Exhibit 99.1
Rackspace Hosting Reports Second Quarter 2008 Results
| • | Delivered strong revenue growth during the quarter, an increase of 9.4% quarter-over-quarter and 55.7% year-over-year |
| • | Rackspace served more than 33,600 customers and managed more than 42,400 servers, an increase of 6.1% and 6.7% quarter-over-quarter |
| • | Continued international expansion, opening U.K. data center in June and Hong Kong data center in September |
SAN ANTONIO – September 10, 2008 –Rackspace® Hosting, Inc. (NYSE: RAX), the world’s leading hosting services provider, today reported quarterly results for the quarter ended June 30, 2008. Summary results were provided in the company’s S-1 filed on August 5, 2008 for its subsequent Initial Public Offering.
Rackspace Hosting continued to deliver on its growth strategy in the second quarter of 2008. Net revenues for the second quarter ended June 30, 2008 were $130.8 million, up 9.4% from the first quarter of 2008 and up 55.7% from the quarter ended June 30, 2007. Net revenues for the first six months of 2008 were $250.4 million, an increase of 57.3% relative to net revenues for the first six months of 2007. The installed base continued to provide a significant portion of growth during the second quarter 2008, growing at an average rate of 1.0% per month. Relative to the quarter ended March 31, 2008, customer count increased by 6.1% to more than 33,600 customers (including more than 13,800 mail customers) and server count increased by 6.7% to more than 42,400.
“We delivered strong growth despite a challenging macroeconomic environment, which demonstrates the strength of Rackspace’s Fanatical Support® and its ability to win and keep customers in a tough climate,” said Lanham Napier, president and chief executive officer, Rackspace Hosting. “We are seeing significant global growth, and we will continue to make disciplined, long-term investments in order to capitalize on the demand for hosting.”
Adjusted EBITDA(1) was $33.8 million for the second quarter, a 5.9% increase compared to the previous quarter and a 56.5% increase compared to the same quarter last year. Net income was $4.2 million for the second quarter, a 23.2% decline compared to the previous quarter and a 13.1% decline compared to the same quarter last year. The reduction in net income was due mainly to current infrastructure projects and the associated increases in depreciation and amortization and interest expenses.
Cash flow from operating activities was $32.8 million for the second quarter of 2008. Capital expenditures were $66.3 million, including $27.3 million for purchases of customer gear, $18.5 million for data center buildouts, $12.8 million for office buildouts, and $7.7 million for capitalized software and other expenditures. Of the $66.3 million in capital expenditures, $26.0 million were vendor financed equipment purchases.
The company is reducing its anticipated capital expenditures estimate for 2008 from $335 million to $310 million. $10 million of the reduction is for office space that has been deferred to 2009. The remaining $15 million is in Other Capital that was originally budgeted for unspecified price increases that the company no longer anticipates to occur. This new estimate also includes the capital to build out Hong Kong. Of the $20 million investment referred to in our September 8th press release, $10 million is scheduled to be spent this year, most of which is capital.
At the end of the second quarter, cash and cash equivalents were $35.1 million. Debt obligations totaled $183.6 million. Of those, $109.9 million were related to current and non-current debt, and $73.7 million were related to obligations under capital and finance method leases.
On a worldwide basis, Rackspace employed 2,422 Rackers as of June 30, 2008, up from 2,254 Rackers as of March 31, 2008, and 1,663 Rackers as of June 30, 2007.
