as of June 30, 2009, compared to 2,661 Rackers as of March 31, 2009, and up from 2,422 Rackers as of June 30, 2008.
Rackspace Cloud Highlights and Other Developments
| · | Launch of Open API for Cloud: In July 2009, Rackspace announced the availability of the public beta of its Cloud Servers™ API. Through the open, standards-based API, Rackspace Cloud customers can now programmatically manage their cloud servers allowing for deep integration between applications and infrastructure which makes on demand scaling a reality. The Cloud Servers API also includes four new features, which are server metadata, server data injection, host identification and shared IP groups. |
| · | Private Cloud Launch: In July 2009, Rackspace announced its new Private Cloud offering, which allows customers to run the centrally managed VMware virtualization platform on private dedicated hardware environments. The Rackspace Private Cloud’s single-tenant architecture offers increased control and security, while still maintaining the scalability, flexibility and resource optimization that make shared cloud offerings so compelling. |
| · | IDG Best Places to Work: In July 2009, IDG’s Computerworld selected Rackspace as one of the top workplaces for information technology (IT) professionals. |
| · | Data Center Expansion: In July 2009, Rackspace entered into an agreement with Tarantula Ventures LLC, a DuPont Fabros Technology company, to lease approximately 36,700 square feet of raised floor space in a data center facility located in the Chicago area. The leased space will be provided with a maximum critical load power of 5.633 megawatts. The company expects to commence operations in this facility in late 2009. |
Conference Call and Webcast
Management will host a conference call to discuss its second quarter 2009 financial results today at 4:30 p.m. EDT. To access the conference call, please dial 877-718-5111 from the United States or dial 719-325-4907 from abroad and reference pass code 7023514. A live webcast and a replay of the conference call will be available on Rackspace’s website, located at ir.rackspace.com.
About Rackspace Hosting
As the leader and specialist in hosting services, Rackspace Hosting® is changing the way businesses worldwide buy IT. Rackspace delivers computing-as-a-service, integrating the industry’s best technologies into a flexible service offering, making computing more reliable and affordable. A trusted partner to companies of all sizes, Rackspace enables IT departments to be more effective. Rackspace is distinguished by its award-winning Fanatical Support®, furthering the company’s mission to be one of the world’s greatest service companies. Rackspace is recognized as one of FORTUNE’S® “100 Best Companies to Work For”, ranking number 43 on the 2009 list. Rackspace's portfolio of hosted IT services includes managed hosting (www.rackspace.com), email hosting (www.mailtrust.com) and cloud hosting (www.mosso.com). For more information on Rackspace Hosting please visit www.rackspace.com or call 800-961-2888.
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 continuation or further deterioration of the current difficult economic conditions or further 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-Q for the quarter ended March 31, 2009, filed with the SEC on May 12, 2009 and in Rackspace Hosting’s Form 10-Q for the quarter ended June 30, 2009 that will 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.
Contact:
| Investor Relations | | Media Relations |
| Jason Luce | | Rachel Ferry |
| 210-312-7291 | | 210-312-3732 |
| ir@rackspace.com | | rachel.ferry@rackspace.com |
Consolidated Statements of Income
(Unaudited)
