Rackspace Hosting Reports Second Quarter 2010 Results
For the quarter ended June 30, 2010:
· | Net revenue of $187.3 million grew 23.2% year-over-year and 4.8% from Q1 2010 |
· | Adjusted EBITDA (1) of $62.2 million grew 29.2% year-over-year and 4.7% from Q1 2010 |
· | Achieved adjusted EBITDA margin of 33.2%, up from 31.7% year-over-year and in-line with Q1 2010 |
· | Net income of $11.2 million grew 60.2% year-over-year and 14.1% from Q1 2010 |
· | Generated $15.4 million of Adjusted Free Cash Flow for the quarter and $16.9 million for the first six months of 2010 |
SAN ANTONIO – August 9, 2010 – Rackspace® Hosting, Inc. (NYSE: RAX), the world's leader in the hosting and cloud computing industry, announced financial results for the quarter ended June 30, 2010.
Net revenue for the second quarter of 2010 was $187.3 million, up 4.8% from the previous quarter and up 23.2% from the second quarter of 2009. Net revenue for the second quarter of 2010 was negatively impacted by currency exchange rates when compared to the first quarter of 2010, but was favorably impacted when compared to the second quarter of 2009.
Changes in currency exchange rates had a negative impact on net revenue of $2.0 million quarter-over-quarter, and a positive impact on net revenue of $1.7 million on a year-over-year basis.
Managed hosting revenue for the quarter increased to $164.1 million, up from $159.5 million in the first quarter of 2010. Cloud revenue increased to $23.2 million in the quarter, up from $19.3 million in the previous quarter.
Total server count increased to 61,874, up from 59,876, servers at the end of the first quarter of 2010, and total customers increased to 108,023, up from 99,446 at the end of the previous quarter.
“Looking at our performance in the first two quarters of the year, it is clear that we are delivering on our financial plan. Our subscription revenue model gives us lots of stability, and we are optimistic that we will continue delivering on our goals,” said Lanham Napier, president and chief executive officer.
Adjusted EBITDA for the quarter was $62.2 million, a 4.7% increase compared to the first quarter of 2010 and a 29.2% increase compared to the second quarter of 2009. The adjusted EBITDA margin for the quarter was 33.2%, in line with 33.2% in the previous quarter and up from 31.7% in the second quarter of 2009. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge of $1.3 million for the quarter relating to operating leases.
Net income was $11.2 million for the quarter, up 14.1% from the previous quarter and up 60.2% from the second quarter of 2009. Net income margin for the quarter was 6.0% compared to 5.5% for the previous quarter and 4.6% in the second quarter of 2009.
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“With the first two quarters of the year completed, we feel optimistic that we will deliver on our financial goals for 2010. As we look out toward the last two quarters, we remain focused on growing revenue while maintaining our current margin profile,” said Bruce Knooihuizen, chief financial officer.
Cash flow from operating activities was $52.0 million for the second quarter of 2010. Capital expenditures were $44.8 million, including $29.6 million for purchases of customer gear, $6.0 million for data center build outs, $1.3 million for office build outs, and $8.0 million for capitalized software and other projects. For the full year of 2010, the company continues to expect total capital expenditures of $185 to $235 million.
Adjusted free cash flow (1) for the quarter was $15.4 million.
At the end of the second quarter of 2010, cash and cash equivalents were $148.5 million. Included in that amount are investments in money market funds in the amount of $60.7 million. Debt obligations totaled $169.8 million consisting of $115.5 million related to capital leases and $54.3 million related to current and non-current debt. $50.0 million of non-current debt is related to borrowings on the company’s line of credit. The company has an additional $194.4 million available for future borrowings on the company’s line of credit.
On a worldwide basis, Rackspace employed 3,002 Rackers as of June 30, 2010, up from 2,905 Rackers as of March 31, 2010 and 2,648 Rackers as of June 30, 2009.
