Rackspace Hosting (RAX) 8-K Rackspace Reports Strong Fourth Quarter 2014 Results

Rackspace Reports Strong Fourth Quarter 2014 Results

•Revenue grew 16 percent compared to the fourth quarter of 2013

•Adjusted EBITDA grew 25 percent compared to the fourth quarter of 2013

•Net income grew 77 percent compared to the fourth quarter of 2013

SAN ANTONIO, TX - February 17, 2015 - Rackspace^® (NYSE: RAX), the #1 managed cloud company, today announced financial results for the quarter that ended December 31, 2014.

On a GAAP basis, net revenue for the fourth quarter of 2014 was $472 million, up 15.8 percent from the fourth quarter of 2013. On a constant currency basis, net revenue grew 16.4 percent from the fourth quarter of 2013.

Adjusted EBITDA for the quarter was $165 million, up 25.3 percent from the fourth quarter of 2013. Net income for the fourth quarter was $36.9 million, for a margin of 7.8 percent, up from 5.1 percent in the fourth quarter of 2013.

For the fourth quarter of 2014, cash flow from operating activities was $151 million, capital expenditures were $105 million, and Adjusted Free Cash Flow was a record $55 million. At the end of the fourth quarter of 2014, cash and cash equivalents were $214 million, and interest-bearing debt including capital lease obligations totaled $49 million. Return on Capital was 15.5 percent in the fourth quarter of 2014 compared to 9.6 percent in the fourth quarter of 2013.

On a worldwide basis, Rackspace employed 5,936 Rackers as of December 31, 2014.

"The strong growth and improving margins that we posted demonstrate the traction that we're gaining as the leader of the managed cloud segment,” said Taylor Rhodes, president and CEO of Rackspace. "We will build on this momentum in 2015 by expanding the specialized expertise that we offer in areas such as ecommerce, big data and security. We're helping more and more businesses leverage the power of the cloud without the pain of managing complex new technologies by themselves."

For the first quarter of 2015, Rackspace expects revenue to grow between 2 percent and 3.5 percent on a constant currency basis. Based on foreign currency movements to date, Rackspace anticipates a 100 basis point headwind to revenue growth in the first quarter, resulting in GAAP revenue in the range of $477 million to $484 million. The company expects adjusted EBITDA margins to be between 32 percent and 34 percent for the first quarter.

For the full year 2015, Rackspace expects revenue to grow between 14 percent and 18 percent on a constant currency basis. Based on foreign currency movements to date, Rackspace anticipates a 200 basis point headwind to revenue growth for the full year of 2015, resulting in GAAP revenue in the range of $2.0 billion to $2.1 billion. The company expects adjusted EBITDA margins to be between 33 percent and 36 percent for the year.

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Recent Highlights

• Rackspace Strengthens Data Tier Leadership With OnMetal^™ Cloud Big Data. Rackspace announced the release of its OnMetal Cloud Big Data Platform, which allows customers to deploy bare metal instances of Apache^™ Hadoop^® with Spark^™ in just three clicks. The new solution provides an efficient and elastic platform that delivers breakthrough speed for Hadoop and Spark, allowing data scientists to gather insights in minutes rather than hours or days.

• Rackspace Announced the Newest Release of its Rackspace Hybrid Cloud offering, RackConnect^® v3. RackConnect v3 includes new security capabilities, increased scalability and an improved customer experience.

• Rackspace Announced Cloud Office Suite for Improved Business Collaboration Backed by Fanatical Support^®. Rackspace announced it has created a new business unit -- Cloud Office at Rackspace -- to unify its portfolio of industry-leading Rackspace and Microsoft^® business productivity and collaboration tools. The suite of solutions available includes hosted Microsoft Exchange and Rackspace Email, Microsoft Lync^® and SharePoint^® collaboration tools, and Jungle Disk^® backup services, all backed by Fanatical Support.

• Rackspace Appointed Todd Cione as Chief Revenue Officer. In this new role, Cione oversees the operations of the Americas sales and global marketing organizations, while uniting the functions to work seamlessly and strengthen the company's go-to-market strategy.

