11-11-13 4:02 PM EST | Email Article

Rackspace® Hosting, Inc. (NYSE: RAX), the open cloud company, announced financial results for the quarter ended September 30, 2013.

Net revenue for the third quarter of 2013 was $389 million, up 3.4% from the previous quarter and 16% from the third quarter of 2012. Net revenue for the third quarter of 2013 was positively impacted by currency exchange rates when compared to the previous quarter by $0.9 million and negatively impacted when compared to the third quarter of 2012 by $1.8 million.

Total server count increased to 101,967, up from 98,884 servers at the end of the previous quarter.

Adjusted EBITDA(1) for the quarter was $125 million, a 1.9% increase compared to the second quarter of 2013 and a 3% increase compared to the third quarter of 2012. The Adjusted EBITDA margin for the quarter was 32.3% compared to 32.8% in the previous quarter and 36.2% in the third quarter of 2012.

Consistent with prior periods, Adjusted EBITDA and Adjusted EBITDA margin were negatively impacted by a non-cash charge relating to data center operating leases. During the third quarter of 2013, the non-cash data center lease charge was $3.8 million, compared to $1.5 million in the previous quarter and $2.3 million in the third quarter of 2012.

Net income was $16 million for the quarter, down 27.1% from the previous quarter and 40% from the third quarter of 2012. Net income margin for the quarter was 4.2% compared to 6.0% for the previous quarter and 8.1% in the third quarter of 2012.

Cash flow from operating activities was $115 million for the third quarter of 2013. Capital expenditures were $118 million, including $74 million for purchases of customer gear, $12 million for data center build outs, $7 million for office build outs and $25 million for capitalized software and other projects.

Adjusted Free Cash Flow(1) for the quarter was $8 million. Return on Capital(1) was 8.0% in the third quarter, compared to 11.9% in the prior quarter and 16.0% in the third quarter of 2012. Average monthly revenue per server was $1,290, compared to $1,298 in the prior quarter and $1,287 in the third quarter of 2012.

At the end of the third quarter of 2013, cash and cash equivalents were $270 million, and debt including capital lease obligations totaled $73 million.

On a worldwide basis, Rackspace employed 5,450 Rackers as of September 30, 2013, up from 5,272 in the previous quarter.

Rackspace Developments and Business Highlights

• Rackspace Launches Performance Cloud Servers - The Performance Cloud Servers deliver up to 132X higher disk IO performance than our current standard. These new servers provide greater speed, throughput and reliability that are designed to deliver enhanced levels of application performance. This public cloud offering creates a powerful hosting platform for a variety of workloads, ranging from basic web hosting to large scale NoSQL data stores like MongoDB and Cassandra. Rackspace customers will receive increased efficiency and performance for their applications and, ultimately, greater revenue for their businesses. The Performance Cloud Servers maximize the performance customers get at any price level. This allows Rackspace to offer the new servers for as little as two-thirds of the price of comparatively sized Standard Cloud Servers.

• Rackspace Elects Ossa Fisher to the Board of Directors - Fisher is currently serving as senior vice president for strategy and analytics at global dating leader, Match.com, where she has built a reputation for wide-ranging industry insight, marketing analytics, and product development.

• Rackspace Launches Comprehensive Big Data Solution and Managed Support for Apache™ Hadoop® - As part of Rackspace Data Services, a collection of SQL and NoSQL data offerings available as a service, Rackspace announced the availability of the Hortonworks Data Platform powered by Apache Hadoop in both the managed hosting environment and the Rackspace public cloud. In addition, Rackspace is offering managed services around the Big Data solution to ease the operational burden for customers.

• Rackspace Launches Hong Kong’s First Hybrid Cloud Powered by OpenStack® - The new public cloud joins Rackspace’s existing portfolio of private cloud and dedicated solutions to complete the Open Cloud Company’s hybrid cloud offering to businesses throughout the Asia-Pacific region. The Rackspace hybrid cloud provides a massive opportunity, as demand for cloud services continues to increase rapidly throughout the Asia-Pacific region.