Significant Developments During the Second Quarter of 2008
| • | Named Best Place to Work in IT:IDG’sComputerworld magazine named Rackspace as one of the best places to work in the information technology field. This is solid recognition of the company’s culture, and Rackspace’s ability to retain and hire a skilled workforce that continually goes above and beyond to develop solutions for its customers. |
| • | Slough, U.K. Data Center Opened: June 9 marked the opening of a new data center in Slough, U.K. This unique facility with approximately 50,000 square feet is powered by renewable resources and is consistent with Rackspace’s goal to minimize energy requirements and the burning of fossil fuel. This opening marks Rackspace’s first solely managed data center in Europe, which will serve as the foundation of the company’s expansion in the region. In the initial phase, 18,713 square feet of technical space were deployed. |
Significant Recent Developments (after June 30, 2008)
| • | Initial Public Offering: On August 8, Rackspace Hosting began trading its shares on the New York Stock Exchange under the symbol RAX. Through this offering, the company received net proceeds of $144.9 million, which will be primarily used to fund the company’s growth initiatives. |
| • | Launch of Hong Kong Operations: On September 8, Rackspace opened its Asian headquarters and data center in Hong Kong to meet global demand. This expansion into Asia marks the company’s continued investment in superior customer service and exhibits its confidence in the business opportunity that Asia represents. |
“We have marked a major milestone in Rackspace’s history,” said Bruce Knooihuizen, senior vice president and chief financial officer, Rackspace Hosting. “Completing the initial public offering provides us with the financial flexibility to pursue our growth plans. The proceeds of this offering, together with the committed debt capital available to us, allow for the necessary infrastructure investments to support our growth and the development of new products, geographies and markets. While the U.S. remains the most important market for the company for the foreseeable future, we are excited about the company’s prospects in EMEA and Asia, which are attractive markets for us. Our returns in the core managed hosting services remain strong, and we continue to invest in this area as well as in our newer technologies such as email and cloud hosting services.”
Conference Call and Webcast
Management will host a conference call to discuss its second quarter 2008 financial results today at 4:30 p.m. ET. To access the conference call, please dial 877-856-1969 and reference passcode 9143062. A live webcast of the conference call also will be available on Rackspace’s website, located at www.rackspace.com. A replay of the call will be available through midnight, September 24, 2008 by calling 888-203-1112 in the United States or for calls from outside the United States, 719-457-0820. The replay passcode is 9143062.
About Rackspace Hosting
As the world’s leader and specialist in hosting, Rackspace® Hosting is changing the way businesses worldwide buy IT. Rackspace delivers computing-as-a-service, integrating the industry’s best technologies into a flexible service offering, making computing more reliable and affordable. A trusted partner to companies of all sizes, Rackspace enables IT departments to be more effective. Rackspace is distinguished by its award-winning Fanatical Support®, furthering the company’s mission to be one of the world’s greatest service companies. Rackspace is recognized as one of FORTUNE’S® “100 Best Companies to Work For”, ranking number 32 on the 2008 list. Rackspace’s portfolio of hosted IT services includes managed hosting (www.rackspace.com), email hosting (www.mailtrust.com) and cloud hosting (www.mosso.com). For more information on Rackspace Hosting please visit www.rackspace.com or call 800-961-2888.