• Rackspace Appointed Kevin Costello to Board of Directors. Kevin Costello is a veteran in the Software-as-a-Service (SaaS) industry, bringing more than 25 years of consulting and advisory experience.

• Rackspace Opened First Office for Latin America in Mexico City. The office will bring the managed cloud and Fanatical Support to its existing customer base of more than a thousand local customers and will support growth in its business in this region.

Non-GAAP Financial Information

Adjusted EBITDA, Adjusted Free Cash Flow, and Return on Capital are non-GAAP financial measures. Rackspace believes these measures provide helpful information with respect to evaluating the company's performance. Other companies may calculate non-GAAP measures differently, limiting their usefulness as a comparative measure. The financial statement tables that accompany this press release include reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures.

Conference Call and Webcast

Rackspace's executive management will host a conference call to discuss the results for the fourth quarter of 2014 starting today at 4:30 p.m. ET.

To access the conference call from the United States and Canada, please dial 800-772-0358; from the United Kingdom, please dial 0800-692-2011; and from Hong Kong, please dial 800-900-872.

A live webcast and a replay of the conference call will be available on Rackspace's website, located at ir.rackspace.com.

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About Rackspace

Rackspace (NYSE: RAX) is the #1 managed cloud company. Its technical expertise and Fanatical Support^® allow companies to tap the power of the cloud without the pain of hiring experts in dozens of complex technologies. Rackspace is also the leader in hybrid cloud, giving each customer the best fit for its unique needs -- whether on single- or multi-tenant servers, or a combination of those platforms. Rackspace is the founder of OpenStack^®, the open-source operating system for the cloud. Headquartered in San Antonio, Rackspace serves more than 300,000 business customers from data centers on four continents. It ranks 29th on Fortune's list of 100 Best Companies to Work For. 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, or 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-Q for the quarter ended September 30, 2014, filed with the SEC on November 10, 2014. 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.

Contacts:

Investor Relations:	Media Relations:
Jessica Drought	Brandon Brunson
210-312-4191	210-312-1357
ir@rackspace.com	brandon.brunson@rackspace.com

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Consolidated Statements of Income

	Three Months Ended									Year Ended
	(Unaudited)												(Unaudited)
(In thousands, except per share data)	December 31, 2013			September 30, 2014			December 31, 2014			December 31, 2013			December 31, 2014
Net revenue	$	408,103		$	459,776		$	472,422		$	1,534,786		$	1,794,357
Costs and expenses:
Cost of revenue	133,821			142,954			153,912			492,493			582,334
Research and development	24,849			30,718			31,385			90,213			117,006
Sales and marketing	55,465			60,582			59,127			208,417			237,548
General and administrative	79,128			86,702			82,780			297,520			322,056
Depreciation and amortization	87,683			98,307			95,213			313,007			371,884
Total costs and expenses	380,946			419,263			422,417			1,401,650			1,630,828
Income from operations	27,157			40,513			50,005			133,136			163,529
Other income (expense):
Interest expense	(656		)	(445		)	(444		)	(3,118		)	(1,913		)
Interest and other income (expense)	405			(2,191		)	(257		)	741			(2,012		)
Total other income (expense)	(251		)	(2,636		)	(701		)	(2,377		)	(3,925		)
Income before income taxes	26,906			37,877			49,304			130,759			159,604
Income taxes	6,108			12,137			12,388			44,022			49,051
Net income	$	20,798		$	25,740		$	36,916		$	86,737		$	110,553
Net income per share
Basic	$	0.15		$	0.18		$	0.26		$	0.63		$	0.78
Diluted	$	0.14		$	0.18		$	0.26		$	0.61		$	0.77
Weighted average number of shares outstanding
Basic	139,875			142,978			141,776			138,577			141,971
Diluted	144,024			144,895			144,526			143,011			144,498