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | March 31, | | | June 30, | | | June 30, | | | June 30, | |
| (In thousands, except per share data) | | 2008 | | | 2009 | | | 2009 | | | 2008 | | | 2009 | |
| | | | | | | | | | |
| Net revenue | | $ | 130,829 | | | $ | 145,077 | | | $ | 151,995 | | | $ | 250,442 | | | $ | 297,072 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 42,842 | | | | 46,210 | | | | 48,235 | | | | 82,065 | | | | 94,445 | |
| Sales and marketing | | | 19,846 | | | | 20,502 | | | | 19,080 | | | | 37,414 | | | | 39,582 | |
| General and administrative | | | 38,108 | | | | 37,540 | | | | 41,566 | | | | 71,741 | | | | 79,106 | |
| Depreciation and amortization | | | 21,637 | | | | 27,804 | | | | 29,711 | | | | 40,688 | | | | 57,515 | |
| Total costs and expenses | | | 122,433 | | | | 132,056 | | | | 138,592 | | | | 231,908 | | | | 270,648 | |
| Income from operations | | | 8,396 | | | | 13,021 | | | | 13,403 | | | | 18,534 | | | | 26,424 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | (1,834 | ) | | | (2,535 | ) | | | (2,172 | ) | | | (3,164 | ) | | | (4,707 | ) |
| Interest and other income (expense) | | | 173 | | | | (91 | ) | | | (267 | ) | | | 420 | | | | (358 | ) |
| Total other income (expense) | | | (1,661 | ) | | | (2,626 | ) | | | (2,439 | ) | | | (2,744 | ) | | | (5,065 | ) |
| Income before income taxes | | | 6,735 | | | | 10,395 | | | | 10,964 | | | | 15,790 | | | | 21,359 | |
| Income taxes | | | 2,553 | | | | 3,807 | | | | 3,973 | | | | 6,166 | | | | 7,780 | |
| Net income | | $ | 4,182 | | | $ | 6,588 | | | $ | 6,991 | | | $ | 9,624 | | | $ | 13,579 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income per share | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.04 | | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.09 | | | $ | 0.11 | |
| Diluted | | $ | 0.04 | | | $ | 0.05 | | | $ | 0.06 | | | $ | 0.09 | | | $ | 0.11 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 103,227 | | | | 117,608 | | | | 120,214 | | | | 102,901 | | | | 118,918 | |
| Diluted | | | 110,508 | | | | 121,889 | | | | 126,442 | | | | 109,810 | | | | 124,007 | |
| | | | | | | | | | | | | | | | | | | | | |
Consolidated Balance Sheets
| (In thousands) | | December 31, | | | June 30, | |
| | | 2008 | | | 2009 | |
| | | | | | (Unaudited) | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 238,407 | | | $ | 147,877 | |
| Accounts receivable, net of allowance for doubtful accounts and | | | | | | | | |
| customer credits of $3,295 as of December 31, 2008 | | | | | | | | |
| and $6,901 as of June 30, 2009 | | | 30,932 | | | | 38,642 | |
| Income taxes receivable | | | 12,318 | | | | 13,353 | |
| Prepaid expenses and other current assets | | | 10,838 | | | | 11,572 | |
| Total current assets | | | 292,495 | | | | 211,444 | |
| | | | | | | | | |
| Property and equipment, net | | | 362,042 | | | | 407,901 | |
| Goodwill | | | 6,942 | | | | 14,329 | |
| Intangible assets, net | | | 15,101 | | | | 13,567 | |
| Other non-current assets | | | 8,681 | | | | 9,552 | |
| Total assets | | $ | 685,261 | | | $ | 656,793 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 71,387 | | | $ | 87,316 | |
| Current portion of deferred revenue | | | 16,284 | | | | 16,812 | |
| Current portion of obligations under capital leases | | | 38,909 | | | | 43,381 | |
| Current portion of debt | | | 5,944 | | | | 52,485 | |
| Total current liabilities | | | 132,524 | | | | 199,994 | |
| | | | | | | | | |
| Non-current deferred revenue | | | 3,883 | | | | 3,199 | |
| Non-current obligations under capital leases | | | 50,781 | | | | 60,707 | |
| Non-current debt | | | 204,779 | | | | 53,711 | |
| Non-current deferred income taxes | | | 13,398 | | | | 20,475 | |