Forward Looking Statements
This Press Release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 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 including international expansion plans, the performance or market share relating to products and services; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. These risks, uncertainties and assumptions include the effectiveness of managing company growth, infrastructure failures, changes in the economy, technological and competitive factors, regulatory factors, and other risks that are described in Rackspace’s amended registration statement on Form S-1, filed with the SEC on August 5, 2008. Additional information will also be set forth in Rackspace’s report on Form 10-Q for the quarter ended June 30, 2008, which will be filed with the SEC in September 2008. These forward-looking statements speak as of the date of this press release. Except as required by law, Rackspace assumes no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Consolidated Statements of Income
| Three months ended | Six Months Ended | |||||||||||||||||||
| (In thousands, except per share data) | June 30, 2007 | March 31, 2008 | June 30, 2008 | June 30, 2007 | June 30, 2008 | |||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||
Net revenues | $ | 84,012 | $ | 119,613 | $ | 130,829 | $ | 159,237 | $ | 250,442 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of revenues | 26,148 | 39,223 | 42,842 | 49,741 | 82,065 | |||||||||||||||
Sales and marketing | 12,609 | 17,568 | 19,846 | 24,270 | 37,414 | |||||||||||||||
General and administrative | 24,279 | 33,633 | 38,108 | 45,225 | 71,741 | |||||||||||||||
Depreciation and amortization | 13,133 | 19,051 | 21,637 | 24,968 | 40,688 | |||||||||||||||
Total costs and expenses | 76,169 | 109,475 | 122,433 | 144,204 | 231,908 | |||||||||||||||
Income from operations | 7,843 | 10,138 | 8,396 | 15,033 | 18,534 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (663 | ) | (1,330 | ) | (1,834 | ) | (1,188 | ) | (3,164 | ) | ||||||||||
Interest and other income | 127 | 247 | 173 | 227 | 420 | |||||||||||||||
Total other income (expense) | (536 | ) | (1,083 | ) | (1,661 | ) | (961 | ) | (2,744 | ) | ||||||||||
Income before income taxes | 7,307 | 9,055 | 6,735 | 14,072 | 15,790 | |||||||||||||||
Income taxes | 2,495 | 3,613 | 2,553 | 5,088 | 6,166 | |||||||||||||||
Net Income | $ | 4,812 | $ | 5,442 | $ | 4,182 | $ | 8,984 | $ | 9,624 | ||||||||||
Net income per share | ||||||||||||||||||||
Basic | $ | 0.05 | $ | 0.05 | $ | 0.04 | $ | 0.09 | $ | 0.09 | ||||||||||
Diluted | $ | 0.05 | $ | 0.05 | $ | 0.04 | $ | 0.08 | $ | 0.09 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||
Basic | 100,959 | 102,574 | 103,227 | 100,926 | 102,901 | |||||||||||||||
Diluted | 106,217 | 109,085 | 110,508 | 106,007 | 109,810 | |||||||||||||||
Consolidated Balance Sheets
| (In thousands, except share and per share data) | December 31, 2007 | June 30, 2008 | ||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 24,937 | $ | 35,094 | ||||
Accounts receivable, net of allowance for doubtful accounts and customer credits of $2,841 as of December 31, 2007, and $2,453 as of June 30, 2008 | 25,449 | 25,902 | ||||||
Prepaid expenses and other current assets | 7,757 | 11,418 | ||||||
Total current assets | 58,143 | 72,414 | ||||||
