Rackspace Hosting (RAX) 10-Q 10 May 16 2016 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2016	May. 05, 2016
Document and Entity Information [Abstract]
Entity Registrant Name	RACKSPACE HOSTING, INC.
Entity Central Index Key	1,107,694
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Period End Date	Mar. 31, 2016
Document Fiscal Year Focus	2,016
Document Fiscal Period Focus	Q1
Amendment Flag	false
Entity Common Stock, Shares Outstanding		125,738,364

Consolidated Balance Sheets

Consolidated Balance Sheets - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 534.2	$ 484.7
Accounts receivable, net of allowance for doubtful accounts and customer credits of $7.3 as of December 31, 2015 and $8.1 as of March 31, 2016	170.9	174.4
Prepaid expenses	49.3	46.6
Other current assets	10.9	12.7
Total current assets	765.3	718.4
Property and equipment, net	1,115.2	1,148
Goodwill	80.4	81.1
Intangible assets, net	6.8	9.1
Other non-current assets	57.7	57.6
Total assets	2,025.4	2,014.2
Current liabilities:
Accounts payable and accrued expenses	145.1	136.3
Accrued compensation and benefits	58.2	57.3
Income and other taxes payable	9.7	12
Deferred revenue	27.5	29.6
Capital lease obligations	0.9	1.7
Total current liabilities	241.4	236.9
Non-current liabilities:
Debt	492.6	492.4
Finance lease obligations for build-to-suit leases	161.5	164.3
Deferred income taxes	57.5	54.8
Deferred rent	49.5	49.5
Deferred revenue	1.5	1.6
Capital lease obligations	0.4	0.2
Other liabilities	45.1	46.4
Total liabilities	$ 1,049.5	$ 1,046.1
Commitments and Contingencies
Stockholders' equity:
Common stock, $0.001 par value per share: 300.0 shares authorized; 130.9 shares issued and outstanding as of December 31, 2015; 128.1 shares issued and outstanding as of March 31, 2016	$ 0.1	$ 0.1
Additional paid-in capital	846.8	834.5
Accumulated other comprehensive loss	(43.2)	(36.2)
Retained earnings	172.2	169.7
Total stockholders’ equity	975.9	968.1
Total liabilities and stockholders’ equity	$ 2,025.4	$ 2,014.2

Consolidated Balance Sheets (Pa

Consolidated Balance Sheets (Parentheticals) - USD ($) shares in Millions, $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Current assets:
Allowance for doubtful accounts and customer credits	$ 8.1	$ 7.3
Stockholders' equity:
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	300	300
Common stock, shares issued	128.1	130.9
Common stock, shares outstanding	128.1	130.9

Consolidated Statements of Comp

Consolidated Statements of Comprehensive Income - USD ($) shares in Millions, $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Net revenue	$ 518.1	$ 480.2
Costs and expenses:
Cost of revenue	180.4	162.8
Research and development	27.6	32
Sales and marketing	63.7	59
General and administrative	85.7	86.6
Depreciation and amortization	104	96.9
Total costs and expenses	461.4	437.3
Gain on sale	24.5	0
Income from operations	81.2	42.9
Other income (expense):
Interest expense	(10.5)	(0.4)
Interest and other income (expense)	1.1	(2)
Total other income (expense)	(9.4)	(2.4)
Income before income taxes	71.8	40.5
Income taxes	23	13
Net income	48.8	27.5
Other comprehensive income, net of tax
Foreign currency translation adjustments	(7)	(11.2)
Other comprehensive income (loss)	(7)	(11.2)
Comprehensive income	$ 41.8	$ 16.3
Net income per share
Basic	$ 0.37	$ 0.19
Diluted	$ 0.37	$ 0.19
Weighted average number of shares outstanding
Basic	130.3	141.4
Diluted	131	144.2

Consolidated Statements of Cash

Consolidated Statements of Cash Flows - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash Flows From Operating Activities
Net income	$ 48.8	$ 27.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	104	96.9
Deferred income taxes	2.4	(15.3)
Share-based compensation expense	17.8	20
Excess tax benefits from share-based compensation arrangements	(15.8)	(20.2)
Gain on sale	(24.5)	0
Other operating activities	4	2.8
Changes in operating assets and liabilities:
Accounts receivable	(0.5)	(1.8)
Prepaid expenses and other current assets	(1)	0.8
Accounts payable, accrued expenses, and other current liabilities	20.8	26.9
Deferred revenue	(2)	4.3
Deferred rent	(0.3)	0.4
Other non-current assets and liabilities	2.5	3
Net cash provided by operating activities	156.2	145.3
Cash Flows From Investing Activities
Purchases of property and equipment	(82.9)	(92.5)
Proceeds from sale	27	0
All other investing activities	(3)	0.7
Net cash used in investing activities	(58.9)	(91.8)
Cash Flows From Financing Activities
Repayments of debt	0	(25.1)
Payments for debt issuance costs	(0.4)	0
Principal payments of capital and build-to-suit leases	(0.8)	(5.6)
Payments for deferred acquisition obligations	0	(0.1)
Repurchase of common stock	(60.8)	0
Shares of common stock withheld for employee taxes	(0.3)	0
Proceeds from employee stock plans	0.2	21.8
Excess tax benefits from share-based compensation arrangements	15.8	20.2
Net cash provided by (used in) financing activities	(46.3)	11.2
Effect of exchange rate changes on cash and cash equivalents	(1.5)	(2.5)
Increase in cash and cash equivalents	49.5	62.2
Cash and cash equivalents, beginning of period	484.7	213.5
Cash and cash equivalents, end of period	534.2	275.7
Supplemental Cash Flow Information
Cash payments for interest, net of amount capitalized	1.9	0.3
Cash payments for income taxes, net of refunds	3.6	3.8
Non-cash Investing and Financing Activities
Non-cash purchases of property and equipment	(4.1)	(2.3)
Accrual for repurchases of common stock not yet settled	6.8	0
Additional finance lease obligations for build-to-suit leases and other	1	35.1
Acquisition of property and equipment by capital leases
Non-cash Investing and Financing Activities
Non-cash purchases of property and equipment	0.2	0
Decrease in property and equipment in accounts payable and accrued expenses
Non-cash Investing and Financing Activities
Non-cash purchases of property and equipment	$ (4.3)	$ (2.3)