• Openstack Announces Latest Version - Havana, the latest version of Openstack, was released on October 17th. Havana had over 900 individual contributors and almost 400 new features added to the platform. The total lines of code increased to 1.72 million with 145 organizations contributing to the Havana release.

• Rackspace Extends On-Premise VMware® Environments with New Dedicated VMware vCenter™ Server Offering - Rackspace announced a new offering for its Managed Virtualization service, Dedicated VMware vCenter Server, that will provide managed support for single-tenant VMware vCenter Servers. With Dedicated VMware vCenter Server, enterprise customers can migrate existing VMware workloads out of their on-premise data center into a Rackspace data center, while leveraging existing tools to maintain the control and agility they require. The new service helps accelerate customers’ journey to hybrid cloud computing, leveraging the reliability of Rackspace, all backed by Fanatical Support®.

Conference Call and Webcast

Management will host a conference call to discuss the results starting today at 4:30 p.m. ET.

To access the conference call, please dial 888-401-4685 from the United States and Canada or dial 719-457-2639 from abroad and reference pass code 8355636. A live webcast and a replay of the conference call will be available on Rackspace's website, located at http://ir.rackspace.com.

About Rackspace Hosting

Rackspace Hosting (NYSE: RAX) is the open cloud company, delivering open technologies and powering more than 200,000 customers worldwide. Rackspace provides its renowned Fanatical Support® across a portfolio of IT products, including Public Cloud, Private Cloud, Hybrid Hosting and Dedicated Hosting. The company offers choice, flexibility and freedom from vendor lock-in. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company, is featured on Fortune's list of 100 Best Companies to Work For and is included on the Dow Jones Sustainability Index. Rackspace was positioned in the Leaders quadrant by Gartner Inc. in the 2013 "Magic Quadrant for Managed Hosting in North America” and "Magic Quadrant for European Managed Hosting." Rackspace is headquartered in San Antonio with offices and data centers around the world. 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-K for the year ended December 31, 2012, filed with the SEC on March 1, 2013, and in Rackspace Hosting’s Form 10-Q for the quarter ended September 30, 2013, expected to be filed later this week. Except as required by law, Rackspace Hosting assumes no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

     
 
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended Nine Months Ended
(In thousands, except per share data)

September 30,
2012

 

June 30,
2013

 

September 30,
2013

September 30,
2012

 

September 30,
2013

Net revenue $ 335,985 $ 375,847 $ 388,636 $ 956,330 $ 1,126,683
Costs and expenses:
Cost of revenue (1) 107,348 117,658

127,404

310,001

358,672

Research and development (1)

15,563

23,216

23,773

39,794

65,364

Sales and marketing (1) 41,109 52,269 50,869 122,705 152,952
General and administrative (1)

62,663

72,840

78,075

179,781

218,392

Depreciation and amortization   63,972     74,460     80,753     180,931     225,324  
Total costs and expenses   290,655     340,443     360,874     833,212     1,020,704  
Income from operations   45,330     35,404     27,762     123,118     105,979  
Other income (expense):
Interest expense (1,253 ) (833 ) (689 ) (3,758 ) (2,462 )
Interest and other income (expense)   38     (303 )   440     (230 )   336  
Total other income (expense)   (1,215 )   (1,136 )   (249 )   (3,988 )   (2,126 )
Income before income taxes 44,115 34,268 27,513 119,130 103,853
Income taxes   16,918     11,901     11,202     43,619     37,914  
Net income $ 27,197   $ 22,367   $ 16,311   $ 75,511   $ 65,939  
 
Net income per share
Basic $ 0.20   $ 0.16   $ 0.12   $ 0.56   $ 0.48  
Diluted $ 0.19   $ 0.16   $ 0.11   $ 0.54   $ 0.46  
 
Weighted average number of shares outstanding
Basic   135,946     138,011     138,714     134,683     138,140  
Diluted   141,474     142,178     143,543     140,794     142,699  
   
(1)

As previously reported in the 10-Q filings for the three months ended March 31, 2013 and June 30, 2013, certain reclassifications have been made to prior period amounts in order to conform to the current period’s presentation. For more information, refer to our Form 10-Q for the quarter ended September 30, 2013.