| Other non-current liabilities | | | 10,212 | | | | 9,884 | |
| Total liabilities | | | 415,577 | | | | 347,970 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity: | | | | | | | | |
| Common stock | | | 117 | | | | 121 | |
| Additional paid-in capital | | | 207,589 | | | | 225,345 | |
| Accumulated other comprehensive income (loss) | | | (16,027 | ) | | | (8,227 | ) |
| Retained earnings | | | 78,005 | | | | 91,584 | |
| Total stockholders’ equity | | | 269,684 | | | | 308,823 | |
| Total liabilities and stockholders’ equity | | $ | 685,261 | | | $ | 656,793 | |
| | | | | | | | | |
Consolidated Statements of Cash Flows (Unaudited)
| (In thousands) | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | March 31, | | | June 30, | | | June 30, | | | June 30, | |
| | | 2008 | | | 2009 | | | 2009 | | | 2008 | | | 2009 | |
| | | | | | | | | | |
| Cash Flows From Operating Activities | | | | | | | | | | | | | | | |
| Net income | | $ | 4,182 | | | $ | 6,588 | | | $ | 6,991 | | | $ | 9,624 | | | $ | 13,579 | |
| Adjustments to reconcile net income to net cash provided | | | | | | | | | | | | | | | | | | | | |
| by operating activities | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 21,637 | | | | 27,804 | | | | 29,711 | | | | 40,688 | | | | 57,515 | |
| Loss on disposal of equipment, net | | | 650 | | | | 176 | | | | 311 | | | | 1,977 | | | | 487 | |
| Provision for bad debts and customer credits | | | 812 | | | | 2,309 | | | | 4,073 | | | | 1,210 | | | | 6,382 | |
| Deferred income taxes | | | 1,367 | | | | 2,507 | | | | 2,810 | | | | 2,524 | | | | 5,317 | |
| Share-based compensation expense | | | 3,804 | | | | 4,237 | | | | 5,017 | | | | 6,556 | | | | 9,254 | |
| Other non-cash compensation expense | | | 109 | | | | 85 | | | | 324 | | | | 140 | | | | 409 | |
| Excess tax benefits from share-based | | | | | | | | | | | | | | | | | | | | |
| compensation arrangements | | | (1,913 | ) | | | - | | | | - | | | | (2,621 | ) | | | - | |
| Changes in certain assets and liabilities | | | | | | | | | | | | | | | | | | | | |
| Accounts receivables | | | (2,020 | ) | | | (6,336 | ) | | | (6,522 | ) | | | (1,640 | ) | | | (12,858 | ) |
| Income taxes receivable | | | - | | | | (257 | ) | | | (778 | ) | | | - | | | | (1,035 | ) |
| Accounts payable and accrued expenses | | | 4,809 | | | | (6,601 | ) | | | 18,627 | | | | 11,077 | | | | 12,026 | |
| Deferred revenues | | | 673 | | | | 304 | | | | (1,096 | ) | | | 2,157 | | | | (792 | ) |
| All other operating activities | | | (1,264 | ) | | | (17 | ) | | | (1,419 | ) | | | (2,688 | ) | | | (1,436 | ) |
| Net cash provided by operating activities | | | 32,846 | | | | 30,799 | | | | 58,049 | | | | 69,004 | | | | 88,848 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash Flows From Investing Activities | | | | | | | | | | | | | | | | | | | | |
| Purchases of property and equipment, net | | | (40,273 | ) | | | (25,589 | ) | | | (31,027 | ) | | | (87,521 | ) | | | (56,616 | ) |
| Earnout payments for acquisitions | | | - | | | | - | | | | (5,622 | ) | | | - | | | | (5,622 | ) |
| Net cash used in investing activities | | | (40,273 | ) | | | (25,589 | ) | | | (36,649 | ) | | | (87,521 | ) | | | (62,238 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash Flows From Financing Activities | | | | | | | | | | | | | | | | | | | | |
| Principal payments of capital leases | | | (6,595 | ) | | | (9,838 | ) | | | (11,084 | ) | | | (14,144 | ) | | | (20,922 | ) |
| Principal payments of notes payable | | | (1,777 | ) | | | (751 | ) | | | (3,776 | ) | | | (2,929 | ) | | | (4,527 | ) |
| Borrowings on line of credit | | | 20,000 | | | | - | | | | - | | | | 40,000 | | | | - | |