Company Overview, Basis of Pres

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies	3 Months Ended
	Mar. 31, 2016
Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies [Abstract]
Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies	Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies Nature of Operations As used in this report, the terms “Rackspace,” “Rackspace Hosting,” “we,” “our company,” “the company,” “us,” or “our” refer to Rackspace Hosting, Inc. and its subsidiaries. Rackspace Hosting, Inc., through its operating subsidiaries, is a provider of managed cloud services in the business information technology ("IT") market. We serve our customers from our data centers on four continents. We help customers tap the power of cloud computing by delivering world-class service on the world's leading technology platforms. We are experts in IT, so our customers do not have to be. Our operations began in 1998 as a limited partnership, and Rackspace Hosting, Inc. was incorporated in Delaware in March 2000. Basis of Consolidation The accompanying consolidated financial statements include the accounts of Rackspace Hosting, Inc. and our wholly-owned subsidiaries, which include, among others, Rackspace US, Inc., our domestic operating entity, and Rackspace Limited, our United Kingdom operating entity. Intercompany transactions and balances have been eliminated in consolidation. Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated other comprehensive income (loss). The income tax expense allocated to foreign currency translation adjustments during the three months ended March 31, 2016 was $0.1 million . There were no income taxes allocated during the three months ended March 31, 2015 . Unaudited Interim Financial Information The accompanying consolidated financial statements as of March 31, 2016 , and for the three months ended March 31, 2015 and 2016 , are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements, and certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2015 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2016 (the " 2015 Annual Consolidated Financial Statements"). The unaudited interim consolidated financial statements have been prepared on the same basis as the 2015 Annual Consolidated Financial Statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of our financial position as of March 31, 2016 , our results of operations for the three months ended March 31, 2015 and 2016 , and our cash flows for the three months ended March 31, 2015 and 2016 . The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2016 , or for any other interim period, or for any other future year. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and customer credits, property and equipment, fair values of intangible assets and goodwill, useful lives of intangible assets, fair value of share-based compensation, contingencies, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from our estimates. Significant Accounting Policies and Estimates Our 2015 Annual Consolidated Financial Statements include an additional discussion of the significant accounting policies and estimates used in the preparation of our consolidated financial statements. There were no material changes to our significant accounting policies and estimates during the three months ended March 31, 2016 . Revision to Prior Period Financial Statements During the first quarter of 2016, we discovered an error in the reporting of certain software licenses for the period from July 2013 through December 2015, resulting in an immaterial understatement of license expense and the related liability for these periods. The cumulative decrease to December 31, 2015 retained earnings as a result of this error was $8.4 million , representing the understatement of license expense of $13.6 million , net of the related impact on income taxes of $5.2 million . We have evaluated the materiality of this error and determined that the impact is not material to our results of operations, financial position, or cash flows in previously issued financial statements. We have retrospectively revised our financial statements for all periods presented to reflect the correction of this error and the related income tax effect. The impact of this revision on the consolidated balance sheet as of December 31, 2015 and the consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2015 is as follows: As of December 31, 2015 (In millions) As Previously Reported Adjustments As Revised Consolidated Balance Sheet: Deferred income taxes $ 60.0 $ (5.2 ) $ 54.8 Other liabilities 32.8 13.6 46.4 Total liabilities 1,037.7 8.4 1,046.1 Retained earnings 178.1 (8.4 ) 169.7 Total stockholders' equity 976.5 (8.4 ) 968.1 Three Months Ended March 31, 2015 (In millions, except per share data) As Previously Reported Adjustments As Revised Consolidated Statement of Comprehensive Income: Cost of revenue $ 161.3 $ 1.5 $ 162.8 Income from operations 44.4 (1.5 ) 42.9 Income before income taxes 42.0 (1.5 ) 40.5 Income taxes 13.6 (0.6 ) 13.0 Net income 28.4 (0.9 ) 27.5 Comprehensive income 17.2 (0.9 ) 16.3 Net income per share Basic $ 0.20 $ (0.01 ) $ 0.19 Diluted $ 0.20 $ (0.01 ) $ 0.19 Three Months Ended March 31, 2015 (In millions) As Previously Reported Adjustments As Revised Consolidated Statement of Cash Flows: Net income $ 28.4 $ (0.9 ) $ 27.5 Deferred income taxes (14.7 ) (0.6 ) (15.3 ) Other non-current assets and liabilities 1.5 1.5 3.0 Recent Accounting Pronouncements Not Yet Adopted In May 2014, the FASB issued a new standard on revenue recognition. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires capitalization of incremental costs to obtain a contract and significantly expanded quantitative and qualitative disclosures. In August 2015, the FASB issued guidance which deferred the effective date by one year. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual periods beginning after December 15, 2016. We intend to adopt the standard on January 1, 2018. Upon adoption, the new guidance will be applied retrospectively using one of two methods. One method is to apply the guidance retrospectively to each prior period presented with practical expedients available. The second method is to apply the guidance retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. We are continuing to evaluate our method of adoption and the impact this new accounting standard will have on our consolidated financial statements. In January 2016, the FASB issued a new standard on the recognition and measurement of financial assets and financial liabilities that requires entities to measure most equity investments, except those accounted for under the equity method, at fair value and recognize changes in fair value in net income. The standard will become effective for Rackspace on January 1, 2018 and will be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this new accounting standard will have on our consolidated financial statements. In February 2016, the FASB issued a new standard on lease accounting that will require lessees to recognize all leases with a term greater than 12 months on the balance sheet, as a lease liability and right-of-use asset. Lease classification will determine whether a lease is reported as a financing transaction in the income statement and statement of cash flows. Additionally, the new standard substantially changes sale-leaseback accounting and replaces current build-to-suit lease accounting guidance. The standard will become effective for Rackspace on January 1, 2019, with early adoption permitted. We anticipate this standard will have a material impact on our consolidated balance sheets, and we are currently evaluating its impact. In March 2016, the FASB issued guidance that simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This new guidance will become effective for Rackspace on January 1, 2017, with early adoption permitted. We are currently evaluating the early adoption option and the impact this guidance will have on our consolidated financial statements.

