Rackspace Hosting Reports Second Quarter 2012 Results

  Rackspace Hosting Reports Second Quarter 2012 Results

For the quarter ended June 30, 2012:

  *Net revenue of $319 million grew 29% year-over-year
  *Adjusted EBITDA ^(1) of $112 million grew 37% year-over-year
  *Achieved adjusted EBITDA margin of 35.1%, up from 33.0% year-over-year
  *Net income of $25 million grew 43% year-over-year

Business Wire

SAN ANTONIO -- August 07, 2012

Rackspace® Hosting, Inc. (NYSE: RAX), the open cloud company, announced
financial results for the quarter ended June 30, 2012.

Net revenue for the second quarter of 2012 was $319 million, up 5.9% from the
previous quarter and 29% from the second quarter of 2011. Net revenue for the
second quarter of 2012 was negatively impacted by currency exchange rates when
compared to the second quarter of 2011 by $2.3 million and positively impacted
compared to the previous quarter by $0.6 million.

Total server count increased to 84,978 up from 82,438 servers at the end of
the previous quarter, and total customers increased to 190,958, up from
180,866 at the end of the previous quarter.

“At the halfway point in the year, we have made a lot of progress on our plans
to broaden our product and services portfolio while simultaneously managing a
rapidly growing business. Keep your eyes open for more product announcements
in the coming weeks and we look forward to updating you on our progress in
November,” said Karl Pichler, chief financial officer.

Adjusted EBITDA for the quarter was $112 million, an 11.1% increase compared
to the first quarter of 2012 and a 37% increase compared to the second quarter
of 2011. The adjusted EBITDA margin for the quarter was 35.1% compared to
33.4% in the previous quarter and 33.0% for the second quarter of 2011.

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 second quarter of 2012, the non-cash data center lease
charge was $2.1 million.

Net income was $25 million for the quarter, up 8.4% from the previous quarter
and up 43% from the second quarter of 2011. Net income margin for the quarter
was 7.9% compared to 7.7% for the previous quarter and 7.1% in the second
quarter of 2011.

Cash flow from operating activities was $101 million for the second quarter of
2012. Capital expenditures were $82 million, including $54 million for
purchases of customer gear, $3 million for data center build outs, $4 million
for office build outs and $21 million for capitalized software and other
projects.

Adjusted free cash flow ^ (1) for the quarter was $28.7 million.

At the end of the second quarter of 2012, cash and cash equivalents were $215
million, and debt including capital lease obligations totaled $149 million.

On a worldwide basis, Rackspace employed 4,528 Rackers as of June 30, 2012, up
from 4,335 in the previous quarter.

“Last week we achieved a significant milestone in our 2012 plan by launching
Cloud Servers powered by OpenStack. This new offering embeds the latest
version of the OpenStack software to combine the on-demand scalability of
modern cloud infrastructure with the flexibility benefits of open source
technology. This product launch represents the culmination of nearly two years
of hard work by Rackers throughout the organization, and it will serve as the
core of our new Open Cloud platform,” said Lanham Napier, chief executive
officer.

Rackspace Developments and Business Highlights

  *Announced availability of production-ready open cloud powered by
    OpenStack®. The latest software release leverages power of
    community-driven development to extend on-demand compute, storage and
    networking capabilities; development process matures to help ensure
    platform quality and reliability.
  *2012 Microsoft Hosting Partner of the Year. Rackspace was chosen from more
    than 3,000 global Microsoft partners recognized in the managed, cloud and
    hybrid hosting industry. This marks the fourth time Rackspace has captured
    this honor.
  *2012 Computerworld 100 Best Places to Work in IT. The criteria was based
    on salaries, turnover, training and development, recognizing and rewarding
    outstanding performances, benefits, and the cost of pursuing technology
    certifications. Computerworld actually surveyed IT employees currently
    employed at the 100 organizations that made the list to get an accurate
    survey result.
  *Business Insider and Glassdoor.com collaborate to name Rackspace one of
    The 25 Best Tech Companies To Work For In 2012. All the reviews and
    ratings were taken within the last year to be as up to date as possible.
    Just a few of the principles they accounted for were culture, lifestyle
    and what you can learn while working at these companies.