     
 

Consolidated Balance Sheets

 
(In thousands)

December 31,
2012

September 30,
2013

(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 292,061 $ 269,995

Accounts receivable, net of allowance for doubtful accounts and customer credits of $4,236 as of December 31, 2012 and $4,350 as of September 30, 2013

92,834 113,543
Deferred income taxes 10,320 10,280
Prepaid expenses 25,195 39,654
Other current assets   4,835     9,191  
Total current assets 425,245 442,663
 
Property and equipment, net 724,985 850,905
Goodwill 68,742 76,831
Intangible assets, net 23,802 25,328
Other non-current assets   52,777     56,042  
Total assets $ 1,295,551   $ 1,451,769  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 105,174 $ 130,390
Accrued compensation and benefits 48,404 67,754
Income and other taxes payable 21,550 15,124
Current portion of deferred revenue 17,265 17,839
Current portion of obligations under capital leases 61,302 44,375
Current portion of debt   1,744     1,835  
Total current liabilities 255,439 277,317
 
Non-current liabilities:
Deferred revenue 3,695 4,372
Obligations under capital leases 60,335 26,192
Debt 1,991 177
Deferred income taxes 71,081 79,654
Deferred rent 32,293 40,593
Other liabilities   27,070     34,756  
Total liabilities 451,904 463,061
 
COMMITMENTS AND CONTINGENCIES
 
Stockholders' equity:
Common stock 138 140
Additional paid-in capital 515,188 594,344
Accumulated other comprehensive loss (8,089 ) (8,125 )
Retained earnings   336,410     402,349  
Total stockholders’ equity   843,647     988,708  
Total liabilities and stockholders’ equity $ 1,295,551   $ 1,451,769  
     
 
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended Nine Months Ended
(in thousands)

September 30,
2012

 

June 30,
2013

 

September 30,
2013

September 30,
2012

 

September 30,
2013

Cash Flows From Operating Activities
Net income $ 27,197 $ 22,367 $ 16,311 $ 75,511 $ 65,939
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 63,972 74,460 80,753 180,931 225,324
Loss (gain) on disposal of equipment, net 597 (15 ) 667 962 892
Provision for bad debts and customer credits 1,426 1,301 1,482 4,559 3,843
Deferred income taxes 1,120 (8,444 ) 12,196 3,793 10,305
Deferred rent 2,279 1,519 3,801 6,329 9,285
Share-based compensation expense 12,418 13,315 16,959 30,302 42,457
Excess tax benefits from share-based compensation arrangements (5,145 ) (11,898 ) (1,186 ) (34,981 ) (17,383 )
Changes in certain assets and liabilities:
Accounts receivable (9,789 ) (7,220 ) (10,641 ) (29,103 ) (24,129 )
Prepaid expenses and other current assets (18,910 ) 5,081 (18,004 ) (11,030 ) (18,560 )
Accounts payable and accrued expenses 25,027 12,473 11,413 51,206 26,948
Deferred revenue (997 ) 823 (874 ) (292 ) 1,191
All other operating activities   (190 )   2,437     1,673     524     8,430  
Net cash provided by operating activities 99,005 106,199 114,550 278,711 334,542
 
Cash Flows From Investing Activities
Purchases of property and equipment (53,449 ) (119,836 ) (100,496 ) (187,455 ) (325,873 )
Acquisitions, net of cash acquired (5,233 ) (5,945 ) (6,203 )
All other investing activities   3     (380 )   (1,436 )   42     (1,808 )
Net cash used in investing activities (58,679 ) (120,216 ) (101,932 ) (193,358 ) (333,884 )
 
Cash Flows From Financing Activities
Principal payments of capital leases (17,928 ) (16,612 ) (15,658 ) (52,970 ) (51,208 )
Principal payments of notes payable (1,032 ) (846 ) (966 ) (1,911 ) (1,863 )
Payments for deferred acquisition obligations (59 ) (58 ) (4,726 ) (1,296 )
Proceeds from notes payable 691 691
Receipt of Texas Enterprise Fund Grant 3,500
Proceeds from employee stock plans 13,671 4,686 8,446 31,514 14,846
Excess tax benefits from share-based compensation arrangements   5,145     11,898     1,186     34,981     17,383  
Net cash provided by (used in) financing activities 547 (933 ) (7,050 ) 11,079 (22,138 )
 