Property and equipment, net | 227,055 | 315,526 | ||||||
Goodwill | 3,574 | 3,518 | ||||||
Intangible assets, net | 5,812 | 9,760 | ||||||
Other non-current assets | 7,229 | 7,092 | ||||||
Total assets | $ | 301,813 | $ | 408,310 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 67,087 | $ | 77,933 | ||||
Current portion of deferred revenue | 13,540 | 15,516 | ||||||
Current portion of obligations under capital and finance method leases | 25,198 | 32,983 | ||||||
Current portion of debt | 2,902 | 4,989 | ||||||
Total current liabilities | 108,727 | 131,421 | ||||||
Non-current deferred revenue | 4,402 | 4,582 | ||||||
Non-current obligations under capital and finance method leases | 23,312 | 40,629 | ||||||
Non-current debt | 60,039 | 104,952 | ||||||
Other non-current liabilities | 8,460 | 9,309 | ||||||
Total liabilities | 204,940 | 290,893 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
Stockholders’ equity: | ||||||||
Series A Convertible Preferred stock, $0.001 par value per share (aggregate involuntary liquidation preference: $13,412) 50,000,000 shares authorized as of December 31, 2007, and June 30, 2008; 1,214,837, issued and outstanding shares | 1 | 1 | ||||||
Common stock, $0.001 par value per share: 300,000,000 shares authorized; 101,211,223 shares issued and 101,128,518 shares outstanding as of December 31,2007, 102,251,652 shares issued and 102,168,947 shares outstanding as of June 30, 2008 | 101 | 102 | ||||||
Treasury stock, at cost: 82,705 common shares held | (126 | ) | (126 | ) | ||||
Additional paid-in capital | 40,082 | 51,152 | ||||||
Accumulated other comprehensive income | 513 | 362 | ||||||
Retained earnings | 56,302 | 65,926 | ||||||
Total stockholders’ equity | 96,873 | 117,417 | ||||||
Total liabilities and stockholders’ equity | $ | 301,813 | $ | 408,310 | ||||
Consolidated Statements of Cash Flows
| (In thousands) | Three Months Ended | Six Months Ended | ||||||||||||||||||
| June 30, 2007 | March 31, 2008 | June 30, 2008 | June 30, 2007 | June 30, 2008 | ||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||||||
Net income | $ | 4,812 | $ | 5,442 | $ | 4,182 | $ | 8,984 | $ | 9,624 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||||||||||
Depreciation and amortization | 13,133 | 19,051 | 21,637 | 24,968 | 40,688 | |||||||||||||||
Loss on disposal and impairment of equipment, net | 676 | 1,327 | 650 | 1,041 | 1,977 | |||||||||||||||
Provision for bad debts and customer credits | 566 | 398 | 812 | 1,471 | 1,210 | |||||||||||||||
Deferred income taxes | (597 | ) | 1,157 | 1,367 | (1,467 | ) | 2,524 | |||||||||||||
Share-based compensation expense | 645 | 2,752 | 3,804 | 1,236 | 6,556 | |||||||||||||||
Other noncash compensation expense | — | 31 | 109 | 156 | 140 | |||||||||||||||
Excess tax benefits from share-based compensation arrangements | (96 | ) | (708 | ) | (1,913 | ) | (150 | ) | (2,621 | ) | ||||||||||
Changes in certain assets and liabilities | ||||||||||||||||||||
Accounts receivables | (2,974 | ) | 380 | (2,020 | ) | (4,982 | ) | (1,640 | ) | |||||||||||
Prepaid expenses and other current assets | (52 | ) | (1,208 | ) | (1,381 | ) | (922 | ) | (2,589 | ) | ||||||||||
Accounts payable and accrued expenses | 14,721 | 6,268 | 4,809 | 25,079 | 11,077 | |||||||||||||||
Deferred revenues | 1,598 | 1,484 | 673 | 2,523 | 2,157 | |||||||||||||||
Other non-current assets | 59 | 9 | 93 | 98 | 102 | |||||||||||||||
Other non-current liabilities | (1,729 | ) | (225 | ) | 24 | (1,482 | ) | (201 | ) | |||||||||||
Net cash provided by operating activities | 30,762 | 36,158 | 32,846 | 56,553 | 69,004 | |||||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||||||