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 888-504-7960 from the United States
and Canada or dial 719-785-1766 from abroad and reference pass code 3500741. A
live webcast and a replay of the conference call will be available on
Rackspace’s website, located at ir.rackspace.com.

About Rackspace Hosting

Rackspace® Hosting(NYSE: RAX) is the open cloud company, delivering open
technologies and powering more than 180,000 customers worldwide. Rackspace
provides its renowned Fanatical Support® to customers across a broad portfolio
of ITproducts, including Public and Private Cloud and Hybrid and Dedicated
Hosting. The company offers customers choice andflexibility, and helps them
avoid vendor lock-in. Rackspace has been recognized by Bloomberg BusinessWeek
as a Top 100 Performing Technology Company and is featured on Fortune’s list
of 100 Best Companies to Work For. Rackspace was positioned in the Leaders
Quadrant by Gartner Inc. in the “2011 Magic Quadrant forManaged Hosting.”
Rackspace is headquartered in San Antonio with offices around the world. The
company website can be found at 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, and 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, 2011, filed with the SEC on February 17, 2012 and in Rackspace
Hosting’s Form 10-Q for the quarter ended June 30, 2012, 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                        Six Months Ended
(In thousands,     June 30,      March 31,     June 30,      June 30,      June 30,
except per         2011         2012         2012          2011         2012
share data)
Net revenue        $ 247,229     $ 301,355     $ 318,990     $ 477,231     $ 620,345
Costs and
expenses:
Cost of              74,057        87,240        90,052        143,799       177,292
revenue
Sales and            31,477        38,502        39,613        61,215        78,115
marketing
General and          66,090        83,378        86,813        128,531       170,191
administrative
Depreciation
and                 46,952      55,151      61,808      91,050      116,959 
amortization
Total costs         218,576     264,271     278,286     424,595     542,557 
and expenses
Income from         28,653      37,084      40,704      52,636      77,788  
operations
Other income
(expense):
Interest             (1,522  )     (1,272  )     (1,233  )     (3,013  )     (2,505  )
expense
Interest and
other income        (614    )    137         (405    )    (692    )    (268    )
(expense)
Total other
income              (2,136  )    (1,135  )    (1,638  )    (3,705  )    (2,773  )
(expense)
Income before        26,517        35,949        39,066        48,931        75,015
income taxes
Income taxes        8,956       12,769      13,932      17,549      26,701  
Net income         $ 17,561     $ 23,180     $ 25,134     $ 31,382     $ 48,314  
                                                                           
Net income per
share
Basic              $ 0.14       $ 0.17       $ 0.19       $ 0.24       $ 0.36    
Diluted            $ 0.13       $ 0.17       $ 0.18       $ 0.23       $ 0.34    
                                                                           
Weighted
average number
of shares
outstanding
Basic               129,706     133,062     135,033     128,780     134,045 
Diluted             137,880     139,964     140,786     137,369     140,396 

                                                             
                                                                 
Consolidated Balance Sheets
                                                                 
(In thousands)                               December 31, 2011   June 30, 2012
                                                                 (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents                    $   159,856         $ 215,448
Accounts receivable, net of allowance
for doubtful accounts and customer
credits of                                       68,709            85,161
$3,420 as of December 31, 2011 and
$3,725 as of June 30, 2012
Deferred income taxes                            9,841             9,774
Prepaid expenses                                 22,006            13,120
Other current assets                            2,953           3,996     
Total current assets                             263,365           327,499
                                                                 
Property and equipment, net                      627,490           677,960
Goodwill                                         59,993            62,177
Intangible assets, net                           26,034            23,760
Other non-current assets                        49,600          47,332    
Total assets                                 $   1,026,482      $ 1,138,728 
                                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses        $   156,004         $ 148,091
Current portion of deferred revenue              14,835            16,065
Current portion of obligations under             66,031            69,210
capital leases
Current portion of debt                         879             650       
Total current liabilities                        237,749           234,016
                                                                 