| Payments on line of credit | | | - | | | | (100,000 | ) | | | - | | | | - | | | | (100,000 | ) |
| Payments for debt issuance costs | | | - | | | | - | | | | (328 | ) | | | (158 | ) | | | (328 | ) |
| Proceeds from sale leaseback transactions | | | 782 | | | | - | | | | - | | | | 1,543 | | | | - | |
| Proceeds from issuance of common stock, net | | | - | | | | - | | | | - | | | | 548 | | | | - | |
| Proceeds from exercise of stock options | | | 702 | | | | 2,235 | | | | 3,995 | | | | 1,205 | | | | 6,230 | |
| Excess tax benefits from share-based | | | | | | | | | | | | | | | | | | | | |
| compensation arrangements | | | 1,913 | | | | - | | | | - | | | | 2,621 | | | | - | |
| Net cash provided by (used in) financing activities | | | 15,025 | | | | (108,354 | ) | | | (11,193 | ) | | | 28,686 | | | | (119,547 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | (1 | ) | | | (243 | ) | | | 2,650 | | | | (12 | ) | | | 2,407 | |
| | | | | | | | | | | | | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | 7,597 | | | | (103,387 | ) | | | 12,857 | | | | 10,157 | | | | (90,530 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 27,497 | | | | 238,407 | | | | 135,020 | | | | 24,937 | | | | 238,407 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 35,094 | | | $ | 135,020 | | | $ | 147,877 | | | $ | 35,094 | | | $ | 147,877 | |
| | | | | | | | | | | | | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | | | | | | | | | | | | | |
| Acquisition of property and equipment by capital leases | | $ | 19,191 | | | $ | 11,683 | | | $ | 23,637 | | | $ | 37,703 | | | $ | 35,320 | |
| Acquisition of property and equipment by notes payable | | | 6,823 | | | | - | | | | - | | | | 9,930 | | | | - | |
| Vendor financed equipment purchases | | $ | 26,014 | | | $ | 11,683 | | | $ | 23,637 | | | $ | 47,633 | | | $ | 35,320 | |
| | | | | | | | | | | | | | | | | | | | | |
Key Metrics – Quarter to Date
(Unaudited)
| | | Three Months Ended | |
| (Dollar amounts in thousands, except annualized net | | June 30, | | | September 30, | | | December 31, | | | March 31, | | | June 30, | |
| revenue per average technical square foot) | | 2008 | | | 2008 | | | 2008 | | | 2009 | | | 2009 | |
| Growth | | | | | | | | | | | | | | | |
| Managed hosting customers at period end | | | 17,220 | | | | 18,012 | | | | 18,480 | | | | 19,048 | | | | 19,363 | |
| Cloud customers at period end* | | | 16,387 | | | | 18,173 | | | | 34,820 | | | | 43,030 | | | | 51,440 | |
| Number of customers at period end | | | 33,607 | | | | 36,185 | | | | 53,300 | | | | 62,078 | | | | 70,803 | |
| | | | | | | | | | | | | | | | | | | | | |
| Managed hosting, net revenue | | $ | 125,498 | | | $ | 131,908 | | | $ | 134,275 | | | $ | 134,204 | | | $ | 138,943 | |
| Cloud, net revenue | | $ | 5,331 | | | $ | 6,446 | | | $ | 8,862 | | | $ | 10,873 | | | $ | 13,052 | |
| Net revenue | | $ | 130,829 | | | $ | 138,354 | | | $ | 143,137 | | | $ | 145,077 | | | $ | 151,995 | |
| Revenue growth (year over year) | | | 55.7 | % | | | 44.0 | % | | | 34.2 | % | | | 21.3 | % | | | 16.2 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Net upgrades (monthly average) | | | 2.1 | % | | | 1.8 | % | | | 1.4 | % | | | 0.9 | % | | | 1.2 | % |
| Churn (monthly average) | | | -1.1 | % | | | -1.2 | % | | | -1.3 | % | | | -1.1 | % | | | -1.0 | % |
| Growth in installed base (monthly average) | | | 1.0 | % | | | 0.6 | % | | | 0.1 | % | | | -0.2 | % | | | 0.2 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Number of employees (Rackers) at period end | | | 2,422 | | | | 2,536 | | | | 2,611 | | | | 2,661 | | | | 2,648 | |
| Number of servers deployed at period end | | | 42,424 | | | | 45,231 | | | | 47,518 | | | | 50,038 | | | | 52,269 | |