Effect of exchange rate changes on cash and cash equivalents 1,330 (625 ) 1,375 1,363 (586 )
         
Increase (decrease) in cash and cash equivalents 42,203 (15,575 ) 6,943 97,795 (22,066 )
 
Cash and cash equivalents, beginning of period 215,448 278,627 263,052 159,856 292,061
         
Cash and cash equivalents, end of period $ 257,651   $ 263,052   $ 269,995   $ 257,651   $ 269,995  
 
Supplemental cash flow information:
Non-cash purchases of property and equipment $ 31,934 $ (13,311 ) $ 17,062 $ 62,212 $ 23,609
   
 
Key Metrics - Quarter to Date
(Unaudited)
 
Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server)

September 30,
2012

 

December 31,
2012

 

March 31,
2013

 

June 30,
2013

 

September 30,
2013

Growth
Dedicated cloud, net revenue $ 256,559 $ 265,585 $ 271,311 $ 276,845 $ 280,215
Public cloud, net revenue $ 79,426   $ 87,324   $ 90,889   $ 99,002   $ 108,421  
Net revenue $ 335,985 $ 352,909 $ 362,200 $ 375,847 $ 388,636
Revenue growth (year over year) 27.0 % 24.6 % 20.2 % 17.8 % 15.7 %
 
Net upgrades (monthly average) 1.6 % 1.2 % 0.9 % 1.5 % 1.5 %
Churn (monthly average)   -0.8 %   -0.7 %   -0.8 %   -0.8 %   -0.8 %
Growth in installed base (monthly average) (2) 0.8 % 0.5 % 0.1 % 0.7 % 0.7 %
 
Number of employees (Rackers) at period end 4,596 4,852 5,043 5,272 5,450
Number of servers deployed at period end 89,051 90,524 94,122 98,884 101,967
Average monthly revenue per server $ 1,287 $ 1,310 $ 1,308 $ 1,298 $ 1,290
 
Profitability
Income from operations $ 45,330 $ 49,623 $ 42,813 $ 35,404 $ 27,762
Depreciation and amortization $ 63,972 $ 68,914 $ 70,111 $ 74,460 $ 80,753
Share-based compensation expense
Cost of revenue $ 2,499 $ 2,759 $ 2,519 $ 2,735 $

3,453

Research and development $

1,379

$

1,237

$

1,528

$

1,813

$

2,306

Sales and marketing $ 2,021 $ 1,764 $ 1,658 $ 1,744 $ 2,149
General and administrative $

6,519

  $

5,484

  $

6,478

  $

7,023

  $

9,051

 
Total share-based compensation expense $ 12,418   $ 11,244   $ 12,183   $ 13,315   $ 16,959  
Adjusted EBITDA (1) $ 121,720 $ 129,781 $ 125,107 $ 123,179 $ 125,474
 
Adjusted EBITDA margin 36.2 % 36.8 % 34.5 % 32.8 % 32.3 %
 
Operating income margin 13.5 % 14.1 % 11.8 % 9.4 % 7.1 %
 
Income from operations $ 45,330 $ 49,623 $ 42,813 $ 35,404 $ 27,762
Effective tax rate   38.3 %   38.8 %   35.2 %   34.7 %   40.7 %
Net operating profit after tax (NOPAT) (1) $ 27,969 $ 30,369 $ 27,743 $ 23,119 $ 16,463
NOPAT margin 8.3 % 8.6 % 7.7 % 6.2 % 4.2 %
 
Capital efficiency and returns
Interest bearing debt $ 150,112 $ 125,372 $ 105,807 $ 88,434 $ 72,579
Stockholders' equity $ 781,934 $ 843,647 $ 879,035 $ 933,897 $ 988,708
Less: Excess cash $ (217,333 ) $ (249,712 ) $ (235,163 ) $ (217,950 ) $ (223,359 )
Capital base $ 714,713 $ 719,307 $ 749,679 $ 804,381 $ 837,928
Average capital base $ 700,795 $ 717,010 $ 734,493 $ 777,030 $ 821,155
Capital turnover (annualized) 1.92 1.97 1.97 1.93 1.89
 