Purchases of property and equipment, net | (27,058 | ) | (47,248 | ) | (40,273 | ) | (50,409 | ) | (87,521 | ) | ||||||||||
Net cash used in investing activities | (27,058 | ) | (47,248 | ) | (40,273 | ) | (50,409 | ) | (87,521 | ) | ||||||||||
Cash Flows From Financing Activities | ||||||||||||||||||||
Principal payments of capital and finance method leases | (3,469 | ) | (7,549 | ) | (6,595 | ) | (5,735 | ) | (14,144 | ) | ||||||||||
Principal payments of notes payable | (225 | ) | (1,152 | ) | (1,777 | ) | (439 | ) | (2,929 | ) | ||||||||||
Borrowings on line of credit | 9,146 | 20,000 | 20,000 | 14,146 | 40,000 | |||||||||||||||
Payments for debt issuance costs | (45 | ) | (158 | ) | — | (277 | ) | (158 | ) | |||||||||||
Proceeds from sale leaseback transactions | — | 761 | 782 | — | 1,543 | |||||||||||||||
Proceeds from issuance of common stock, net | — | 548 | — | — | 548 | |||||||||||||||
Proceeds from exercise of stock options | 61 | 503 | 702 | 76 | 1,205 | |||||||||||||||
Excess tax benefits from share-based compensation arrangements | 96 | 708 | 1,913 | 150 | 2,621 | |||||||||||||||
Net cash provided by financing activities | 5,564 | 13,661 | 15,025 | 7,921 | 28,686 | |||||||||||||||
Effect of exchange rate changes on cash | (76 | ) | (11 | ) | (1 | ) | (48 | ) | (12 | ) | ||||||||||
Increase in cash and cash equivalents | 9,192 | 2,560 | 7,597 | 14,017 | 10,157 | |||||||||||||||
Cash and equivalents, beginning of period | 8,374 | 24,937 | 27,497 | 8,374 | 24,937 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 17,566 | $ | 27,497 | $ | 35,094 | $ | 22,391 | $ | 35,094 | ||||||||||
Supplemental cash flow information: | ||||||||||||||||||||
Acquisition of property and equipment by capital and finance method leases | $ | 9,410 | $ | 18,512 | $ | 19,191 | $ | 15,632 | $ | 37,703 | ||||||||||
Acquisition of property and equipment by notes payable | 742 | 3,107 | 6,823 | 742 | 9,930 | |||||||||||||||
Vendor financed equipment purchases | $ | 10,152 | $ | 21,619 | $ | 26,014 | $ | 16,374 | $ | 47,633 | ||||||||||
Cash payments for interest, net of amount capitalized | $ | 446 | $ | 1,690 | $ | 1,586 | $ | 800 | $ | 3,276 | ||||||||||
Cash payments for income taxes | 4,312 | — | 3,540 | 5,147 | 3,540 | |||||||||||||||
Key Metrics
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| June 30, 2007 | March 31, 2008 | June 30, 2008 | June 30, 2007 | June 30, 2008 | ||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||
Growth | ||||||||||||||||||||
Number of employees (Rackers) at period end | 1,663 | 2,254 | 2,422 | 1,663 | 2,422 | |||||||||||||||
Number of customers at period end * | 14,694 | 31,662 | 33,607 | 14,694 | 33,607 | |||||||||||||||
Number of servers deployed at period end | 31,140 | 39,755 | 42,424 | 31,140 | 42,424 | |||||||||||||||
Net upgrades (monthly average) | 2.6 | % | 2.1 | % | 2.1 | % | 2.6 | % | 2.1 | % | ||||||||||
Churn (monthly average) | -0.8 | % | -1.2 | % | -1.1 | % | -1.1 | % | -1.2 | % | ||||||||||
Growth in Installed Base (monthly average) | 1.8 | % | 0.9 | % | 1.0 | % | 1.5 | % | 0.9 | % | ||||||||||
Net revenues (in thousands) | $ | 84,012 | $ | 119,613 | $ | 130,829 | $ | 159,237 | $ | 250,442 | ||||||||||
Revenue growth (year over year) | 61.5 | % | 59.0 | % | 55.7 | % | 62.9 | % | 57.3 | % | ||||||||||
Profitability | ||||||||||||||||||||
Income from Operations (in thousands) | $ | 7,843 | $ | 10,138 | $ | 8,396 | $ | 15,033 | $ | 18,534 | ||||||||||
Depreciation and amortization (in thousands) | $ | 13,133 | $ | 19,051 | $ | 21,637 | $ | 24,968 | $ | 40,688 | ||||||||||
Share-based compensation expense (in thousands) | ||||||||||||||||||||