| | | | | | | | | | | | | | | | | | | | | |
| Profitability | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | $ | 8,396 | | | $ | 9,490 | | | $ | 12,125 | | | $ | 13,021 | | | $ | 13,403 | |
| Depreciation and amortization | | $ | 21,637 | | | $ | 23,174 | | | $ | 26,310 | | | $ | 27,804 | | | $ | 29,711 | |
| Share-based compensation expense | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | $ | 603 | | | $ | 819 | | | $ | 678 | | | $ | 629 | | | $ | 675 | |
| Sales and marketing | | $ | 533 | | | $ | 612 | | | $ | 595 | | | $ | 698 | | | $ | 721 | |
| General and administrative | | $ | 2,668 | | | $ | 2,886 | | | $ | 2,871 | | | $ | 2,910 | | | $ | 3,621 | |
| Total share-based compensation expense | | $ | 3,804 | | | $ | 4,317 | | | $ | 4,144 | | | $ | 4,237 | | | $ | 5,017 | |
| Adjusted EBITDA (1) | | $ | 33,837 | | | $ | 36,981 | | | $ | 42,579 | | | $ | 45,062 | | | $ | 48,131 | |
| | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA margin (1) | | | 25.9 | % | | | 26.7 | % | | | 29.7 | % | | | 31.1 | % | | | 31.7 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income margin | | | 6.4 | % | | | 6.9 | % | | | 8.5 | % | | | 9.0 | % | | | 8.8 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | $ | 8,396 | | | $ | 9,490 | | | $ | 12,125 | | | $ | 13,021 | | | $ | 13,403 | |
| Effective tax rate | | | 37.9 | % | | | 29.6 | % | | | 27.7 | % | | | 36.6 | % | | | 36.2 | % |
| Net operating profit after tax (NOPAT) (1) | | $ | 5,214 | | | $ | 6,681 | | | $ | 8,766 | | | $ | 8,255 | | | $ | 8,551 | |
| NOPAT margin | | | 4.0 | % | | | 4.8 | % | | | 6.1 | % | | | 5.7 | % | | | 5.6 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Capital efficiency and returns | | | | | | | | | | | | | | | | | | | | |
| Interest bearing debt | | $ | 183,553 | | | $ | 297,933 | | | $ | 300,413 | | | $ | 201,507 | | | $ | 210,284 | |
| Stockholders' equity | | $ | 117,417 | | | $ | 269,008 | | | $ | 269,684 | | | $ | 282,880 | | | $ | 308,823 | |
| Less: Excess cash | | $ | - | | | $ | (235,421 | ) | | $ | (200,620 | ) | | $ | (117,611 | ) | | $ | (129,638 | ) |
| Capital base | | $ | 300,970 | | | $ | 331,520 | | | $ | 369,477 | | | $ | 366,776 | | | $ | 389,469 | |
| Average capital base | | $ | 275,935 | | | $ | 316,245 | | | $ | 350,497 | | | $ | 368,127 | | | $ | 378,123 | |
| Capital turnover (annualized) | | | 1.90 | | | | 1.75 | | | | 1.63 | | | | 1.58 | | | | 1.61 | |
| | | | | | | | | | | | | | | | | | | | | |
| Return on capital (annualized) (1) | | | 7.6 | % | | | 8.5 | % | | | 10.0 | % | | | 9.0 | % | | | 9.0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | | | | | | | | | | | | | | | | | | |
| Purchases of property and equipment, net | | $ | 40,273 | | | $ | 45,328 | | | $ | 32,547 | | | $ | 25,589 | | | $ | 31,027 | |
| Vendor financed equipment purchases | | $ | 26,014 | | | $ | 23,009 | | | $ | 14,848 | | | $ | 11,683 | | | $ | 23,637 | |
| Total capital expenditures | | $ | 66,287 | | | $ | 68,337 | | | $ | 47,395 | | | $ | 37,272 | | | $ | 54,664 | |
| | | | | | | | | | | | | | | | | | | | | |
| Customer gear | | $ | 27,347 | | | $ | 27,627 | | | $ | 23,073 | | | $ | 19,255 | | | $ | 32,448 | |
| Data center build outs | | $ | 18,509 | | | $ | 21,679 | | | $ | 14,240 | | | $ | 11,386 | | | $ | 13,914 | |
| Office build outs | | $ | 12,815 | | | $ | 11,227 | | | $ | 8,340 | | | $ | 2,239 | | | $ | 1,651 | |
| Capitalized software and other projects | | $ | 7,616 | | | $ | 7,804 | | | $ | 1,742 | | | $ | 4,392 | | | $ | 6,651 | |
| Total capital expenditures | | $ | 66,287 | | | $ | 68,337 | | | $ | 47,395 | | | $ | 37,272 | | | $ | 54,664 | |