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Consolidated Balance Sheets

(In thousands)	December 31, 2013			December 31, 2014
				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	259,733		$	213,505
Accounts receivable, net of allowance for doubtful accounts and customer credits of $3,891 as of December 31, 2013 and $5,334 as of December 31, 2014	123,898			156,455
Deferred income taxes	12,637			9,260
Prepaid expenses	30,782			33,628
Other current assets	11,918			8,895
Total current assets	438,968			421,743
Property and equipment, net	890,776			1,057,684
Goodwill	81,084			81,084
Intangible assets, net	23,880			16,592
Other non-current assets	57,089			47,181
Total assets	$	1,491,797		$	1,624,284
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	122,047		$	137,295
Accrued compensation and benefits	62,459			66,696
Income and other taxes payable	11,388			11,783
Deferred revenue	22,868			20,851
Capital lease obligations	37,885			14,969
Debt	1,861			25,124
Total current liabilities	258,508			276,718
Non-current liabilities:
Deferred revenue	3,662			1,425
Capital lease obligations	25,048			8,946
Finance lease obligations for assets under construction	—			109,991
Debt	124			—
Deferred income taxes	69,729			71,228
Deferred rent	43,046			49,899
Other liabilities	36,268			32,283
Total liabilities	436,385			550,490
Commitments and Contingencies
Stockholders' equity:
Common stock	141			141
Additional paid-in capital	636,660			696,029
Accumulated other comprehensive loss	(4,536		)	(20,685		)
Retained earnings	423,147			398,309
Total stockholders’ equity	1,055,412			1,073,794
Total liabilities and stockholders’ equity	$	1,491,797		$	1,624,284

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Consolidated Statements of Cash Flows

	Three Months Ended									Year Ended
	(Unaudited)												(Unaudited)
(in thousands)	December 31, 2013			September 30, 2014			December 31, 2014			December 31, 2013			December 31, 2014
Cash Flows From Operating Activities
Net income	$	20,798		$	25,740		$	36,916		$	86,737		$	110,553
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	87,683			98,307			95,213			313,007			371,884
Deferred income taxes	(12,407		)	(11,046		)	30,553			(2,102		)	413
Share-based compensation expense	17,188			19,842			20,166			59,645			70,005
Excess tax benefits from share-based compensation arrangements	(16,156		)	(16,990		)	10,838			(33,539		)	(34,473		)
Other operating activities	755			2,381			2,435			5,490			8,242
Changes in operating assets and liabilities:
Accounts receivable	(10,344		)	(6,609		)	(25,952		)	(34,473		)	(41,681		)
Prepaid expenses and other current assets	6,290			(24,454		)	16,083			(12,270		)	(1,116		)
Accounts payable, accrued expenses, and other current liabilities	8,355			41,886			(38,458		)	35,303			55,424
Deferred revenue	4,176			(1,431		)	1,210			5,367			(3,742		)
Deferred rent	2,279			1,928			1,120			11,564			7,417
Other non-current assets and liabilities	901			(4,126		)	762			9,331			(416		)
Net cash provided by operating activities	109,518			125,428			150,886			444,060			542,510
Cash Flows From Investing Activities
Purchases of property and equipment	(126,723		)	(124,129		)	(107,209		)	(452,596		)	(430,335		)
Acquisitions, net of cash acquired	(3,727		)	—			—			(9,930		)	—
All other investing activities	110			317			285			(1,698		)	2,230
Net cash used in investing activities	(130,340		)	(123,812		)	(106,924		)	(464,224		)	(428,105		)
Cash Flows From Financing Activities
Principal payments of capital leases	(14,652		)	(8,957		)	(7,133		)	(65,860		)	(39,635		)
Proceeds from debt	—			—			25,000			—			25,000
Repayments of debt	(52		)	(967		)	(35		)	(1,915		)	(1,901		)
Payments for deferred acquisition obligations	(57		)	(55		)	(55		)	(1,353		)	(223		)
Receipt of Texas Enterprise Fund grant	—			—			—			—			5,500
Repurchase of common stock	—			—			(200,000		)	—			(200,000		)
Shares of common stock withheld for employee taxes	—			—			—			—			(13,620		)
Proceeds from employee stock plans	8,971			3,268			15,099			23,817			33,120
Excess tax benefits from share-based compensation arrangements	16,156			16,990			(10,838		)	33,539			34,473
Net cash provided by (used in) financing activities	10,366			10,279			(177,962		)	(11,772		)	(157,286		)
Effect of exchange rate changes on cash and cash equivalents	194			(2,759		)	(1,975		)	(392		)	(3,347		)
Increase (decrease) in cash and cash equivalents	(10,262		)	9,136			(135,975		)	(32,328		)	(46,228		)
Cash and cash equivalents, beginning of period	269,995			340,344			349,480			292,061			259,733
Cash and cash equivalents, end of period	$	259,733		$	349,480		$	213,505		$	259,733		$	213,505
Supplemental Cash Flow Information
Non-cash purchases of property and equipment (1)	$	(4,116	)	$	(6,706	)	$	(2,580	)	$	19,493		$	4,804