Cost of revenues | 21 | 365 | 603 | 55 | 968 | |||||||||||||||
Sales & marketing | 98 | 401 | 533 | 170 | 934 | |||||||||||||||
General & administrative | 526 | 1,986 | 2,668 | 1,011 | 4,654 | |||||||||||||||
Total share-based compensation expense | 645 | 2,752 | 3,804 | 1,236 | 6,556 | |||||||||||||||
Adjusted EBITDA (in thousands) (1) | $ | 21,621 | $ | 31,941 | $ | 33,837 | $ | 41,237 | $ | 65,778 | ||||||||||
Adjusted EBITDA margin | 25.7 | % | 26.7 | % | 25.9 | % | 25.9 | % | 26.3 | % | ||||||||||
Operating income margin | 9.3 | % | 8.5 | % | 6.4 | % | 9.4 | % | 7.4 | % | ||||||||||
Income from Operations (in thousands) | $ | 7,843 | $ | 10,138 | $ | 8,396 | $ | 15,033 | $ | 18,534 | ||||||||||
Effective Tax Rate | 34.1 | % | 39.9 | % | 37.9 | % | 36.2 | % | 39.1 | % | ||||||||||
Net Operating Profit After Tax (NOPAT, in thousands) (1) | $ | 5,169 | $ | 6,093 | $ | 5,214 | $ | 9,591 | $ | 11,287 | ||||||||||
NOPAT margin | 6.2 | % | 5.1 | % | 4.0 | % | 6.0 | % | 4.5 | % | ||||||||||
Capital efficiency and returns | ||||||||||||||||||||
Interest bearing debt (in thousands) | $ | 43,670 | $ | 145,130 | $ | 183,553 | $ | 43,670 | $ | 183,553 | ||||||||||
Shareholders’ equity (in thousands) | $ | 81,299 | $ | 105,770 | $ | 117,417 | $ | 81,299 | $ | 117,417 | ||||||||||
Capital (in thousands) | $ | 124,969 | $ | 250,900 | $ | 300,970 | $ | 124,969 | $ | 300,970 | ||||||||||
Average capital base (in thousands) | $ | 114,302 | $ | 229,612 | $ | 275,935 | $ | 106,139 | $ | 253,399 | ||||||||||
Capital turnover (annualized) | 2.94 | 2.08 | 1.90 | 3.00 | 1.98 | |||||||||||||||
Return on Capital (annualized) (1) | 18.1 | % | 10.6 | % | 7.6 | % | 18.1 | % | 8.9 | % | ||||||||||
Capital expenditures (in thousands) | ||||||||||||||||||||
Cash flows used in investing activities | $ | 27,058 | $ | 47,248 | $ | 40,273 | $ | 50,409 | $ | 87,521 | ||||||||||
Vendor financed equipment purchases | $ | 10,152 | $ | 21,619 | $ | 26,014 | $ | 16,374 | $ | 47,633 | ||||||||||
Total capital expenditures | $ | 37,210 | $ | 68,867 | $ | 66,287 | $ | 66,783 | $ | 135,154 | ||||||||||
Customer gear | $ | 23,668 | $ | 27,558 | $ | 27,347 | $ | 49,037 | $ | 54,906 | ||||||||||
Data center build outs | $ | 4,320 | $ | 25,392 | $ | 18,509 | $ | 5,122 | $ | 43,901 | ||||||||||
Office build outs | $ | 1,052 | $ | 8,832 | $ | 12,815 | $ | 1,221 | $ | 21,647 | ||||||||||
Capitalized software and other | $ | 8,170 | $ | 7,085 | $ | 7,616 | $ | 11,403 | $ | 14,700 | ||||||||||
Total capital expenditures | $ | 37,210 | $ | 68,867 | $ | 66,287 | $ | 66,783 | $ | 135,154 | ||||||||||
Infrastructure capacity and utilization | ||||||||||||||||||||
Technical square feet of data center space at period end | 91,905 | 114,749 | 133,462 | ** | 91,905 | 133,462 | ** | |||||||||||||
Annualized net revenue per average square foot | $ | 3,656 | $ | 4,170 | $ | 4,217 | $ | 3,465 | $ | 4,140 | ||||||||||
Utilization rate at period end | 68.8 | % | 67.3 | % | 59.1 | % | 68.8 | % | 59.1 | % | ||||||||||
| * | Includes 123 and 13,893 mail customers as of June 30, 2007 and 2008, and 13,376 customers as of March 31, 2008, respectively |
| ** | Includes 18,713 square feet added in June 2008 |
| (1) | See discussion and reconciliations of Non-GAAP financial measures to the most comparable GAAP measure included within the document |
(1) Non-GAAP Financial Measures
Adjusted EBITDA (Non-GAAP financial measure)
We define Adjusted EBITDA as Net Income, less Total Other Income (Expense), plus Income Taxes, 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 Adjusted EBITDA reconciliation in our key metrics table below.