Net Income Per Share

Net Income Per Share	3 Months Ended
	Mar. 31, 2016
Earnings Per Share [Abstract]
Net Income Per Share	Net Income Per Share The following table sets forth the computation of basic and diluted net income per share: Three Months Ended March 31, (In millions, except per share data) 2015 2016 Basic net income per share: Net income $ 27.5 $ 48.8 Weighted average shares outstanding: Common stock 141.4 130.3 Number of shares used in per share computations 141.4 130.3 Net income per share $ 0.19 $ 0.37 Diluted net income per share: Net income $ 27.5 $ 48.8 Weighted average shares outstanding: Common stock 141.4 130.3 Stock options, awards and employee share purchase plans 2.8 0.7 Number of shares used in per share computations 144.2 131.0 Net income per share $ 0.19 $ 0.37 We excluded 2.5 million and 7.6 million potential common shares from the computation of dilutive net income per share for the three months ended March 31, 2015 and 2016 , respectively, because the effect would have been anti-dilutive.

Property and Equipment, net

Property and Equipment, net	3 Months Ended
	Mar. 31, 2016
Property, Plant and Equipment [Abstract]
Property and Equipment, net	Property and Equipment, net Property and equipment, net, at December 31, 2015 and March 31, 2016 consisted of the following: (In millions) December 31, March 31, Computers and equipment $ 1,787.2 $ 1,797.6 Computer software 370.6 376.3 Furniture and fixtures 63.5 63.3 Buildings and leasehold improvements 355.7 350.0 Land 28.1 27.8 Property and equipment, at cost 2,605.1 2,615.0 Less: Accumulated depreciation and amortization (1,539.7 ) (1,589.7 ) Work in process 82.6 89.9 Property and equipment, net $ 1,148.0 $ 1,115.2 The composition of the work in process balance was as follows: (In millions) December 31, March 31, Office facility build outs $ 11.5 $ 11.6 Data center build outs 49.0 50.7 Capitalized software 22.1 27.6 Work in process $ 82.6 $ 89.9

Goodwill

Goodwill	3 Months Ended
	Mar. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill	Goodwill As described in Note 12. Segment Information , beginning in the first quarter of 2016, we changed our presentation of segment information to reflect changes in the way our business is managed. This resulted in a change to our operating segments and reporting units. We allocated goodwill to our new reporting units using a relative fair value approach. During the first quarter of 2016, we reduced goodwill by $0.7 million in connection with the sale of certain assets of a non-strategic product line as described in Note 11. Gain on Sale . As of March 31, 2016 , the balance of goodwill by operating segment was as follows: (In millions) March 31, Americas $ 58.1 International 22.3 Total goodwill $ 80.4

Cost-Method Investments

Cost-Method Investments	3 Months Ended
	Mar. 31, 2016
Investments, All Other Investments [Abstract]
Cost-Method Investments	Cost-Method Investments We have several direct investments accounted for under the cost method. The aggregate carrying amount of our cost-method investments, which are recorded as "Other non-current assets" in the consolidated balance sheets, as of December 31, 2015 and March 31, 2016 was $11.6 million . We hav e determined that it is not practicable to estimate the fair value of these investments. If we identify events or changes in circumstances that may have a significant adverse effect on the fair value of these investments, we will then estimate their fair values and determine if any decline in the fair value of the investments below carrying value is other-than-temporary . No events or circumstances indicating a potential impairment were identified as of March 31, 2016 .