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Rackspace Developments and Business Highlights
· | Launch of OpenStack™ Project: In July, Rackspace announced the launch of OpenStack, an open-source cloud platform designed to foster the emergence of technology standards and cloud interoperability. Rackspace has made the core code that powers its Cloud Files available publicly through the OpenStack project and intends to make the core code that powers its Cloud Servers public cloud offering available later this year. The project will also incorporate technology that powers the NASA Nebula Cloud Platform. Rackspace and NASA plan to actively collaborate on joint technology development and leverage the efforts of open-source software developers worldwide. |
· | Accelerating Traction with Channel Partners: During the second quarter Rackspace continued to expand its Channel Partner program through the signing of a distribution agreement with Ingram Micro Inc. The agreement will bring Rackspace’s managed hosting and cloud computing offerings to Ingram Micro’s growing base of North American channel partners through the new Seismic Cloud Conduit Program. Seismic Cloud Conduit is a new services program designed to enable Ingram Micro's channel partners to take advantage of and maximize the business opportunities offered by cloud computing. Rackspace is one of the first hosting providers to offer its services through a traditional distribution model allowing VARs, resellers and channel partners to embrace the shift in IT to cloud computing and realize new recu rring revenue streams. |
· | Accelerated Traction with Enterprise Customers: During the second quarter of 2010, Rackspace added several new enterprise customers to its installed base. Additionally, Vodafone, our largest customer out of the UK region, awarded Rackspace a five year contract. |
Conference Call and Webcast
Management will host a conference call to discuss its second quarter 2010 financial results today at 4:30 p.m. EST. To access the conference call, please dial 877-718-5101 from the United States or dial 719-325-4791 from abroad and reference pass code 7346462. A live webcast and a replay of the conference call will be available on Rackspace’s website, located at ir.rackspace.com.
About Rackspace Hosting
Rackspace Hosting is the world leader in hosting. The San Antonio-based company provides its customers Fanatical Support ® in their portfolio of hosted IT services, including Managed Hosting, Cloud Computing and Email and Apps. 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 statement s 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-K for the year ended December 31, 2009, filed with the SEC on February 26, 2010 and in Rackspace Hosting’s Form 10-Q for the quarter ended June 30, 2010 that will be filed on August 9, 2010. Except as required by law, Rackspace Hosting assumes no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Contact:
Investor Relations | Corporate Communications |
Bryan McGrath | Rachel Ferry |
210-312-5230 | 210-312-3732 |
ir@rackspace.com | rachel.ferry@rackspace.com |
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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) | 2009 | 2010 | 2010 | 2009 | 2010 | |||||||||||||||
Net revenue | $ | 151,995 | $ | 178,805 | $ | 187,314 | $ | 297,072 | $ | 366,119 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of revenue | 48,235 | 57,007 | 61,470 | 94,445 | 118,477 | |||||||||||||||