(1) Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.

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Key Metrics - Quarter to Date (Unaudited)
	Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server)	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Growth
Dedicated cloud, net revenue	$	291,265		$	299,689		$	310,647		$	319,601		$	324,729
Public cloud, net revenue	$	116,838		$	121,358		$	130,465		$	140,175		$	147,693
Net revenue	$	408,103		$	421,047		$	441,112		$	459,776		$	472,422
Revenue growth (year over year)	15.6		%	16.2		%	17.4		%	18.3		%	15.8		%
Net upgrades (monthly average)	1.1		%	0.9		%	1.5		%	1.4		%	1.2		%
Churn (monthly average)	-0.7		%	-0.6		%	-0.7		%	-0.6		%	-0.5		%
Growth in installed base (monthly average) (1)	0.4		%	0.3		%	0.8		%	0.8		%	0.7		%
Number of employees (Rackers) at period end	5,651			5,743			5,798			5,939			5,936
Number of servers deployed at period end	103,886			106,229			107,657			110,453			112,628
Average monthly revenue per server	$	1,322		$	1,336		$	1,375		$	1,405		$	1,412
Profitability
Income from operations	$	27,157		$	39,124		$	33,887		$	40,513		$	50,005
Depreciation and amortization	$	87,683		$	87,805		$	90,559		$	98,307		$	95,213
Share-based compensation expense:
Cost of revenue	$	3,877		$	3,791		$	4,127		$	4,175		$	4,353
Research and development	$	2,521		$	2,780		$	3,293		$	3,399		$	3,109
Sales and marketing	$	1,766		$	2,091		$	2,062		$	2,637		$	2,783
General and administrative	$	9,024		$	4,070		$	7,783		$	9,631		$	9,921
Total share-based compensation expense	$	17,188		$	12,732		$	17,265		$	19,842		$	20,166
Adjusted EBITDA (2)	$	132,028		$	139,661		$	141,711		$	158,662		$	165,384
Adjusted EBITDA margin	32.4		%	33.2		%	32.1		%	34.5		%	35.0		%
Operating income margin	6.7		%	9.3		%	7.7		%	8.8		%	10.6		%
Income from operations	$	27,157		$	39,124		$	33,887		$	40,513		$	50,005
Effective tax rate	22.7		%	34.6		%	33.0		%	32.0		%	25.1		%
Net operating profit after tax (NOPAT) (2)	$	20,992		$	25,587		$	22,704		$	27,549		$	37,454
NOPAT margin	5.1		%	6.1		%	5.1		%	6.0		%	7.9		%
Capital efficiency and returns
Interest bearing debt	$	64,918		$	53,326		$	41,747		$	31,472		$	49,039
Stockholders' equity	$	1,055,412		$	1,100,012		$	1,171,197		$	1,223,772		$	1,073,794
Less: Excess cash	$	(210,761	)	$	(263,309	)	$	(287,411	)	$	(294,307	)	$	(156,814	)
Capital base	$	909,569		$	890,029		$	925,533		$	960,937		$	966,019
Average capital base	$	873,749		$	899,799		$	907,781		$	943,235		$	963,478
Capital turnover (annualized)	1.87			1.87			1.94			1.95			1.96
Return on capital (annualized) (2)	9.6		%	11.4		%	10.0		%	11.7		%	15.5		%