Debt

Debt	3 Months Ended
	Mar. 31, 2016
Debt Disclosure [Abstract]
Debt	Debt Debt consisted of: December 31, 2015 (In millions) Revolving Credit Facility Senior Notes due 2024 Total Principal balance $ — $ 500.0 $ 500.0 Unamortized debt issuance costs — (7.6 ) (7.6 ) Total debt — 492.4 492.4 Less: current portion of debt — — — Debt, excluding current portion $ — $ 492.4 $ 492.4 March 31, 2016 (In millions) Revolving Credit Facility Senior Notes due 2024 Total Principal balance $ — $ 500.0 $ 500.0 Unamortized debt issuance costs — (7.4 ) (7.4 ) Total debt — 492.6 492.6 Less: current portion of debt — — — Debt, excluding current portion $ — $ 492.6 $ 492.6 Revolving Credit Facility We are party to a $200 million unsecured revolving credit facility (the "Revolving Credit Facility"). As of March 31, 2016 , we had no outstanding borrowings under the Revolving Credit Facility and $0.4 million of undrawn letters of credit. As of the same date, we were in compliance with all of the covenants under this facility . Senior Notes due 2024 As of March 31, 2016 , the outstanding principal amount of the Senior Notes due 2024 (the "Senior Notes") was $500 million . The Senior Notes will mature on January 15, 2024 and bear interest at a rate of 6.5% per year, payable semi-annually on January 15 and July 15 of each year. The first interest payment date is July 15, 2016 . As of March 31, 2016 , we were in compliance with all covenants under the Senior Notes indenture . The fair value of the Senior Notes as of March 31, 2016 was $490.0 million , based on quoted market prices for identical assets that are traded in over-the-counter secondary markets that are not considered active. The fair value of the Senior Notes is classified as Level 2 in the fair value hierarchy.

Contingencies

Contingencies	3 Months Ended
	Mar. 31, 2016
Commitments and Contingencies Disclosure [Abstract]
Contingencies	Contingencies We have contingent liabilities resulting from various litigation, claims and commitments. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. The amount that will ultimately be paid related to these matters may differ from the recorded accruals, and the timing of such payments is uncertain. We are a party to various claims that certain of our services and technologies infringe the intellectual property rights of others. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, products, or services, and may also cause us to change our business practices and require development of non-infringing products or technologies, which could result in a loss of revenue for us and otherwise harm our business. We have disputed the allegations of wrongdoing in these proceedings and intend to vigorously defend ourselves in all such matters. We cannot predict the impact, if any, that any of the matters described above may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in many of them, we cannot estimate the range of possible losses from them.

Share-Based Compensation

Share-Based Compensation	3 Months Ended
	Mar. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Share-Based Compensation	Share-Based Compensation Share-based compensation expense was recognized as follows: Three Months Ended March 31, (In millions) 2015 2016 Cost of revenue $ 4.0 $ 4.1 Research and development 3.2 2.2 Sales and marketing 2.7 2.6 General and administrative 10.1 8.9 Pre-tax share-based compensation 20.0 17.8 Less: Income tax benefit (6.5 ) (5.7 ) Total share-based compensation expense, net of tax $ 13.5 $ 12.1 As of March 31, 2016 , there was $166.7 million of unrecognized compensation cost, which will be recognized using the straight-line method over a weighted average period of 2.6 years .

Taxes

Taxes	3 Months Ended
	Mar. 31, 2016
Income Tax Disclosure [Abstract]
Taxes	Taxes We are subject to U.S. federal income tax and various state, local, and international income taxes in numerous jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. As such, our effective tax rate is impacted by the geographical distribution of income and mix of profits in the various jurisdictions. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We expect a taxable profit in the U.S. and U.K. for the full year 2016 before consideration of excess tax benefits, and therefore we anticipate utilizing benefits of tax deductions related to share-based compensation in 2016 . As a result, we have recognized an excess tax benefit in the U.S. and U.K. during the three months ended March 31, 2016 . On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of share-based compensation expense in an intercompany cost-sharing arrangement. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include share-based compensation from its regulations, and the Internal Revenue Service filed a notice of appeal to the Ninth Circuit of Appeals on February 19, 2016. Until a final decision has been reached, we will continue to monitor developments related to the regulation and the possible impact, if any, of those developments on the consolidated financial statements.

Share Repurchase Program

Share Repurchase Program	3 Months Ended
	Mar. 31, 2016
Stockholders' Equity Note [Abstract]
Share Repurchase Program	Share Repurchase Program Our board of directors has authorized a share repurchase program under which shares may be repurchased from time to time through both open market and privately negotiated transactions. During the three months ended March 31, 2016 , we repurchased $68 million , or 3.2 million shares, of our common stock on the open market under our authorized share repurchase program; these shares were subsequently retired. Of these repurchases, $61 million had been settled as of March 31, 2016 , and the remaining $7 million , representing 0.3 million shares, was recorded as a liability in "Accounts payable and accrued expenses" on the Consolidated Balance Sheet. As of March 31, 2016 , approximately $566 million of the amount authorized by the board under the current program remained available for additional purchases.

Gain on Sale

Gain on Sale	3 Months Ended
	Mar. 31, 2016
Discontinued Operations and Disposal Groups [Abstract]
Gain on Sale	Gain on Sale On January 5, 2016, we completed the sale of certain assets of a non-strategic product line, consisting primarily of intellectual property with an immaterial remaining net book value, for total consideration of $27.0 million . We recorded a pre-tax gain of $24.5 million on the sale of these assets, reported within “Gain on sale” in the consolidated statement of comprehensive income for the three months ended March 31, 2016.