Sales and marketing | 19,080 | 21,977 | 23,285 | 39,582 | 45,262 | |||||||||||||||
General and administrative | 41,566 | 46,395 | 46,737 | 79,106 | 93,132 | |||||||||||||||
Depreciation and amortization | 29,711 | 36,698 | 37,991 | 57,515 | 74,689 | |||||||||||||||
Total costs and expenses | 138,592 | 162,077 | 169,483 | 270,648 | 331,560 | |||||||||||||||
Income from operations | 13,403 | 16,728 | 17,831 | 26,424 | 34,559 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (2,172 | ) | (2,144 | ) | (1,875 | ) | (4,707 | ) | (4,019 | ) | ||||||||||
Interest and other income (expense) | (267 | ) | 185 | 814 | (358 | ) | 999 | |||||||||||||
Total other income (expense) | (2,439 | ) | (1,959 | ) | (1,061 | ) | (5,065 | ) | (3,020 | ) | ||||||||||
Income before income taxes | 10,964 | 14,769 | 16,770 | 21,359 | 31,539 | |||||||||||||||
Income taxes | 3,973 | 4,957 | 5,572 | 7,780 | 10,529 | |||||||||||||||
Net income | $ | 6,991 | $ | 9,812 | $ | 11,198 | $ | 13,579 | $ | 21,010 | ||||||||||
Net income per share | ||||||||||||||||||||
Basic | $ | 0.06 | $ | 0.08 | $ | 0.09 | $ | 0.11 | $ | 0.17 | ||||||||||
Diluted | $ | 0.06 | $ | 0.07 | $ | 0.08 | $ | 0.11 | $ | 0.16 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||
Basic | 120,214 | 123,981 | 124,592 | 118,918 | 124,288 | |||||||||||||||
Diluted | 126,442 | 132,439 | 132,660 | 124,007 | 132,562 |
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Consolidated Balance Sheets
(In thousands) | December 31, | June 30, | ||||||
2009 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 125,425 | $ | 148,496 | ||||
Accounts receivable, net of allowance for doubtful accounts and | ||||||||
customer credits of $4,298 as of December 31, 2009 | ||||||||
and $3,402 as of March 31, 2010 | 38,732 | 43,577 | ||||||
Income taxes receivable | 7,509 | 10,801 | ||||||
Deferred income taxes | 9,764 | 7,894 | ||||||
Prepaid expenses and other current assets | 10,239 | 10,901 | ||||||
Total current assets | 191,669 | 221,669 | ||||||
Property and equipment, net | 432,971 | 456,650 | ||||||
Goodwill | 22,329 | 23,329 | ||||||
Intangible assets, net | 10,790 | 7,879 | ||||||
Other non-current assets | 10,886 | 10,930 | ||||||
Total assets | $ | 668,645 | $ | 720,457 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 89,773 | $ | 97,711 | ||||
Current portion of deferred revenue | 17,113 | 14,996 | ||||||
Current portion of obligations under capital leases | 46,415 | 51,549 | ||||||
Current portion of debt | 4,893 | 2,589 | ||||||
Total current liabilities | 158,194 | 166,845 | ||||||
Non-current deferred revenue | 2,331 | 1,644 | ||||||
Non-current obligations under capital leases | 63,287 | 63,959 | ||||||
Non-current debt | 52,791 | 51,750 | ||||||
Non-current deferred income taxes | 30,850 | 22,796 | ||||||
Other non-current liabilities | 11,765 | 15,469 | ||||||
Total liabilities | 319,218 | 322,463 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' equity: | ||||||||
Common stock | 124 | 125 | ||||||
Additional paid-in capital | 251,337 | 284,912 | ||||||
Accumulated other comprehensive loss | (10,257 | ) | (16,276 | ) | ||||
Retained earnings | 108,223 | 129,233 | ||||||
Total stockholders’ equity | 349,427 | 397,994 | ||||||
Total liabilities and stockholders’ equity | $ | 668,645 | $ | 720,457 |
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(Unaudited)
(In thousands) | Three Months Ended | Six Months Ended | ||||||||||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | ||||||||||||||||