Return on capital (annualized) (1) 16.0 % 16.9 % 15.1 % 11.9 % 8.0 %
 
Capital expenditures
Cash purchases of property and equipment $ 53,449 $ 82,919 $ 105,541 $ 119,836 $ 100,496
Non-cash purchases of property and equipment (3) $ 31,934   $ 5,096   $ 19,858   $ (13,311 ) $ 17,062  
Total capital expenditures $ 85,383 $ 88,015 $ 125,399 $ 106,525 $ 117,558
 
Customer gear $ 51,026 $ 60,099 $ 85,690 $ 73,022 $ 73,784
Data center build outs $ 5,767 $ 7,768 $ 13,228 $ 10,085 $ 12,441
Office build outs $ 3,413 $ 2,288 $ 7,860 $ 1,683 $ 6,700
Capitalized software and other projects $ 25,177   $ 17,860   $ 18,621   $ 21,735   $ 24,633  
Total capital expenditures $ 85,383 $ 88,015 $ 125,399 $ 106,525 $ 117,558
 
Infrastructure capacity and utilization
Megawatts under contract at period end 58.0 61.1 59.4 59.6 60.0
Megawatts available for use at period end 33.7 36.9 38.8 44.4 46.9
Megawatts utilized at period end 23.5 24.0 24.7 26.0 27.0
Annualized net revenue per average Megawatt of power utilized $ 58,179 $ 59,437 $ 59,499 $ 59,305 $ 58,662
   
(1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures below.
(2) Due to rounding, totals may not equal the sum of the line items in the table above.
(3) Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.
   
 
Consolidated Quarterly Statements of Income
(Unaudited)
 
Three Months Ended

(In thousands)

September 30,
2012

 

December 31,
2012

 

March 31,
2013

 

June 30,
2013

 

September 30,
2013

Net revenue $ 335,985 $ 352,909 $ 362,200 $ 375,847 $ 388,636
Costs and expenses:
Cost of revenue 107,348 109,012 113,610 117,658

127,404

Research and development

15,563

16,942

18,375

23,216

23,773

Sales and marketing 41,109 43,467 49,814 52,269 50,869
General and administrative

62,663

64,951

67,477

72,840

78,075

Depreciation and amortization   63,972     68,914     70,111     74,460     80,753  
Total costs and expenses   290,655     303,286     319,387     340,443     360,874  
Income from operations   45,330     49,623     42,813     35,404     27,762  
Other income (expense):
Interest expense (1,253 ) (991 ) (940 ) (833 ) (689 )
Interest and other income (expense)   38     245     199     (303 )   440  
Total other income (expense)   (1,215 )   (746 )   (741 )   (1,136 )   (249 )
Income before income taxes 44,115 48,877 42,072 34,268 27,513
Income taxes   16,918     18,970     14,811     11,901     11,202  
Net income $ 27,197   $ 29,907   $ 27,261   $ 22,367   $ 16,311  
 
Three Months Ended
(Percent of net revenue)

September 30,
2012

December 31,
2012

March 31,
2013

June 30,
2013

September 30,
2013

Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 32.0 % 30.9 % 31.4 % 31.3 %

32.8

%
Research and development

4.6

%

4.8

%

5.1

%

6.2

%

6.1

%
Sales and marketing 12.2 % 12.3 % 13.8 % 13.9 % 13.1 %
General and administrative

18.7

%

18.4

%

18.6

%

19.4

%

20.1

%
Depreciation and amortization   19.0 %   19.5 %   19.4 %   19.8 %   20.8 %
Total costs and expenses   86.5 %   85.9 %   88.2 %   90.6 %   92.9 %
Income from operations   13.5 %   14.1 %   11.8 %   9.4 %   7.1 %
Other income (expense):
Interest expense (0.4 )% (0.3 )% (0.3 )% (0.2 )% (0.2 )%
Interest and other income (expense)   0.0 %   0.1 %   0.1 %   (0.1 )%   0.1 %
Total other income (expense)   (0.4 )%   (0.2 )%   (0.2 )%   (0.3 )%   (0.1 )%
Income before income taxes 13.1 % 13.8 % 11.6 % 9.1 % 7.1 %
Income taxes   5.0 %   5.4 %   4.1 %   3.2 %   2.9 %
Net income   8.1 %   8.5 %   7.5 %   6.0 %   4.2 %
 
Due to rounding, totals may not equal the sum of the line items in the table above.
 