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Key Metrics - Quarter to Date (Unaudited)
	Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server)	December 31, 2013			March 31, 2014		June 30, 2014			September 30, 2014			December 31, 2014
Capital expenditures
Cash purchases of property and equipment	$	126,723		$	84,953	$	114,044		$	124,129		$	107,209
Non-cash purchases of property and equipment (3)	$	(4,116	)	$	15,741	$	(1,651	)	$	(6,706	)	$	(2,580	)
Total capital expenditures	$	122,607		$	100,694	$	112,393		$	117,423		$	104,629
Customer gear	$	65,291		$	60,688	$	64,767		$	78,677		$	72,488
Data center build outs	$	22,524		$	10,963	$	13,767		$	14,825		$	11,079
Office build outs	$	14,860		$	9,212	$	6,857		$	3,464		$	1,633
Capitalized software and other projects	$	19,932		$	19,831	$	27,002		$	20,457		$	19,429
Total capital expenditures	$	122,607		$	100,694	$	112,393		$	117,423		$	104,629
Infrastructure capacity and utilization
Megawatts under contract at period end	60.0			58.1		58.1			58.1			58.1
Megawatts available for use at period end	46.9			45.3		45.4			45.4			49.7
Megawatts utilized at period end	27.4			28.1		29.0			29.9			30.5
Annualized net revenue per average Megawatt of power utilized	$	60,015		$	60,691	$	61,802		$	62,448		$	62,572

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

(2) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.

(3) Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.

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Key Metrics - Year to Date (Unaudited)
	Year Ended December 31,
(Dollar amounts in thousands, except average monthly revenue per server)	2013			2014
Growth
Dedicated cloud, net revenue	$	1,119,636		$	1,254,666
Public cloud, net revenue	$	415,150		$	539,691
Net revenue	$	1,534,786		$	1,794,357
Revenue growth (year over year)	17.2		%	16.9		%
Net upgrades (monthly average)	1.3		%	1.3		%
Churn (monthly average)	-0.8		%	-0.6		%
Growth in installed base (monthly average) (1)	0.5		%	0.7		%
Number of employees (Rackers) at period end	5,651			5,936
Number of servers deployed at period end	103,886			112,628
Average monthly revenue per server	$	1,307		$	1,382
Profitability
Income from operations	$	133,136		$	163,529
Depreciation and amortization	$	313,007		$	371,884
Share-based compensation expense:
Cost of revenue	$	12,584		$	16,446
Research and development	$	8,168		$	12,581
Sales and marketing	$	7,317		$	9,573
General and administrative	$	31,576		$	31,405
Total share-based compensation expense	$	59,645		$	70,005
Adjusted EBITDA (2)	$	505,788		$	605,418
Adjusted EBITDA margin	33.0		%	33.7		%
Operating income margin	8.7		%	9.1		%
Income from operations	$	133,136		$	163,529
Effective tax rate	33.7		%	30.7		%
Net operating profit after tax (NOPAT) (2)	$	88,269		$	113,326
NOPAT margin	5.8		%	6.3		%
Capital efficiency and returns
Interest bearing debt	$	64,918		$	49,039
Stockholders' equity	$	1,055,412		$	1,073,794
Less: Excess cash	$	(210,761	)	$	(156,814	)
Capital base	$	909,569		$	966,019
Average capital base	$	804,173		$	930,417
Capital turnover	1.91			1.93
Return on capital (2)	11.0		%	12.2		%

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Key Metrics - Year to Date (Unaudited)
	Year Ended December 31,
(Dollar amounts in thousands, except average monthly revenue per server)	2013		2014
Capital expenditures
Cash purchases of property and equipment	$	452,596	$	430,335
Non-cash purchases of property and equipment (3)	$	19,493	$	4,804
Total capital expenditures	$	472,089	$	435,139
Customer gear	$	297,787	$	276,620
Data center build outs	$	58,278	$	50,634
Office build outs	$	31,103	$	21,166
Capitalized software and other projects	$	84,921	$	86,719
Total capital expenditures	$	472,089	$	435,139
Infrastructure capacity and utilization
Megawatts under contract at period end	60.0		58.1
Megawatts available for use at period end	46.9		49.7
Megawatts utilized at period end	27.4		30.5
Net revenue per average Megawatt of power utilized	$	59,442	$	61,917

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

(2) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.