2009 | 2010 | 2010 | 2009 | 2010 | ||||||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||||||
Net income | $ | 6,991 | $ | 9,812 | $ | 11,198 | $ | 13,579 | $ | 21,010 | ||||||||||
Adjustments to reconcile net income to net cash provided | ||||||||||||||||||||
by operating activities | ||||||||||||||||||||
Depreciation and amortization | 29,711 | 36,698 | 37,991 | 57,515 | 74,689 | |||||||||||||||
Loss on disposal of equipment, net | 311 | 148 | 126 | 487 | 274 | |||||||||||||||
Provision for bad debts and customer credits | 4,073 | 536 | 848 | 6,382 | 1,384 | |||||||||||||||
Deferred income taxes | 2,810 | (1,721 | ) | (4,911 | ) | 5,317 | (6,632 | ) | ||||||||||||
Deferred rent | 231 | 1,804 | 1,316 | 124 | 3,120 | |||||||||||||||
Share-based compensation expense | 5,017 | 5,978 | 6,376 | 9,254 | 12,354 | |||||||||||||||
Other non-cash compensation expense | 324 | 104 | 105 | 409 | 209 | |||||||||||||||
Excess tax benefits from share-based compensation arrangements | - | (7,015 | ) | (8,438 | ) | - | (15,453 | ) | ||||||||||||
Changes in certain assets and liabilities | ||||||||||||||||||||
Accounts receivables | (6,522 | ) | (1,366 | ) | (5,362 | ) | (12,858 | ) | (6,728 | ) | ||||||||||
Income taxes receivable | (778 | ) | 3,770 | 8,215 | (1,035 | ) | 11,985 | |||||||||||||
Accounts payable and accrued expenses | 18,605 | 3,407 | 6,454 | 12,054 | 9,861 | |||||||||||||||
Deferred revenue | (1,096 | ) | (1,074 | ) | (1,351 | ) | (792 | ) | (2,425 | ) | ||||||||||
All other operating activities | (1,628 | ) | (188 | ) | (605 | ) | (1,588 | ) | (793 | ) | ||||||||||
Net cash provided by operating activities | 58,049 | 50,893 | 51,962 | 88,848 | 102,855 | |||||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||||||
Purchases of property and equipment, net | (31,027 | ) | (39,622 | ) | (29,050 | ) | (56,616 | ) | (68,672 | ) | ||||||||||
Earnout payments for acquisitions | (5,622 | ) | - | (490 | ) | (5,622 | ) | (490 | ) | |||||||||||
Other investing activities | - | - | (75 | ) | - | (75 | ) | |||||||||||||
Net cash used in investing activities | (36,649 | ) | (39,622 | ) | (29,615 | ) | (62,238 | ) | (69,237 | ) | ||||||||||
Cash Flows From Financing Activities | ||||||||||||||||||||
Principal payments of capital leases | (11,084 | ) | (12,796 | ) | (12,957 | ) | (20,922 | ) | (25,753 | ) | ||||||||||
Principal payments of notes payable | (3,776 | ) | (840 | ) | (2,505 | ) | (4,527 | ) | (3,345 | ) | ||||||||||
Payments on line of credit | - | - | - | (100,000 | ) | - | ||||||||||||||
Payments for debt issuance costs | (328 | ) | - | - | (328 | ) | - | |||||||||||||
Proceeds from employee stock plans | 3,995 | 2,262 | 2,788 | 6,230 | 5,050 | |||||||||||||||
Excess tax benefits from share-based compensation arrangements | - | 7,015 | 8,438 | - | 15,453 | |||||||||||||||
Net cash used in financing activities | (11,193 | ) | (4,359 | ) | (4,236 | ) | (119,547 | ) | (8,595 | ) | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | 2,650 | (1,040 | ) | (912 | ) | 2,407 | (1,952 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents | 12,857 | 5,872 | 17,199 | (90,530 | ) | 23,071 | ||||||||||||||
Cash and cash equivalents, beginning of period | 135,020 | 125,425 | 131,297 | 238,407 | 125,425 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 147,877 | $ | 131,297 | $ | 148,496 | $ | 147,877 | $ | 148,496 | ||||||||||
Supplemental cash flow information: | ||||||||||||||||||||