Segment Information

Segment Information	3 Months Ended
	Mar. 31, 2016
Segment Reporting [Abstract]
Segment Information	Segment Information Rackspace operates solely as a provider of managed cloud services in the business information technology market. Beginning in the first quarter of 2016, we have revised our reportable segments to present Americas and International. These reportable segments are the result of changes in our organization effective January 1, 2016 and represent the way we report both Net revenue and Income before income taxes, which are the primary financial measures our chief operating decision maker ("CODM") uses to manage our business, including the allocation of resources and performance assessment. In addition, they are inputs for measuring achievement in our non-equity incentive compensation plan and certain performance-vesting equity awards. Revenue is attributed to each geographic segment based on the location of the Rackspace support team serving the customer. There are no internal revenue transactions between our segments. The Americas segment includes revenue from customers who are supported by Rackspace support teams located primarily in the U.S. and, to a lesser extent, in Latin America. The International segment includes revenue from customers who are supported by Rackspace support teams located in countries outside the U.S. and Latin America. Direct costs, including employee-related costs of our customer support teams and data center employees, costs to lease and operate our data centers, and selling and marketing expenses are recorded by each segment. Certain expenses related to functions centrally managed by the Americas segment, such as research and development expenses, amortization of internally developed software, and many of our general and administrative expenses, are recorded by the Americas segment and are not allocated. In addition, the gain on the sale of certain assets of a non-strategic product line, as described in Note 11. Gain on Sale , has been reflected in the Americas segment in the three months ended March 31, 2016. Segment information for total assets and capital expenditures is not presented as this information is not used by our CODM in measuring segment performance or allocating resources between segments. Information related to our segments is as follows: Three Months Ended March 31, (In millions) 2015 2016 Net Revenue: Americas $ 349.2 $ 383.6 International 131.0 134.5 Total net revenue $ 480.2 $ 518.1 Income before income taxes: Americas $ 5.1 $ 40.9 International 35.4 30.9 Total income before income taxes $ 40.5 $ 71.8 Depreciation and amortization: Americas $ 76.9 $ 79.2 International 20.0 24.8 Total depreciation and amortization $ 96.9 $ 104.0

Summary of Significant Accounti

Summary of Significant Accounting Policies (Policies)	3 Months Ended
	Mar. 31, 2016
Accounting Policies [Abstract]
Basis of Consolidation	The accompanying consolidated financial statements include the accounts of Rackspace Hosting, Inc. and our wholly-owned subsidiaries, which include, among others, Rackspace US, Inc., our domestic operating entity, and Rackspace Limited, our United Kingdom operating entity. Intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency Translation	Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated other comprehensive income (loss).
Basis of Accounting	The accompanying consolidated financial statements as of March 31, 2016 , and for the three months ended March 31, 2015 and 2016 , are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X.
Use of Estimates	The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and customer credits, property and equipment, fair values of intangible assets and goodwill, useful lives of intangible assets, fair value of share-based compensation, contingencies, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from our estimates.
Recent Accounting Pronouncements Not Yet Adopted	In May 2014, the FASB issued a new standard on revenue recognition. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires capitalization of incremental costs to obtain a contract and significantly expanded quantitative and qualitative disclosures. In August 2015, the FASB issued guidance which deferred the effective date by one year. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual periods beginning after December 15, 2016. We intend to adopt the standard on January 1, 2018. Upon adoption, the new guidance will be applied retrospectively using one of two methods. One method is to apply the guidance retrospectively to each prior period presented with practical expedients available. The second method is to apply the guidance retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. We are continuing to evaluate our method of adoption and the impact this new accounting standard will have on our consolidated financial statements. In January 2016, the FASB issued a new standard on the recognition and measurement of financial assets and financial liabilities that requires entities to measure most equity investments, except those accounted for under the equity method, at fair value and recognize changes in fair value in net income. The standard will become effective for Rackspace on January 1, 2018 and will be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this new accounting standard will have on our consolidated financial statements. In February 2016, the FASB issued a new standard on lease accounting that will require lessees to recognize all leases with a term greater than 12 months on the balance sheet, as a lease liability and right-of-use asset. Lease classification will determine whether a lease is reported as a financing transaction in the income statement and statement of cash flows. Additionally, the new standard substantially changes sale-leaseback accounting and replaces current build-to-suit lease accounting guidance. The standard will become effective for Rackspace on January 1, 2019, with early adoption permitted. We anticipate this standard will have a material impact on our consolidated balance sheets, and we are currently evaluating its impact. In March 2016, the FASB issued guidance that simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This new guidance will become effective for Rackspace on January 1, 2017, with early adoption permitted. We are currently evaluating the early adoption option and the impact this guidance will have on our consolidated financial statements.
Cost-Method Investments	We hav e determined that it is not practicable to estimate the fair value of these investments. If we identify events or changes in circumstances that may have a significant adverse effect on the fair value of these investments, we will then estimate their fair values and determine if any decline in the fair value of the investments below carrying value is other-than-temporary .
Contingencies	We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated.
Segment Information	Beginning in the first quarter of 2016, we have revised our reportable segments to present Americas and International. These reportable segments are the result of changes in our organization effective January 1, 2016 and represent the way we report both Net revenue and Income before income taxes, which are the primary financial measures our chief operating decision maker ("CODM") uses to manage our business, including the allocation of resources and performance assessment. In addition, they are inputs for measuring achievement in our non-equity incentive compensation plan and certain performance-vesting equity awards. Revenue is attributed to each geographic segment based on the location of the Rackspace support team serving the customer. There are no internal revenue transactions between our segments. The Americas segment includes revenue from customers who are supported by Rackspace support teams located primarily in the U.S. and, to a lesser extent, in Latin America. The International segment includes revenue from customers who are supported by Rackspace support teams located in countries outside the U.S. and Latin America. Direct costs, including employee-related costs of our customer support teams and data center employees, costs to lease and operate our data centers, and selling and marketing expenses are recorded by each segment. Certain expenses related to functions centrally managed by the Americas segment, such as research and development expenses, amortization of internally developed software, and many of our general and administrative expenses, are recorded by the Americas segment and are not allocated.