| | | | | | | | | | | | | | | | | | | | | |
| Infrastructure capacity and utilization | | | | | | | | | | | | | | | | | | | | |
Technical square feet of data center space at period end ** | | | 133,462 | | | | 136,962 | | | | 134,923 | | | | 157,523 | | | | 177,371 | |
Annualized net revenue per average technical square foot ** | | $ | 4,217 | | | $ | 4,093 | | | $ | 4,212 | | | $ | 3,969 | | | $ | 3,631 | |
| Utilization rate at period end | | | 59.1 | % | | | 63.4 | % | | | 70.4 | % | | | 64.6 | % | | | 59.8 | % |
| * December 31, 2008, March 31, 2009, and June 30, 2009 amounts include customers resulting from the Slicehost acquisition, and |
| March 31, 2009 and June 30, 2009 amounts include SaaS customers for Jungle Disk. | | |
| ** The technical square feet as of June 30, 2009, includes the addition of 18,748 square feet for phase two of our Slough, U.K. data center and 1,100 |
| square feet for the first phase of our new Virginia data center. 11,750 square feet will be removed in the 3rd quarter of 2009 for operations |
| at a U.K. data center that will be decommissioned and migrated to the Slough data center. | |
| (1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures. |
Consolidated Quarterly Statements of Income (Unaudited)
| | | Three Months Ended | |
| (In thousands) | | June 30, 2008 | | | September 30, 2008 | | | December 31, 2008 | | | March 31, 2009 | | | June 30, 2009 | |
| | | | | | | | | | | | | | | | |
| Net revenue | | $ | 130,829 | | | $ | 138,354 | | | $ | 143,137 | | | $ | 145,077 | | | $ | 151,995 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 42,842 | | | | 45,499 | | | | 45,019 | | | | 46,210 | | | | 48,235 | |
| Sales and marketing | | | 19,846 | | | | 21,462 | | | | 21,447 | | | | 20,502 | | | | 19,080 | |
| General and administrative | | | 38,108 | | | | 38,729 | | | | 38,236 | | | | 37,540 | | | | 41,566 | |
| Depreciation and amortization | | | 21,637 | | | | 23,174 | | | | 26,310 | | | | 27,804 | | | | 29,711 | |
| Total costs and expenses | | | 122,433 | | | | 128,864 | | | | 131,012 | | | | 132,056 | | | | 138,592 | |
| Income from operations | | | 8,396 | | | | 9,490 | | | | 12,125 | | | | 13,021 | | | | 13,403 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | (1,834 | ) | | | (1,912 | ) | | | (3,153 | ) | | | (2,535 | ) | | | (2,172 | ) |
| Interest and other income (expense) | | | 173 | | | | (144 | ) | | | 492 | | | | (91 | ) | | | (267 | ) |
| Total other income (expense) | | | (1,661 | ) | | | (2,056 | ) | | | (2,661 | ) | | | (2,626 | ) | | | (2,439 | ) |
| Income before income taxes | | | 6,735 | | | | 7,434 | | | | 9,464 | | | | 10,395 | | | | 10,964 | |
| Income taxes | | | 2,553 | | | | 2,199 | | | | 2,620 | | | | 3,807 | | | | 3,973 | |
| Net income | | $ | 4,182 | | | $ | 5,235 | | | $ | 6,844 | | | $ | 6,588 | | | $ | 6,991 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| (Percent of net revenue) | | June 30, 2008 | | | September 30, 2008 | | | December 31, 2008 | | | March 31, 2009 | | | June 30, 2009 | |
| | | | | | | | | | | | | | | | |
| Net revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Costs and expenses | | | | | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 32.7 | % | | | 32.9 | % | | | 31.5 | % | | | 31.9 | % | | | 31.7 | % |
| Sales and marketing | | | 15.2 | % | | | 15.5 | % | | | 15.0 | % | | | 14.1 | % | | | 12.6 | % |
| General and administrative | | | 29.1 | % | | | 28.0 | % | | | 26.7 | % | | | 25.9 | % | | | 27.3 | % |
| Depreciation and amortization | | | 16.5 | % | | | 16.7 | % | | | 18.4 | % | | | 19.2 | % | | | 19.5 | % |
| Total costs and expenses | | | 93.6 | % | | | 93.1 | % | | | 91.5 | % | | | 91.0 | % | | | 91.2 | % |