Acquisition of property and equipment by capital leases | $ | 23,637 | $ | 15,766 | $ | 15,793 | $ | 35,320 | $ | 31,559 | ||||||||||
Shares issued in business combinations | $ | 1,115 | $ | - | $ | 510 | $ | 1,880 | $ | 510 | ||||||||||
Cash payments for interest, net of amount capitalized | $ | 2,116 | $ | 2,144 | $ | 1,861 | $ | 4,857 | $ | 4,005 | ||||||||||
Cash payments for income taxes | $ | 2,179 | $ | 3,414 | $ | 8,525 | $ | 2,938 | $ | 11,939 |
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Key Metrics – Quarter to Date
(Unaudited)
Three Months Ended | ||||||||||||||||||||
(Dollar amounts in thousands, except annualized | June 30, | September 30, | December 31, | March 31, | June 30, | |||||||||||||||
net revenue per average technical square foot) | 2009 | 2009 | 2009 | 2010 | 2010 | |||||||||||||||
Growth | ||||||||||||||||||||
Managed hosting customers at period end | 19,363 | 19,328 | 19,304 | 19,366 | 19,433 | |||||||||||||||
Cloud customers at period end** | 51,440 | 61,616 | 71,621 | 80,080 | 88,590 | |||||||||||||||
Number of customers at period end | 70,803 | 80,944 | 90,925 | 99,446 | 108,023 | |||||||||||||||
Managed hosting, net revenue | $ | 138,943 | $ | 147,065 | $ | 152,394 | $ | 159,536 | $ | 164,094 | ||||||||||
Cloud, net revenue | $ | 13,052 | $ | 15,334 | $ | 17,122 | $ | 19,269 | $ | 23,220 | ||||||||||
Net revenue | $ | 151,995 | $ | 162,399 | $ | 169,516 | $ | 178,805 | $ | 187,314 | ||||||||||
Revenue growth (year over year) | 16.2 | % | 17.4 | % | 18.4 | % | 23.2 | % | 23.2 | % | ||||||||||
Net upgrades (monthly average) | 1.2 | % | 1.2 | % | 1.3 | % | 1.1 | % | 1.4 | % | ||||||||||
Churn (monthly average) | -1.0 | % | -1.1 | % | -0.8 | % | -0.9 | % | -0.9 | % | ||||||||||
Growth in installed base (monthly average) * | 0.2 | % | 0.1 | % | 0.4 | % | 0.2 | % | 0.5 | % | ||||||||||
�� | ||||||||||||||||||||
Number of employees (Rackers) at period end | 2,648 | 2,730 | 2,774 | 2,905 | 3,002 | |||||||||||||||
Number of servers deployed at period end | 52,269 | 54,655 | 56,671 | 59,876 | 61,874 | |||||||||||||||
Profitability | ||||||||||||||||||||
Income from operations | $ | 13,403 | $ | 13,128 | $ | 15,689 | $ | 16,728 | $ | 17,831 | ||||||||||
Depreciation and amortization | $ | 29,711 | $ | 32,696 | $ | 35,018 | $ | 36,698 | $ | 37,991 | ||||||||||
Share-based compensation expense | ||||||||||||||||||||
Cost of revenue | $ | 675 | $ | 778 | $ | 768 | $ | 969 | $ | 1,163 | ||||||||||
Sales and marketing | $ | 721 | $ | 826 | $ | 639 | $ | 880 | $ | 1,100 | ||||||||||
General and administrative | $ | 3,621 | $ | 4,008 | $ | 3,851 | $ | 4,129 | $ | 4,113 | ||||||||||
Total share-based compensation expense | $ | 5,017 | $ | 5,612 | $ | 5,258 | $ | 5,978 | $ | 6,376 | ||||||||||
Adjusted EBITDA (1) | $ | 48,131 | $ | 51,436 | $ | 55,965 | $ | 59,404 | $ | 62,198 | ||||||||||
Adjusted EBITDA margin (1) | 31.7 | % | 31.7 | % | 33.0 | % | 33.2 | % | 33.2 | % | ||||||||||
Operating income margin | 8.8 | % | 8.1 | % | 9.3 | % | 9.4 | % | 9.5 | % | ||||||||||
Income from operations | $ | 13,403 | $ | 13,128 | $ | 15,689 | $ | 16,728 | $ | 17,831 | ||||||||||
Effective tax rate | 36.2 | % | 33.9 | % | 34.0 | % | 33.6 | % | 33.2 | % | ||||||||||
Net operating profit after tax (NOPAT) (1) | $ | 8,551 | $ | 8,678 | $ | 10,355 | $ | 11,107 | $ | 11,911 | ||||||||||
NOPAT margin | 5.6 | % | 5.3 | % | 6.1 | % | 6.2 | % | 6.4 | % | ||||||||||
Capital efficiency and returns | ||||||||||||||||||||