Non-current deferred revenue                     3,446             3,162
Non-current obligations under capital            72,216            77,939
leases
Non-current debt                                 —                 1,427
Non-current deferred income taxes                68,781            55,164
Non-current deferred rent                        23,343            27,754
Other non-current liabilities                   21,524          24,447    
Total liabilities                                427,059           423,909
                                                                 
COMMITMENTS AND CONTINGENCIES
                                                                 
Stockholders' equity:
Common stock                                     132               135
Additional paid-in capital                       383,031           449,133
Accumulated other comprehensive loss             (14,732    )      (13,755   )
Retained earnings                               230,992         279,306   
Total stockholders’ equity                      599,423         714,819   
Total liabilities and stockholders’          $   1,026,482      $ 1,138,728 
equity

                                                        
                                                            
Consolidated Statements of Cash Flows
(Unaudited)
                                                            
                 Three Months Ended                        Six Months Ended
(in               June 30,     March 31,    June 30,      June 30,      June 30,
thousands)        2011          2012          2012          2011           2012
Cash Flows
From
Operating
Activities
Net income        $ 17,561      $ 23,180      $ 25,134      $ 31,382       $ 48,314
Adjustments
to reconcile
net income to
net cash
provided by
operating
activities
Depreciation
and                 46,952        55,151        61,808        91,050         116,959
amortization
Loss on
disposal of         90            279           86            272            365
equipment,
net
Provision for
bad debts and       1,635         1,455         1,678         3,238          3,133
customer
credits
Deferred            2,179         4,275         (1,602  )     5,859          2,673
income taxes
Deferred rent       2,783         1,930         2,120         5,814          4,050
Share-based
compensation        5,983         8,509         9,375         13,793         17,884
expense
Excess tax
benefits from
share-based         (692    )     (20,235 )     (9,601  )     (1,590   )     (29,836  )
compensation
arrangements
Changes in
certain
assets and
liabilities
Accounts            (12,154 )     (9,008  )     (10,306 )     (17,870  )     (19,314  )
receivable
Income taxes        1,928         —             —             1,928          —
receivable
Prepaid
expenses and        1,268         1,708         6,172         2,478          7,880
other current
assets
Accounts
payable and         12,589        9,841         15,722        20,315         25,563
accrued
expenses (1)
Deferred            (476    )     1,496         (791    )     (323     )     705
revenue
All other
operating          (1,611  )    (820    )    1,534       978          714      
activities
Net cash
provided by         78,035        77,761        101,329       157,324        179,090
operating
activities
                                                                           
Cash Flows
From
Investing
Activities
Purchases of
property and        (73,295 )     (67,604 )     (65,786 )     (121,982 )     (133,390 )
equipment (1)
Acquisitions,
net of cash         —             (712    )     —             (952     )     (712     )
acquired
All other
investing          —           7           32          —            39       
activities
Net cash used
in investing        (73,295 )     (68,309 )     (65,754 )     (122,934 )     (134,063 )
activities
                                                                           
Cash Flows
From
Financing
Activities
Principal
payments of         (16,198 )     (17,273 )     (17,769 )     (31,420  )     (35,042  )
capital
leases
Principal
payments of         (433    )     (439    )     (440    )     (1,041   )     (879     )
notes payable
Payments for
deferred            —             (1,826  )     (2,900  )     —              (4,726   )
acquisition
obligations
Receipt of
Texas               —             3,500         —             —              3,500
Enterprise
Fund Grant
Proceeds from
employee            9,216         12,381        5,462         22,967         17,843
stock plans
Excess tax
benefits from
share-based        692         20,235      9,601       1,590        29,836   
compensation
arrangements
Net cash
provided by
(used in)           (6,723  )     16,578        (6,046  )     (7,904   )     10,532
financing
activities
                                                                           