| Income from operations | | | 6.4 | % | | | 6.9 | % | | | 8.5 | % | | | 9.0 | % | | | 8.8 | % |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | -1.4 | % | | | -1.4 | % | | | -2.2 | % | | | -1.7 | % | | | -1.4 | % |
| Interest and other income (expense) | | | 0.1 | % | | | -0.1 | % | | | 0.3 | % | | | -0.1 | % | | | -0.2 | % |
| Total other income (expense) | | | -1.3 | % | | | -1.5 | % | | | -1.9 | % | | | -1.8 | % | | | -1.6 | % |
| Income before income taxes | | | 5.1 | % | | | 5.4 | % | | | 6.6 | % | | | 7.2 | % | | | 7.2 | % |
| Income taxes | | | 2.0 | % | | | 1.6 | % | | | 1.8 | % | | | 2.6 | % | | | 2.6 | % |
| Net income | | | 3.2 | % | | | 3.8 | % | | | 4.8 | % | | | 4.5 | % | | | 4.6 | % |
| | | | | | | | | | | | | | | | | | | | | |
| 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 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 income from operations, which we consider to be the most directly comparable GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. See our Adjusted EBITDA reconciliation in our key metrics table below.
| | | Three Months Ended | |
| (Dollars in thousands) | | June 30, 2008 | | | September 30, 2008 | | | December 31, 2008 | | | March 31, 2009 | | | June 30, 2009 | |
| | | (Unaudited) | |
| Net revenue | | $ | 130,829 | | | $ | 138,354 | | | $ | 143,137 | | | $ | 145,077 | | | $ | 151,995 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | $ | 8,396 | | | $ | 9,490 | | | $ | 12,125 | | | $ | 13,021 | | | $ | 13,403 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 4,182 | | | $ | 5,235 | | | $ | 6,844 | | | $ | 6,588 | | | $ | 6,991 | |
| Plus: Income taxes | | | 2,553 | | | | 2,199 | | | | 2,620 | | | | 3,807 | | | | 3,973 | |
| Plus: Total other (income) expense | | | 1,661 | | | | 2,056 | | | | 2,661 | | | | 2,626 | | | | 2,439 | |
| Plus: Depreciation and amortization | | | 21,637 | | | | 23,174 | | | | 26,310 | | | | 27,804 | | | | 29,711 | |
| Plus: Share-based compensation expense | | | 3,804 | | | | 4,317 | | | | 4,144 | | | | 4,237 | | | | 5,017 | |
| Adjusted EBITDA | | $ | 33,837 | | | $ | 36,981 | | | $ | 42,579 | | | $ | 45,062 | | | $ | 48,131 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income margin | | | 6.4 | % | | | 6.9 | % | | | 8.5 | % | | | 9.0 | % | | | 8.8 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA margin | | | 25.9 | % | | | 26.7 | % | | | 29.7 | % | | | 31.1 | % | | | 31.7 | % |
Return on Capital (ROC) (Non-GAAP financial measure)
We define Return on Capital (ROC) as follows:
ROC = Net Operating Profit After Tax (NOPAT)
Average Capital Base
NOPAT = Income from operations x (1 – Effective tax rate)
Average Capital Base = Average of (Interest bearing debt + stockholders’ equity – excess cash) = Average of (Total assets – excess cash – accounts payables and accrued expenses – deferred revenues – other non-current liabilities and deferred income taxes); calculated on a quarterly basis.
For the periods ending March 31, 2009 and June 30, 2009, we define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which for these periods are calculated as three percent of our annualized net revenue for the three months prior to period end. For prior periods, we defined excess cash as our investments in money market funds. As a result of a decrease in capital requirements due to the completion of the last phase of our Grapevine, Texas data center and phase 2 of our Slough, U.K. data center, as well as the signing of leases to occupy data centers that have minimal data center build out costs, our operating cash requirements have declined. We will periodically review the calculation and adjust it to reflect our projected cash requirements for the upcoming year.