Company Overview, Basis of Pr19

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies (Tables)	3 Months Ended
	Mar. 31, 2016
Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies [Abstract]
Impact of prior period adjustments to financial statements	During the first quarter of 2016, we discovered an error in the reporting of certain software licenses for the period from July 2013 through December 2015, resulting in an immaterial understatement of license expense and the related liability for these periods. The cumulative decrease to December 31, 2015 retained earnings as a result of this error was $8.4 million , representing the understatement of license expense of $13.6 million , net of the related impact on income taxes of $5.2 million . We have evaluated the materiality of this error and determined that the impact is not material to our results of operations, financial position, or cash flows in previously issued financial statements. We have retrospectively revised our financial statements for all periods presented to reflect the correction of this error and the related income tax effect. The impact of this revision on the consolidated balance sheet as of December 31, 2015 and the consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2015 is as follows: As of December 31, 2015 (In millions) As Previously Reported Adjustments As Revised Consolidated Balance Sheet: Deferred income taxes $ 60.0 $ (5.2 ) $ 54.8 Other liabilities 32.8 13.6 46.4 Total liabilities 1,037.7 8.4 1,046.1 Retained earnings 178.1 (8.4 ) 169.7 Total stockholders' equity 976.5 (8.4 ) 968.1 Three Months Ended March 31, 2015 (In millions, except per share data) As Previously Reported Adjustments As Revised Consolidated Statement of Comprehensive Income: Cost of revenue $ 161.3 $ 1.5 $ 162.8 Income from operations 44.4 (1.5 ) 42.9 Income before income taxes 42.0 (1.5 ) 40.5 Income taxes 13.6 (0.6 ) 13.0 Net income 28.4 (0.9 ) 27.5 Comprehensive income 17.2 (0.9 ) 16.3 Net income per share Basic $ 0.20 $ (0.01 ) $ 0.19 Diluted $ 0.20 $ (0.01 ) $ 0.19 Three Months Ended March 31, 2015 (In millions) As Previously Reported Adjustments As Revised Consolidated Statement of Cash Flows: Net income $ 28.4 $ (0.9 ) $ 27.5 Deferred income taxes (14.7 ) (0.6 ) (15.3 ) Other non-current assets and liabilities 1.5 1.5 3.0

Net Income Per Share (Tables)

Net Income Per Share (Tables)	3 Months Ended
	Mar. 31, 2016
Earnings Per Share [Abstract]
Computation of Basic and Diluted Net Income Per Share	The following table sets forth the computation of basic and diluted net income per share: Three Months Ended March 31, (In millions, except per share data) 2015 2016 Basic net income per share: Net income $ 27.5 $ 48.8 Weighted average shares outstanding: Common stock 141.4 130.3 Number of shares used in per share computations 141.4 130.3 Net income per share $ 0.19 $ 0.37 Diluted net income per share: Net income $ 27.5 $ 48.8 Weighted average shares outstanding: Common stock 141.4 130.3 Stock options, awards and employee share purchase plans 2.8 0.7 Number of shares used in per share computations 144.2 131.0 Net income per share $ 0.19 $ 0.37

Property and Equipment, net (Ta

Property and Equipment, net (Tables)	3 Months Ended
	Mar. 31, 2016
Property, Plant and Equipment [Abstract]
Property and equipment, net	Property and equipment, net, at December 31, 2015 and March 31, 2016 consisted of the following: (In millions) December 31, March 31, Computers and equipment $ 1,787.2 $ 1,797.6 Computer software 370.6 376.3 Furniture and fixtures 63.5 63.3 Buildings and leasehold improvements 355.7 350.0 Land 28.1 27.8 Property and equipment, at cost 2,605.1 2,615.0 Less: Accumulated depreciation and amortization (1,539.7 ) (1,589.7 ) Work in process 82.6 89.9 Property and equipment, net $ 1,148.0 $ 1,115.2
Work in process	The composition of the work in process balance was as follows: (In millions) December 31, March 31, Office facility build outs $ 11.5 $ 11.6 Data center build outs 49.0 50.7 Capitalized software 22.1 27.6 Work in process $ 82.6 $ 89.9

Goodwill (Tables)

Goodwill (Tables)	3 Months Ended
	Mar. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill by operating segment	As of March 31, 2016 , the balance of goodwill by operating segment was as follows: (In millions) March 31, Americas $ 58.1 International 22.3 Total goodwill $ 80.4

Debt (Tables)