(3) Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.

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Consolidated Quarterly Statements of Income

(Unaudited)

	Three Months Ended
(In thousands)	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Net revenue	$	408,103		$	421,047		$	441,112		$	459,776		$	472,422
Costs and expenses:
Cost of revenue	133,821			140,417			145,051			142,954			153,912
Research and development	24,849			25,192			29,711			30,718			31,385
Sales and marketing	55,465			57,359			60,480			60,582			59,127
General and administrative	79,128			71,150			81,424			86,702			82,780
Depreciation and amortization	87,683			87,805			90,559			98,307			95,213
Total costs and expenses	380,946			381,923			407,225			419,263			422,417
Income from operations	27,157			39,124			33,887			40,513			50,005
Other income (expense):
Interest expense	(656		)	(495		)	(529		)	(445		)	(444		)
Interest and other income (expense)	405			265			171			(2,191		)	(257		)
Total other income (expense)	(251		)	(230		)	(358		)	(2,636		)	(701		)
Income before income taxes	26,906			38,894			33,529			37,877			49,304
Income taxes	6,108			13,448			11,078			12,137			12,388
Net income	$	20,798		$	25,446		$	22,451		$	25,740		$	36,916
	Three Months Ended
(Percent of net revenue)	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Net revenue	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%
Costs and expenses:
Cost of revenue	32.8		%	33.3		%	32.9		%	31.1		%	32.6		%
Research and development	6.1		%	6.0		%	6.7		%	6.7		%	6.6		%
Sales and marketing	13.6		%	13.6		%	13.7		%	13.2		%	12.5		%
General and administrative	19.4		%	16.9		%	18.5		%	18.9		%	17.5		%
Depreciation and amortization	21.5		%	20.9		%	20.5		%	21.4		%	20.2		%
Total costs and expenses	93.3		%	90.7		%	92.3		%	91.2		%	89.4		%
Income from operations	6.7		%	9.3		%	7.7		%	8.8		%	10.6		%
Other income (expense):
Interest expense	(0.2		)%	(0.1		)%	(0.1		)%	(0.1		)%	(0.1		)%
Interest and other income (expense)	0.1		%	0.1		%	0.0		%	(0.5		)%	(0.1		)%
Total other income (expense)	(0.1		)%	(0.1		)%	(0.1		)%	(0.6		)%	(0.1		)%
Income before income taxes	6.6		%	9.2		%	7.6		%	8.2		%	10.4		%
Income taxes	1.5		%	3.2		%	2.5		%	2.6		%	2.6		%
Net income	5.1		%	6.0		%	5.1		%	5.6		%	7.8		%
Due to rounding, totals may not equal the sum of the line items in the table above.

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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 tables below:

	Three Months Ended
(Dollars in thousands)	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Net revenue	$	408,103		$	421,047		$	441,112		$	459,776		$	472,422
Income from operations	$	27,157		$	39,124		$	33,887		$	40,513		$	50,005
Net income	$	20,798		$	25,446		$	22,451		$	25,740		$	36,916
Plus: Income taxes	6,108			13,448			11,078			12,137			12,388
Plus: Total other (income) expense	251			230			358			2,636			701
Plus: Depreciation and amortization	87,683			87,805			90,559			98,307			95,213
Plus: Share-based compensation expense	17,188			12,732			17,265			19,842			20,166
Adjusted EBITDA	$	132,028		$	139,661		$	141,711		$	158,662		$	165,384
Operating income margin	6.7		%	9.3		%	7.7		%	8.8		%	10.6		%
Adjusted EBITDA margin	32.4		%	33.2		%	32.1		%	34.5		%	35.0		%

	Year Ended December 31,
(Dollars in thousands)	2013			2014
Net revenue	$	1,534,786		$	1,794,357
Income from operations	$	133,136		$	163,529
Net income	$	86,737		$	110,553
Plus: Income taxes	44,022			49,051
Plus: Total other (income) expense	2,377			3,925
Plus: Depreciation and amortization	313,007			371,884
Plus: Share-based compensation expense	59,645			70,005
Adjusted EBITDA	$	505,788		$	605,418
Operating income margin	8.7		%	9.1		%
Adjusted EBITDA margin	33.0		%	33.7		%

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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 payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable – deferred revenue – other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction).