Effect of
exchange rate
changes on          140           645           (612    )     598            33
cash and cash
equivalents
                                                                       
Increase
(decrease) in       (1,843  )     26,675        28,917        27,084         55,592
cash and cash
equivalents
                                                                           
Cash and cash
equivalents,        133,868       159,856       186,531       104,941        159,856
beginning of
period
                                                                       
Cash and cash
equivalents,      $ 132,025    $ 186,531    $ 215,448    $ 132,025     $ 215,448  
end of period
                                                                           
Supplemental
cash flow
information:
Acquisition
of property
and equipment
by vendor         $ 20,567      $ 22,564      $ 21,380      $ 39,576       $ 43,944
financed
capital
leases
Acquisition
of property
and equipment       —             —             2,045         —              2,045
by vendor
financed
notes payable
Increase
(decrease) in
property and
equipment in       1,459       (7,852  )    (7,243  )    10,423       (15,095  )
accounts
payable and
accrued
expenses
Non-cash
purchases of      $ 22,026     $ 14,712     $ 16,182     $ 49,999      $ 30,894   
property and
equipment
                                                                           
Cash payments
for interest,     $ 1,313       $ 1,258       $ 1,208       $ 2,776        $ 2,466
net of amount
capitalized
Cash payments
for income        $ 7,065       $ 1,955       $ 2,117       $ 11,635       $ 4,072
taxes

      The amounts for the three and six months ended June 30, 2011 and the
      three months ended March 31, 2012 were corrected for immaterial
      errors.The change was a reclassification between purchases of property
(1)  and equipment in investing activities and the change in accounts payable
      and accrued expenses in operating activities.The impact of the change
      is reflected in the supplemental line "Increase (decrease) in property
      and equipment in accounts payable and accrued expenses." There were no
      changes to the other financial statements.

                
                   
Key Metrics - Quarter to Date
(Unaudited)
                   
                   Three Months Ended
(Dollar
amounts in
thousands,         June 30,       September     December 31,   March 31,      June 30,
except average     2011          30,          2011          2012          2012
monthly                           2011
revenue per
server)
Growth
Dedicated
Cloud, net         $ 204,275      $ 213,899     $ 224,808      $ 236,604      $ 246,417
revenue
Public Cloud,      $ 42,954      $ 50,673     $ 58,453      $ 64,751      $ 72,573   
net revenue
Net revenue        $ 247,229      $ 264,572     $ 283,261      $ 301,355      $ 318,990
Revenue growth
(year over           32.0     %     32.5    %     31.9     %     31.0     %     29.0     %
year)
                                                                              
Net upgrades
(monthly             1.8      %     1.8     %     2.0      %     1.5      %     1.7      %
average)
Churn (monthly      -0.9     %    -0.9    %    -0.8     %    -0.8     %    -0.8     %
average)
Growth in
installed base       0.9      %     0.9     %     1.2      %     0.7      %     1.0      %
(monthly
average) (2)
                                                                              
Number of
customers at         152,578        161,422       172,510        180,866        190,958
period end (3)
Number of
employees            3,712          3,799         4,040          4,335          4,528
(Rackers) at
period end
                                                                              
Number of
servers              74,028         78,717        79,805         82,438         84,978
deployed at
period end
Average
monthly            $ 1,141        $ 1,155       $ 1,191        $ 1,238        $ 1,270
revenue per
server
                                                                              
Profitability
Income from        $ 28,653       $ 31,070      $ 39,765       $ 37,084       $ 40,704
operations
Depreciation
and                $ 46,952       $ 49,518      $ 54,844       $ 55,151       $ 61,808
amortization
Share-based
compensation
expense
Cost of            $ 756          $ 1,005       $ 1,047        $ 1,236        $ 1,113
revenue
Sales and          $ 609          $ 864         $ 839          $ 1,114        $ 1,393
marketing
General and        $ 4,618       $ 5,526      $ 5,699       $ 6,159       $ 6,869    
administrative
Total
share-based        $ 5,983       $ 7,395      $ 7,585       $ 8,509       $ 9,375    
compensation
expense
Adjusted           $ 81,588       $ 87,983      $ 102,194      $ 100,744      $ 111,887
EBITDA (1)
                                                                              