Interest bearing debt | $ | 210,284 | $ | 167,976 | $ | 167,386 | $ | 169,517 | $ | 169,847 | ||||||||||
Stockholders' equity | $ | 308,823 | $ | 330,392 | $ | 349,427 | $ | 370,425 | $ | 397,994 | ||||||||||
Less: Excess cash | $ | (129,638 | ) | $ | (83,462 | ) | $ | (105,083 | ) | $ | (109,840 | ) | $ | (126,018 | ) | |||||
Capital base | $ | 389,469 | $ | 414,906 | $ | 411,730 | $ | 430,102 | $ | 441,823 | ||||||||||
Average capital base | $ | 378,123 | $ | 402,188 | $ | 413,318 | $ | 420,916 | $ | 435,963 | ||||||||||
Capital turnover (annualized) | 1.61 | 1.62 | 1.64 | 1.70 | 1.72 | |||||||||||||||
Return on capital (annualized) (1) | 9.0 | % | 8.6 | % | 10.0 | % | 10.6 | % | 10.9 | % | ||||||||||
Capital expenditures | ||||||||||||||||||||
Purchases of property and equipment, net | $ | 31,027 | $ | 26,024 | $ | 34,652 | $ | 39,622 | $ | 29,050 | ||||||||||
Vendor financed equipment purchases | $ | 23,637 | $ | 20,664 | $ | 12,398 | $ | 15,766 | $ | 15,793 | ||||||||||
Total capital expenditures | $ | 54,664 | $ | 46,688 | $ | 47,050 | $ | 55,388 | $ | 44,843 | ||||||||||
Customer gear | $ | 32,448 | $ | 28,705 | $ | 28,421 | $ | 32,488 | $ | 29,589 | ||||||||||
Data center build outs | $ | 13,914 | $ | 4,028 | $ | 7,880 | $ | 16,644 | $ | 5,955 | ||||||||||
Office build outs | $ | 1,651 | $ | 5,432 | $ | 5,350 | $ | 1,220 | $ | 1,306 | ||||||||||
Capitalized software and other projects | $ | 6,651 | $ | 8,523 | $ | 5,399 | $ | 5,036 | $ | 7,993 | ||||||||||
Total capital expenditures | $ | 54,664 | $ | 46,688 | $ | 47,050 | $ | 55,388 | $ | 44,843 | ||||||||||
Infrastructure capacity and utilization | ||||||||||||||||||||
Technical square feet of data center space at period end *** | 177,371 | 167,821 | 162,848 | 169,998 | 169,998 | |||||||||||||||
Annualized net revenue per average technical square foot *** | $ | 3,631 | $ | 3,764 | $ | 4,101 | $ | 4,298 | $ | 4,407 | ||||||||||
Utilization rate at period end | 59.8 | % | 62.3 | % | 65.3 | % | 66.5 | % | 69.1 | % | ||||||||||
* Due to rounding, totals may not equal the sum of the line items in the table above. | ||||||||||||||||||||
** Amounts include SaaS customers for Jungle Disk using a Rackspace storage solution. Jungle Disk customers using a third | ||||||||||||||||||||
party storage solution are excluded. | ||||||||||||||||||||
*** Technical square footage excludes 30,250 square feet and 4,400 square feet for unused portions of the Chicago and | ||||||||||||||||||||
Northern Virginia facilities, respectively. | ||||||||||||||||||||
(1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures. |
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Consolidated Quarterly Statements of Income
(Unaudited)
Three Months Ended | ||||||||||||||||||||
(In thousands) | June 30, 2009 | September 30, 2009 | December 31, 2009 | March 31, 2010 | June 30, 2010 | |||||||||||||||
Net revenue | $ | 151,995 | $ | 162,399 | $ | 169,516 | $ | 178,805 | $ | 187,314 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of revenue | 48,235 | 53,093 | 53,405 | 57,007 | 61,470 | |||||||||||||||
Sales and marketing | 19,080 | 19,860 | 20,016 | 21,977 | 23,285 | |||||||||||||||
General and administrative | 41,566 | 43,622 | 45,388 | 46,395 | 46,737 | |||||||||||||||
Depreciation and amortization | 29,711 | 32,696 | 35,018 | 36,698 | 37,991 | |||||||||||||||
Total costs and expenses | 138,592 | 149,271 | 153,827 | 162,077 | 169,483 | |||||||||||||||