Year-to-date average balances are based on an average calculated using the quarter-end balances at the beginning of the period and all other quarter ending balances included in the period.

We define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which is calculated as three percent of our annualized net revenue for the three months prior to the period end. We will periodically review the calculation and adjust it to reflect our projected cash requirements for the upcoming year.

We believe that ROC is an important metric for investors in evaluating our company’s performance. ROC relates after-tax operating profits with the capital that is placed into service. It is therefore a performance metric that incorporates both the Statement of Income and the Balance Sheet. ROC measures how successfully capital is deployed within a company.

Note that ROC is not a measure of financial performance under GAAP and should not be considered a substitute for return on assets, which we calculate directly from amounts on the Statement of 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.

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

	Three Months Ended
(Dollars in thousands)	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Income from operations	$	27,157		$	39,124		$	33,887		$	40,513		$	50,005
Effective tax rate	22.7		%	34.6		%	33.0		%	32.0		%	25.1		%
Net operating profit after tax (NOPAT)	$	20,992		$	25,587		$	22,704		$	27,549		$	37,454
Net income	$	20,798		$	25,446		$	22,451		$	25,740		$	36,916
Total assets at period end	$	1,491,797		$	1,566,949		$	1,647,975		$	1,724,542		$	1,624,284
Less: Excess cash	(210,761		)	(263,309		)	(287,411		)	(294,307		)	(156,814		)
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable	(195,894		)	(224,423		)	(231,563		)	(244,397		)	(215,774		)
Less: Deferred revenue (current and non-current)	(26,530		)	(24,485		)	(23,248		)	(21,437		)	(22,276		)
Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction	(149,043		)	(164,703		)	(180,220		)	(203,464		)	(263,401		)
Capital base	$	909,569		$	890,029		$	925,533		$	960,937		$	966,019
Average total assets	$	1,471,783		$	1,529,373		$	1,607,462		$	1,686,259		$	1,674,413
Average capital base	$	873,749		$	899,799		$	907,781		$	943,235		$	963,478
Return on assets (annualized)	5.7		%	6.7		%	5.6		%	6.1		%	8.8		%
Return on capital (annualized)	9.6		%	11.4		%	10.0		%	11.7		%	15.5		%

	Year Ended December 31,
(Dollars in thousands)	2013			2014
Income from operations	$	133,136		$	163,529
Effective tax rate	33.7		%	30.7		%
Net operating profit after tax (NOPAT)	$	88,269		$	113,326
Net income	$	86,737		$	110,553
Total assets at period end	$	1,491,797		$	1,624,284
Less: Excess cash	(210,761		)	(156,814		)
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable	(195,894		)	(215,774		)
Less: Deferred revenue (current and non-current)	(26,530		)	(22,276		)
Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction	(149,043		)	(263,401		)
Capital base	$	909,569		$	966,019
Average total assets	$	1,393,079		$	1,611,109
Average capital base	$	804,173		$	930,417
Return on assets (Net income/Average total assets)	6.2		%	6.9		%
Return on capital (NOPAT/Average capital base)	11.0		%	12.2		%

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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 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						Year Ended
(In thousands)	December 31, 2013			December 31, 2014			December 31, 2013			December 31, 2014
Adjusted EBITDA	$	132,028		$	165,384		$	505,788		$	605,418
Non-cash deferred rent	2,279			1,120			11,564			7,417
Total capital expenditures	(122,607		)	(104,629		)	(472,089		)	(435,139		)
Cash payments for interest, net of interest received	(609		)	(331		)	(3,096		)	(1,643		)
Cash payments for income taxes, net of refunds	(2,575		)	(6,700		)	(14,930		)	(13,518		)
Adjusted free cash flow	$	8,516		$	54,844		$	27,237		$	162,535

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