Adjusted             33.0     %     33.3    %     36.1     %     33.4     %     35.1     %
EBITDA margin
                                                                              
Operating            11.6     %     11.7    %     14.0     %     12.3     %     12.8     %
income margin
                                                                              
Income from        $ 28,653       $ 31,070      $ 39,765       $ 37,084       $ 40,704
operations
Effective tax       33.8     %    31.7    %    34.5     %    35.5     %    35.7     %
rate
Net operating
profit after       $ 18,968       $ 21,221      $ 26,046       $ 23,919       $ 26,173
tax (NOPAT)
(1)
NOPAT margin         7.7      %     8.0     %     9.2      %     7.9      %     8.2      %
                                                                              
Capital
efficiency and
returns
Interest           $ 138,841      $ 144,152     $ 139,126      $ 143,978      $ 149,226
bearing debt
Stockholders'      $ 511,843      $ 551,049     $ 599,423      $ 668,436      $ 714,819
equity
Less: Excess       $ (102,358 )   $ (92,931 )   $ (125,865 )   $ (150,368 )   $ (177,169 )
cash
Capital base       $ 548,326      $ 602,270     $ 612,684      $ 662,046      $ 686,876
Average            $ 527,635      $ 575,298     $ 607,477      $ 637,365      $ 674,461
capital base
Capital
turnover             1.87           1.84          1.87           1.89           1.89
(annualized)
                                                                              
Return on
capital              14.4     %     14.8    %     17.2     %     15.0     %     15.5     %
(annualized)
(1)
                                                                              
Capital
expenditures
Purchases of
property and       $ 73,295       $ 67,916      $ 56,629       $ 67,604       $ 65,786
equipment^(4)
Non-cash
purchases of       $ 22,026      $ 25,642     $ 22,726      $ 14,712      $ 16,182   
property and
equipment^(4)
Total capital      $ 95,321       $ 93,558      $ 79,355       $ 82,316       $ 81,968
expenditures
                                                                              
Customer gear      $ 48,777       $ 53,643      $ 47,376       $ 52,999       $ 53,746
Data center        $ 17,491       $ 16,715      $ 6,568        $ 9,473        $ 3,285
build outs
Office build       $ 14,074       $ 8,806       $ 9,915        $ 4,666        $ 4,015
outs
Capitalized
software and       $ 14,979      $ 14,394     $ 15,496      $ 15,178      $ 20,922   
other projects
Total capital      $ 95,321       $ 93,558      $ 79,355       $ 82,316       $ 81,968
expenditures
                                                                              
Infrastructure
capacity and
utilization
Megawatts
under contract       38.0           41.9          48.1           47.8           58.0
at period end
Megawatts
available for        27.0           29.7          30.7           32.2           32.7
use at period
end
Megawatts
utilized at          19.0           20.2          20.9           21.4           22.7
period end
Annualized net
revenue per
average            $ 53,455       $ 53,994      $ 55,136       $ 56,994       $ 57,867
Megawatt of
power utilized

(1)  See discussion and reconciliation of our Non-GAAP financial measures to
      the most comparable GAAP measures.
(2)   Due to rounding, totals may not equal the sum of the line items in the
      table above.
      Customers are counted on an account basis, and therefore a customer with
      more than one account with us would be included as more than one
(3)   customer.Furthermore, amounts include SaaS customers for Jungle Disk
      using a Rackspace storage solution. Jungle Disk customers using a
      third-party storage solution are excluded.
      Purchases of property and equipment in prior periods were corrected for
(4)   immaterial errors.The change was a reclassification between purchases
      of property and equipment and non-cash purchases of property and
      equipment.There was no impact on total capital expenditures.