Debt (Tables)	3 Months Ended
	Mar. 31, 2016
Debt Disclosure [Abstract]
Debt	Debt consisted of: December 31, 2015 (In millions) Revolving Credit Facility Senior Notes due 2024 Total Principal balance $ — $ 500.0 $ 500.0 Unamortized debt issuance costs — (7.6 ) (7.6 ) Total debt — 492.4 492.4 Less: current portion of debt — — — Debt, excluding current portion $ — $ 492.4 $ 492.4 March 31, 2016 (In millions) Revolving Credit Facility Senior Notes due 2024 Total Principal balance $ — $ 500.0 $ 500.0 Unamortized debt issuance costs — (7.4 ) (7.4 ) Total debt — 492.6 492.6 Less: current portion of debt — — — Debt, excluding current portion $ — $ 492.6 $ 492.6

Share-Based Compensation (Table

Share-Based Compensation (Tables)	3 Months Ended
	Mar. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Allocation of share-based compensation expense to income statement line items	Share-based compensation expense was recognized as follows: Three Months Ended March 31, (In millions) 2015 2016 Cost of revenue $ 4.0 $ 4.1 Research and development 3.2 2.2 Sales and marketing 2.7 2.6 General and administrative 10.1 8.9 Pre-tax share-based compensation 20.0 17.8 Less: Income tax benefit (6.5 ) (5.7 ) Total share-based compensation expense, net of tax $ 13.5 $ 12.1

Segment Information (Tables)

Segment Information (Tables)	3 Months Ended
	Mar. 31, 2016
Segment Reporting [Abstract]
Segment Information	Information related to our segments is as follows: Three Months Ended March 31, (In millions) 2015 2016 Net Revenue: Americas $ 349.2 $ 383.6 International 131.0 134.5 Total net revenue $ 480.2 $ 518.1 Income before income taxes: Americas $ 5.1 $ 40.9 International 35.4 30.9 Total income before income taxes $ 40.5 $ 71.8 Depreciation and amortization: Americas $ 76.9 $ 79.2 International 20.0 24.8 Total depreciation and amortization $ 96.9 $ 104.0

Company Overview, Basis of Pr26

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies (Details 1)	3 Months Ended
	Mar. 31, 2016USD ($)continent	Mar. 31, 2015USD ($)
Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies [Abstract]
Number of continents on which we have data centers | continent	4
Income tax expense allocated to foreign currency translation adjustments | $	$ 100,000	$ 0

Company Overview, Basis of Pr27

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies (Details 2) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		30 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Consolidated Balance Sheet:
Deferred income taxes	$ 57.5		$ 54.8
Other liabilities	45.1		46.4
Total liabilities	1,049.5		1,046.1
Retained earnings	172.2		169.7
Total stockholders' equity	975.9		968.1
Consolidated Statement of Comprehensive Income:
Cost of revenue	180.4	$ 162.8
Income from operations	81.2	42.9
Income before income taxes	71.8	40.5
Income taxes	23	13
Net income	48.8	27.5
Comprehensive income	$ 41.8	$ 16.3
Net income per share
Basic	$ 0.37	$ 0.19
Diluted	$ 0.37	$ 0.19
Consolidated Statement of Cash Flows:
Net income	$ 48.8	$ 27.5
Deferred income taxes	2.4	(15.3)
Other non-current assets and liabilities	$ 2.5	3
As Previously Reported
Consolidated Balance Sheet:
Deferred income taxes			60
Other liabilities			32.8
Total liabilities			1,037.7
Retained earnings			178.1
Total stockholders' equity			976.5
Consolidated Statement of Comprehensive Income:
Cost of revenue		161.3
Income from operations		44.4
Income before income taxes		42
Income taxes		13.6
Net income		28.4
Comprehensive income		$ 17.2
Net income per share
Basic		$ 0.20
Diluted		$ 0.20
Consolidated Statement of Cash Flows:
Net income		$ 28.4
Deferred income taxes		(14.7)
Other non-current assets and liabilities		1.5
Adjustments
Consolidated Balance Sheet:
Deferred income taxes			(5.2)
Other liabilities			13.6
Total liabilities			8.4
Retained earnings			(8.4)
Total stockholders' equity			(8.4)
Consolidated Statement of Comprehensive Income:
License expense			13.6
Cost of revenue		1.5
Income from operations		(1.5)
Income before income taxes		(1.5)
Income taxes		(0.6)	$ (5.2)
Net income		(0.9)
Comprehensive income		$ (0.9)
Net income per share
Basic		$ (0.01)
Diluted		$ (0.01)
Consolidated Statement of Cash Flows:
Net income		$ (0.9)
Deferred income taxes		(0.6)
Other non-current assets and liabilities		$ 1.5

Net Income Per Share (Details)

Net Income Per Share (Details) - USD ($) $ / shares in Units, shares in Millions, $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Basic net income per share:
Net income	$ 48.8	$ 27.5
Weighted average shares outstanding:
Common stock	130.3	141.4
Number of shares used in per share computations	130.3	141.4
Net income per share - basic	$ 0.37	$ 0.19
Diluted net income per share:
Net income	$ 48.8	$ 27.5
Weighted average shares outstanding:
Common stock	130.3	141.4
Stock options, awards and employee share purchase plans	0.7	2.8
Number of shares used in per share computations	131	144.2
Net income per share - diluted	$ 0.37	$ 0.19
Number of potential common shares excluded from the computation of dilutive net income per share because the effect would have been anti-dilutive	7.6	2.5