| Three Months Ended | Six Months Ended June 30, | ||||||||||||||
| (In thousands) | June 30, 2007 | March 31, 2008 | June 30, 2008 | 2007 | 2008 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||||
Net income | $ | 4,812 | $ | 5,442 | $ | 4,182 | $ | 8,984 | $ | 9,624 | |||||
Less: Total other income (expense) | $ | 536 | $ | 1,083 | $ | 1,661 | $ | 961 | $ | 2,744 | |||||
Plus: Income taxes | $ | 2,495 | $ | 3,613 | $ | 2,553 | $ | 5,088 | $ | 6,166 | |||||
Plus: Depreciation and amortization | $ | 13,133 | $ | 19,051 | $ | 21,637 | $ | 24,968 | $ | 40,688 | |||||
Plus: Share-based compensation expense | $ | 645 | $ | 2,752 | $ | 3,804 | $ | 1,236 | $ | 6,556 | |||||
Adjusted EBITDA | $ | 21,621 | $ | 31,941 | $ | 33,837 | $ | 41,237 | $ | 65,778 | |||||
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) = Average of (Total assets – accounts payables and accrued expenses – deferred revenues – other non-current liabilities)
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 accounting principles generally accepted in the United States (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.
ROC decreased from 18.1% for the six months ended June 30, 2007 to 8.9% for the six months ended June 30, 2008. This decrease was due to an increase in income from operations and a proportionately larger increase in the average capital base over the same time period. Included in the average capital base for the six months ended June 30, 2008 are capital expenditures related to our new corporate headquarter facilities and data centers that are in the process of being built out. Return on assets decreased from 11.3% to 5.4% for the six months ended June 30, 2007 and 2008, respectively. For the quarter ended June 30, 2008, ROC was 7.6% and return on assets was 4.4%.
| Three Months Ended | Six Months Ended June 30, | |||||||||||||||||||
| (In thousands, except financial metrics) | June 30, 2007 | March 31, 2008 | June 30, 2008 | 2007 | 2008 | |||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||
Income from operations | $ | 7,843 | 10,138 | $ | 8,396 | $ | 15,033 | $ | 18,534 | |||||||||||
Effective tax rate | 34.1 | % | 39.9 | % | 37.9 | % | 36.2 | % | 39.1 | % | ||||||||||
Net operating profit after tax (NOPAT) | $ | 5,169 | $ | 6,093 | $ | 5,214 | $ | 9,591 | $ | 11,287 | ||||||||||
Net income | $ | 4,812 | $ | 5,442 | $ | 4,182 | $ | 8,984 | $ | 9,624 | ||||||||||
Average total assets | $ | 172,399 | $ | 328,567 | $ | 381,815 | $ | 159,260 | $ | 355,148 | ||||||||||
Less: Average accounts payable and accrued expenses | $ | (43,645 | ) | $ | (71,071 | ) | $ | (76,494 | ) | $ | (38,683 | ) | $ | (73,358 | ) | |||||
Less: Average deferred revenues (current and non-current) | $ | (11,691 | ) | $ | (18,684 | ) | $ | (19,762 | ) | $ | (11,101 | ) | $ | (19,155 | ) | |||||
Less: Average other non-current liabilities | $ | (2,761 | ) | $ | (9,200 | ) | $ | (9,624 | ) | $ | (3,337 | ) | $ | (9,236 | ) | |||||
Average capital base | $ | 114,302 | $ | 229,612 | $ | 275,935 | $ | 106,139 | $ | 253,399 | ||||||||||
Return on assets (Net income/Average total assets) | 11.2 | % | 6.6 | % | 4.4 | % | 11.3 | % | 5.4 | % | ||||||||||
Return on capital (NOPAT/Average capital base) | 18.1 | % | 10.6 | % | 7.6 | % | 18.1 | % | 8.9 | % | ||||||||||
Contact:
Karl Pichler
Investor Relations
210.312.7291
ir@rackspace.com
Annalie Drusch
Media Relations
210.312.7290
media@rackspace.com
Erin Becker / Ashley Zandy
Brunswick Group
415.293.8461