                
                   
Consolidated Quarterly Statements of Income
(Unaudited)
                   
                   Three Months Ended
                   June 30,       September      December 31,   March 31,      June 30,
(In thousands)     2011          30,           2011          2012          2012
                                  2011
                                                                               
Net revenue        $ 247,229      $ 264,572      $ 283,261      $ 301,355      $ 318,990
Costs and
expenses:
Cost of              74,057         82,445         82,851         87,240         90,052
revenue
Sales and            31,477         31,838         33,452         38,502         39,613
marketing
General and          66,090         69,701         72,349         83,378         86,813
administrative
Depreciation
and                 46,952       49,518       54,844       55,151       61,808  
amortization
Total costs         218,576      233,502      243,496      264,271      278,286 
and expenses
Income from         28,653       31,070       39,765       37,084       40,704  
operations
Other income
(expense):
Interest             (1,522  )      (1,531  )      (1,304  )      (1,272  )      (1,233  )
expense
Interest and
other income        (614    )     (276    )     (226    )     137          (405    )
(expense)
Total other
income              (2,136  )     (1,807  )     (1,530  )     (1,135  )     (1,638  )
(expense)
Income before        26,517         29,263         38,235         35,949         39,066
income taxes
Income taxes        8,956        9,281        13,188       12,769       13,932  
Net income         $ 17,561      $ 19,982      $ 25,047      $ 23,180      $ 25,134  
                                                                               
                   Three Months Ended
(Percent of        June 30,       September      December 31,   March 31,      June 30,
net revenue)       2011           30,            2011           2012           2012
                                  2011
                                                                               
Net revenue          100.0   %      100.0   %      100.0   %      100.0   %      100.0   %
Costs and
expenses:
Cost of              30.0    %      31.2    %      29.2    %      28.9    %      28.2    %
revenue
Sales and            12.7    %      12.0    %      11.8    %      12.8    %      12.4    %
marketing
General and          26.7    %      26.3    %      25.5    %      27.7    %      27.2    %
administrative
Depreciation
and                 19.0    %     18.7    %     19.4    %     18.3    %     19.4    %
amortization
Total costs         88.4    %     88.3    %     86.0    %     87.7    %     87.2    %
and expenses
Income from         11.6    %     11.7    %     14.0    %     12.3    %     12.8    %
operations
Other income
(expense):
Interest             (0.6    )%     (0.6    )%     (0.5    )%     (0.4    )%     (0.4    )%
expense
Interest and
other income        (0.2    )%    (0.1    )%    (0.1    )%    0.0     %     (0.1    )%
(expense)
Total other
income              (0.9    )%    (0.7    )%    (0.5    )%    (0.4    )%    (0.5    )%
(expense)
Income before        10.7    %      11.1    %      13.5    %      11.9    %      12.2    %
income taxes
Income taxes        3.6     %     3.5     %     4.7     %     4.2     %     4.4     %
Net income          7.1     %     7.6     %     8.8     %     7.7     %     7.9     %

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 Adjusted EBITDA to net income reconciliations in the table below.

              
                 Three Months Ended
(Dollars in      June 30,      September     December      March 31,     June 30,
thousands)       2011         30,          31,          2012         2012
                               2011          2011
Net revenue      $ 247,229     $ 264,572     $ 283,261     $ 301,355     $ 318,990
                                                                         
Income from      $ 28,653      $ 31,070      $ 39,765      $ 37,084      $ 40,704
operations
                                                                         
Net income       $ 17,561      $ 19,982      $ 25,047      $ 23,180      $ 25,134
Plus: Income       8,956         9,281         13,188        12,769        13,932
taxes
Plus: Total
other              2,136         1,807         1,530         1,135         1,638
(income)
expense
Plus:
Depreciation       46,952        49,518        54,844        55,151        61,808
and
amortization
Plus:
Share-based       5,983       7,395       7,585       8,509       9,375   
compensation
expense
Adjusted         $ 81,588      $ 87,983      $ 102,194     $ 100,744     $ 111,887
EBITDA
                                                                         
Operating
income             11.6    %     11.7    %     14.0    %     12.3    %     12.8    %
margin
                                                                         