Property and Equipment, net (De

Property and Equipment, net (Details) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Property and equipment
Property and equipment, at cost	$ 2,615	$ 2,605.1
Less: Accumulated depreciation and amortization	(1,589.7)	(1,539.7)
Work in process	89.9	82.6
Property and equipment, net	1,115.2	1,148
Computers and equipment
Property and equipment
Property and equipment, at cost	1,797.6	1,787.2
Computer software
Property and equipment
Property and equipment, at cost	376.3	370.6
Furniture and fixtures
Property and equipment
Property and equipment, at cost	63.3	63.5
Buildings and leasehold improvements
Property and equipment
Property and equipment, at cost	350	355.7
Land
Property and equipment
Property and equipment, at cost	27.8	28.1
Office facility build outs
Property and equipment
Work in process	11.6	11.5
Data center build outs
Property and equipment
Work in process	50.7	49
Capitalized software
Property and equipment
Work in process	$ 27.6	$ 22.1

Goodwill (Details)

Goodwill (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Goodwill
Reduction in goodwill in connection with sale of certain assets of a non-strategic product line	$ 0.7
Goodwill	80.4	$ 81.1
Americas
Goodwill
Goodwill	58.1
International
Goodwill
Goodwill	$ 22.3

Cost-Method Investments (Detail

Cost-Method Investments (Details) - USD ($) $ in Millions	Mar. 31, 2016	Dec. 31, 2015
Investments, All Other Investments [Abstract]
Aggregate carrying amount of cost-method investments, not evaluated for impairment	$ 11.6	$ 11.6

Debt (Details)

Debt (Details) - USD ($)	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Debt
Principal balance	$ 500,000,000	$ 500,000,000
Unamortized debt issuance costs	(7,400,000)	(7,600,000)
Total debt	492,600,000	492,400,000
Less: current portion of debt	0	0
Debt, excluding current portion	492,600,000	492,400,000
Revolving Credit Facility
Debt
Principal balance	0	0
Unamortized debt issuance costs	0	0
Total debt	0	0
Less: current portion of debt	0	0
Debt, excluding current portion	0	0
Revolving Credit Facility
Borrowing capacity of revolving credit facility	200,000,000
Undrawn letters of credit	$ 400,000
Covenant compliance	in compliance with all of the covenants under this facility
Senior Notes due 2024
Debt
Principal balance	$ 500,000,000	500,000,000
Unamortized debt issuance costs	(7,400,000)	(7,600,000)
Total debt	492,600,000	492,400,000
Less: current portion of debt	0	0
Debt, excluding current portion	$ 492,600,000	$ 492,400,000
Senior Notes due 2024
Maturity date	Jan. 15, 2024
Stated Interest Rate	6.50%
Date of first required payment	Jul. 15, 2016
Covenant compliance	in compliance with all covenants under the Senior Notes indenture
Senior Notes due 2024 | Level 2 in the fair value hierarchy
Senior Notes due 2024
Fair value	$ 490,000,000

Share-Based Compensation (Detai

Share-Based Compensation (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	$ 17.8	$ 20
Less: Income tax benefit	(5.7)	(6.5)
Total share-based compensation expense, net of tax	12.1	13.5
Share-Based Compensation Expense, Aggregate Disclosures
Unrecognized compensation cost	$ 166.7
Weighted-average period over which the unrecognized compensation cost will be recognized using the straight-line method	2 years 6 months 29 days
Cost of revenue
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	$ 4.1	4
Research and development
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	2.2	3.2
Sales and marketing
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	2.6	2.7
General and administrative
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	$ 8.9	$ 10.1

Share Repurchase Program (Detai

Share Repurchase Program (Details) - Common Stock shares in Millions, $ in Millions	3 Months Ended
	Mar. 31, 2016USD ($)shares
Value of shares repurchased and subsequently retired during period	$ 68
Number of shares repurchased and subsequently retired during period | shares	3.2
Value of shares repurchased during period and settled as of period-end	$ 61
Value of shares repurchased during period and not yet settled as of period-end	$ 7
Number of shares repurchased during period and not yet settled as of period-end | shares	0.3
Amount authorized by the board that remains available for additional purchases under the share repurchase program	$ 566

Gain on Sale (Details)

Gain on Sale (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Jan. 05, 2016
Gain on Sale
Pre-tax gain recorded on the sale of certain assets of a non-strategic product line	$ 24.5	$ 0
Disposal Group, Disposed of by Sale, Not Discontinued Operations
Gain on Sale
Total consideration received for sale of certain assets of a non-strategic product line			$ 27
Disposal Group, Disposed of by Sale, Not Discontinued Operations | Gain on sale
Gain on Sale
Pre-tax gain recorded on the sale of certain assets of a non-strategic product line	$ 24.5

Segment Information (Details)

Segment Information (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Net Revenue:
Net revenue	$ 518.1	$ 480.2
Income before income taxes:
Income before income taxes	71.8	40.5
Depreciation and amortization:
Depreciation and amortization	104	96.9
Americas
Net Revenue:
Net revenue	383.6	349.2
Income before income taxes:
Income before income taxes	40.9	5.1
Depreciation and amortization:
Depreciation and amortization	79.2	76.9
International
Net Revenue:
Net revenue	134.5	131
Income before income taxes:
Income before income taxes	30.9	35.4
Depreciation and amortization:
Depreciation and amortization	$ 24.8	$ 20