 

(1) Non-GAAP Financial Measures

Adjusted EBITDA (Non-GAAP financial measure)

We 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 table below:

   
Three Months Ended
(Dollars in thousands)

September 30,
2012

 

December 31,
2012

 

March 31,
2013

 

June 30,
2013

 

September 30,
2013

Net revenue $ 335,985 $ 352,909 $ 362,200 $ 375,847 $ 388,636
 
Income from operations $ 45,330 $ 49,623 $ 42,813 $ 35,404 $ 27,762
 
Net income $ 27,197 $ 29,907 $ 27,261 $ 22,367 $ 16,311
Plus: Income taxes 16,918 18,970 14,811 11,901 11,202
Plus: Total other (income) expense 1,215 746 741 1,136 249
Plus: Depreciation and amortization 63,972 68,914 70,111 74,460 80,753
Plus: Share-based compensation expense   12,418     11,244     12,183     13,315     16,959  
Adjusted EBITDA $ 121,720 $ 129,781 $ 125,107 $ 123,179 $ 125,474
 
Operating income margin 13.5 % 14.1 % 11.8 % 9.4 % 7.1 %
 
Adjusted EBITDA margin 36.2 % 36.8 % 34.5 % 32.8 % 32.3 %
 
 

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, and deferred rent); calculated on a quarterly basis.

We define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which is calculated as three percent of our annualized net revenue for the three months prior to 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 Comprehensive 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 Comprehensive 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.

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

   
Three Months Ended
(Dollars in thousands)

September 30,
2012

 

December 31,
2012

 

March 31,
2013

 

June 30,
2013

 

September 30,
2013

Income from operations $ 45,330 $ 49,623 $ 42,813 $ 35,404 $ 27,762
Effective tax rate   38.3 %   38.8 %   35.2 %   34.7 %   40.7 %
Net operating profit after tax (NOPAT) $ 27,969 $ 30,369 $ 27,743 $ 23,119 $ 16,463
 
Net income $ 27,197 $ 29,907 $ 27,261 $ 22,367 $ 16,311
 
Total assets at period end $ 1,241,765 $ 1,295,551 $ 1,348,350 $ 1,377,928 $ 1,451,769
Less: Excess cash (217,333 ) (249,712 ) (235,163 ) (217,950 ) (223,359 )
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable (177,328 ) (175,128 ) (197,686 ) (178,552 ) (213,268 )
Less: Deferred revenue (current and non-current) (18,483 ) (20,960 ) (21,811 ) (22,636 ) (22,211 )
Less: Other non-current liabilities, deferred income taxes, and deferred rent   (113,908 )   (130,444 )   (144,011 )   (154,409 )   (155,003 )
Capital base $ 714,713 $ 719,307 $ 749,679 $ 804,381 $ 837,928
 
Average total assets $ 1,190,247 $ 1,268,658 $ 1,321,951 $ 1,363,139 $ 1,414,849
Average capital base $ 700,795 $ 717,010 $ 734,493 $ 777,030 $ 821,155
 
Return on assets (annualized) 9.1 % 9.4 % 8.2 % 6.6 % 4.6 %
Return on capital (annualized) 16.0 % 16.9 % 15.1 % 11.9 % 8.0 %
 
 

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 Nine Months Ended
(In thousands)

September 30, 2013

September 30, 2013

Adjusted EBITDA $ 125,474 $ 373,760
Non-cash deferred rent 3,801 9,285
Total capital expenditures (117,558 ) (349,482 )
Cash payments for interest, net (661 ) (2,487 )
Cash payments for income taxes, net   (2,605 )   (12,355 )
Adjusted free cash flow $ 8,451   $ 18,721  

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