Income from operations | 13,403 | 13,128 | 15,689 | 16,728 | 17,831 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (2,172 | ) | (2,147 | ) | (2,096 | ) | (2,144 | ) | (1,875 | ) | ||||||||||
Interest and other income (expense) | (267 | ) | 523 | 90 | 185 | 814 | ||||||||||||||
Total other income (expense) | (2,439 | ) | (1,624 | ) | (2,006 | ) | (1,959 | ) | (1,061 | ) | ||||||||||
Income before income taxes | 10,964 | 11,504 | 13,683 | 14,769 | 16,770 | |||||||||||||||
Income taxes | 3,973 | 3,900 | 4,648 | 4,957 | 5,572 | |||||||||||||||
Net income | $ | 6,991 | $ | 7,604 | $ | 9,035 | $ | 9,812 | $ | 11,198 |
Three Months Ended | ||||||||||||||||||||
(Percent of net revenue) | June 30, 2009 | September 30, 2009 | December 31, 2009 | March 31, 2010 | June 30, 2010 | |||||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Costs and expenses | ||||||||||||||||||||
Cost of revenue | 31.7 | % | 32.7 | % | 31.5 | % | 31.9 | % | 32.8 | % | ||||||||||
Sales and marketing | 12.6 | % | 12.2 | % | 11.8 | % | 12.3 | % | 12.4 | % | ||||||||||
General and administrative | 27.3 | % | 26.9 | % | 26.8 | % | 25.9 | % | 25.0 | % | ||||||||||
Depreciation and amortization | 19.5 | % | 20.1 | % | 20.7 | % | 20.5 | % | 20.3 | % | ||||||||||
Total costs and expenses | 91.2 | % | 91.9 | % | 90.7 | % | 90.6 | % | 90.5 | % | ||||||||||
Income from operations | 8.8 | % | 8.1 | % | 9.3 | % | 9.4 | % | 9.5 | % | ||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | -1.4 | % | -1.3 | % | -1.2 | % | -1.2 | % | -1.0 | % | ||||||||||
Interest and other income (expense) | -0.2 | % | 0.3 | % | 0.1 | % | 0.1 | % | 0.4 | % | ||||||||||
Total other income (expense) | -1.6 | % | -1.0 | % | -1.2 | % | -1.1 | % | -0.6 | % | ||||||||||
Income before income taxes | 7.2 | % | 7.1 | % | 8.1 | % | 8.3 | % | 9.0 | % | ||||||||||
Income taxes | 2.6 | % | 2.4 | % | 2.7 | % | 2.8 | % | 3.0 | % | ||||||||||
Net income | 4.6 | % | 4.7 | % | 5.3 | % | 5.5 | % | 6.0 | % | ||||||||||
Due to rounding, totals may not equal the sum of the line items in the table above. |
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(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 net income, which we consider to be the most directly comparable GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. See our Adjusted EBITDA to net income reconciliations in the table below.
Three Months Ended | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
(Dollars in thousands) | June 30, 2009 | September 30, 2009 | December 31, 2009 | March 31, 2010 | June 30, 2010 | |||||||||||||||
Net revenue | $ | 151,995 | $ | 162,399 | $ | 169,516 | $ | 178,805 | $ | 187,314 | ||||||||||
Income from operations | $ | 13,403 | $ | 13,128 | $ | 15,689 | $ | 16,728 | $ | 17,831 | ||||||||||
Net income | $ | 6,991 | $ | 7,604 | $ | 9,035 | $ | 9,812 | $ | 11,198 | ||||||||||
Plus: Income taxes | 3,973 | 3,900 | 4,648 | 4,957 | 5,572 | |||||||||||||||
Plus: Total other (income) expense | 2,439 | 1,624 | 2,006 | 1,959 | 1,061 | |||||||||||||||
Plus: Depreciation and amortization | 29,711 | 32,696 | 35,018 | 36,698 | 37,991 | |||||||||||||||
Plus: Share-based compensation expense | 5,017 | 5,612 | 5,258 | 5,978 | 6,376 | |||||||||||||||
Adjusted EBITDA | $ | 48,131 | $ | 51,436 | $ | 55,965 | $ | 59,404 | $ | 62,198 | ||||||||||
Operating income margin | 8.8 | % | 8.1 | % | 9.3 | % | 9.4 | % | 9.5 | % | ||||||||||
Adjusted EBITDA margin | 31.7 | % | 31.7 | % | 33.0 | % | 33.2 | % | 33.2 | % |
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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.