We believe that ROC is an important metric for investors in evaluating a company’s performance. ROC relates after-tax operating profits with the capital that is placed into service. It is therefore a performance metric that incorporates both the Statement of Income and the Balance Sheet. ROC measures how successfully capital is deployed within a company.
Note that ROC is not a measure of financial performance under GAAP and should not be considered a substitute for return on assets, which we consider to be the most directly comparable GAAP measure, and may not be comparable to similarly titled measures reported by other companies. See our ROC reconciliation to return on assets below.
| | | Three Months Ended | |
| (Dollars in thousands) | | June 30, 2008 | | | September 30, 2008 | | | December 31, 2008 | | | March 31, 2009 | | | June 30, 2009 | |
| | | (Unaudited) | |
| Income from operations | | $ | 8,396 | | | $ | 9,490 | | | $ | 12,125 | | | $ | 13,021 | | | $ | 13,403 | |
| Effective tax rate | | | 37.9 | % | | | 29.6 | % | | | 27.7 | % | | | 36.6 | % | | | 36.2 | % |
| Net operating profit after tax (NOPAT) | | $ | 5,214 | | | $ | 6,681 | | | $ | 8,766 | | | $ | 8,255 | | | $ | 8,551 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 4,182 | | | $ | 5,235 | | | $ | 6,844 | | | $ | 6,588 | | | $ | 6,991 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average total assets | | $ | 381,815 | | | $ | 546,761 | | | $ | 685,236 | | | $ | 643,349 | | | $ | 629,114 | |
| Less: Average excess cash | | | - | | | | (117,710 | ) | | | (218,021 | ) | | | (159,116 | ) | | | (123,625 | ) |
Less: Average accounts payable and accrued expenses | | | (76,494 | ) | | | (79,837 | ) | | | (76,564 | ) | | | (71,299 | ) | | | (79,263 | ) |
Less: Average deferred revenue (current and non-current) | | | (19,762 | ) | | | (20,077 | ) | | | (20,111 | ) | | | (20,271 | ) | | | (20,193 | ) |
Less: Average other non-current liabilities and deferred income taxes | | | (9,624 | ) | | | (12,892 | ) | | | (20,043 | ) | | | (24,536 | ) | | | (27,910 | ) |
| Average capital base | | $ | 275,935 | | | $ | 316,245 | | | $ | 350,497 | | | $ | 368,127 | | | $ | 378,123 | |
| | | | | | | | | | | | | | | | | | | | | |
| Return on assets (annualized) | | | 4.4 | % | | | 3.8 | % | | | 4.0 | % | | | 4.1 | % | | | 4.4 | % |
| Return on capital (annualized) | | | 7.6 | % | | | 8.5 | % | | | 10.0 | % | | | 9.0 | % | | | 9.0 | % |
Adjusted Free Cash Flow (Non-GAAP financial measure)
We define Adjusted Free Cash Flow as Adjusted EBITDA 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 a company’s operating financial performance and liquidity. Note that Adjusted Free Cash Flow is not a measure of financial performance under GAAP and may not be comparable to similarly titled measures reported by other companies. See our Adjusted Free Cash Flow reconciliation to Adjusted EBITDA below, as well as our reconciliation of Net income to Adjusted EBITDA provided above.
| | | Three Months Ended | |
| (In thousands) | | June 30, 2009 | |
| | | (Unaudited) | |
| Adjusted EBITDA | | $ | 48,131 | |
| Less: Total capital expenditures | | | (54,664 | ) |
| Less: Cash payments for interest, net | | | (2,250 | ) |
| Less: Cash payments for income taxes, net | | | 741 | |
| Adjusted free cash flow | | $ | (8,042 | ) |
| | | | | |
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 June 30, | |
| | | 2009 | |
| | | (Unaudited) | |
| Obligations under capital leases | | $ | 104,088 | |
| Debt | | | 106,196 | |
| Total debt | | $ | 210,284 | |
| Less: Cash and cash equivalents | | | (147,877 | ) |
| Net debt | | $ | 62,407 | |
| Adjusted EBITDA (trailing twelve months) | | $ | 172,753 | |
| | | | | |
| Net leverage | | | 0.36 | |