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 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 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 | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
(Dollars in thousands) | June 30, 2009 | September 30, 2009 | December 31, 2009 | March 31, 2010 | June 30, 2010 | |||||||||||||||
Income from operations | $ | 13,403 | $ | 13,128 | $ | 15,689 | $ | 16,728 | $ | 17,831 | ||||||||||
Effective tax rate | 36.2 | % | 33.9 | % | 34.0 | % | 33.6 | % | 33.2 | % | ||||||||||
Net operating profit after tax (NOPAT) | $ | 8,551 | $ | 8,678 | $ | 10,355 | $ | 11,107 | $ | 11,911 | ||||||||||
Net income | $ | 6,991 | $ | 7,604 | $ | 9,035 | $ | 9,812 | $ | 11,198 | ||||||||||
Total assets at period end | $ | 656,793 | $ | 625,330 | $ | 668,645 | $ | 691,729 | $ | 720,457 | ||||||||||
Less: Excess cash | (129,638 | ) | (83,462 | ) | (105,083 | ) | (109,840 | ) | (126,018 | ) | ||||||||||
Less: Accounts payable and accrued expenses | (87,316 | ) | (77,108 | ) | (89,773 | ) | (92,828 | ) | (97,711 | ) | ||||||||||
Less: Deferred revenue (current and non-current) | (20,011 | ) | (18,222 | ) | (19,444 | ) | (18,044 | ) | (16,640 | ) | ||||||||||
Less: Other non-current liabilities and deferred income taxes | (30,359 | ) | (31,632 | ) | (42,615 | ) | (40,915 | ) | (38,265 | ) | ||||||||||
Capital base | $ | 389,469 | $ | 414,906 | $ | 411,730 | $ | 430,102 | $ | 441,823 | ||||||||||
Average total assets | $ | 629,114 | $ | 641,062 | $ | 646,988 | $ | 680,187 | $ | 706,093 | ||||||||||
Average capital base | $ | 378,123 | $ | 402,188 | $ | 413,318 | $ | 420,916 | $ | 435,963 | ||||||||||
Return on assets (annualized) | 4.4 | % | 4.7 | % | 5.6 | % | 5.8 | % | 6.3 | % | ||||||||||
Return on capital (annualized) | 9.0 | % | 8.6 | % | 10.0 | % | 10.6 | % | 10.9 | % |
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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 refunds (payments) for income taxes, net.
We believe that Adjusted Free Cash Flow is an important metric for investors in evaluating how a company is currently using cash generated, and may indicate its ability to generate cash that can potentially be used by the business for capital investments, acquisitions, reduction of debt, payment of dividends, etc. Note that Adjusted Free Cash Flow is not a measure of financial performance under GAAP and may not be comparable to similarly titled measures reported by other companies. See our Adjusted Free Cash Flow reconciliation to Adjusted EBITDA below, as well as our reconciliation of Net income to Adjusted EBITDA provided above.
Three Months Ended | Six Months Ended | |||||||
(In thousands) | June 30, 2010 | June 30, 2010 | ||||||
(Unaudited) | ||||||||
Adjusted EBITDA | $ | 62,198 | $ | 121,602 | ||||
Non-cash deferred rent | 1,316 | 3,120 | ||||||
Total capital expenditures | (44,843 | ) | (100,231 | ) | ||||
Cash payments for interest, net | (1,831 | ) | (3,928 | ) | ||||
Cash payments for income taxes, net | (1,415 | ) | (3,699 | ) | ||||
Adjusted free cash flow | $ | 15,425 | $ | 16,864 |
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, | |||
2010 | ||||
(Unaudited) | ||||
Obligations under capital leases | $ | 115,508 | ||
Debt | 54,339 | |||
Total debt | $ | 169,847 | ||
Less: Cash and cash equivalents | (148,496 | ) | ||
Net debt | $ | 21,351 | ||
Adjusted EBITDA (trailing twelve months) | $ | 229,003 | ||
Net leverage | 0.09 | x |
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