Adjusted
EBITDA             33.0    %     33.3    %     36.1    %     33.4    %     35.1    %
margin
                                                                                   

Return on Capital (ROC) (Non-GAAP financial measure)

We define Return on Capital (ROC) as follows:

                 ROC = Net Operating Profit After Tax (NOPAT)
                             Average Capital Base

NOPAT = Income from operations x (1 – Effective tax rate)

Average capital base = Average of (Interest bearing debt + stockholders’
equity – excess cash) = Average of (Total assets – excess cash – accounts
payables and accrued expenses – deferred 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 to 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 consider to be
the most directly comparable GAAP measure. 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 ROC
reconciliation to return on assets below.

              
                 Three Months Ended
(Dollars in      June 30,       September      December 31,    March 31,       June 30,
thousands)       2011          30,           2011           2012           2012
                                2011
Income from      $ 28,653       $ 31,070       $ 39,765        $ 37,084        $ 40,704
operations
Effective         33.8     %    31.7     %    34.5      %    35.5      %    35.7      %
tax rate
Net
operating        $ 18,968       $ 21,221       $ 26,046        $ 23,919        $ 26,173
profit after
tax (NOPAT)
                                                                               
Net income       $ 17,561       $ 19,982       $ 25,047        $ 23,180        $ 25,134
                                                                               
Total assets
at period        $ 887,576      $ 970,677      $ 1,026,482     $ 1,089,393     $ 1,138,728
end
Less: Excess       (102,358 )     (92,931  )     (125,865  )     (150,368  )     (177,169  )
cash
Less:
Accounts
payable and        (145,609 )     (148,464 )     (156,004  )     (153,668  )     (148,091  )
accrued
expenses
Less:
Deferred
revenue            (18,687  )     (17,772  )     (18,281   )     (20,195   )     (19,227   )
(current and
non-current)
Less: Other
non-current
liabilities,
deferred          (72,596  )    (109,240 )    (113,648  )    (103,116  )    (107,365  )
income
taxes, and
deferred
rent
Capital base     $ 548,326      $ 602,270      $ 612,684       $ 662,046       $ 686,876
                                                                               
Average          $ 859,495      $ 929,127      $ 998,580       $ 1,057,938     $ 1,114,061
total assets
Average          $ 527,635      $ 575,298      $ 607,477       $ 637,365       $ 674,461
capital base
                                                                               
Return on
assets             8.2      %     8.6      %     10.0      %     8.8       %     9.0       %
(annualized)
Return on
capital            14.4     %     14.8     %     17.2      %     15.0      %     15.5      %
(annualized)
                                                                                           

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 an important metric for investors
in evaluating how a company is currently using cash generated and may indicate
its ability to generate cash that can potentially be used by the business for
capital investments, acquisitions, reduction of debt, payment of dividends,
etc. Note that Adjusted Free Cash Flow is not a measure of financial
performance under GAAP and may not be comparable to similarly titled measures
reported by other companies. See our Adjusted Free Cash Flow reconciliation to
Adjusted EBITDA below, as well as our reconciliation of Net income to Adjusted
EBITDA provided above.

                                                         
                                        Three Months Ended  Six Months Ended
(In thousands)                          June 30, 2012       June 30, 2012
Adjusted EBITDA                         $    111,887         $   212,631
Non-cash deferred rent                       2,120               4,050
Total capital expenditures                   (81,968   )         (164,284  )
Cash payments for interest, net              (1,209    )         (2,435    )
Cash payments for income taxes, net         (2,100    )       (3,775    )
Adjusted free cash flow                 $    28,730          $   46,187
                                                             

Net Leverage (Non-GAAP financial measure)

We define Net Leverage as Net Debt divided by Adjusted EBITDA (trailing twelve
months).

We believe that Net Leverage is an important metric for investors in
evaluating a company’s liquidity. Note that Net Leverage is not a measure of
financial performance under GAAP and may not be comparable to similarly titled
measures reported by other companies. We believe that Net Leverage provides an
additional indicator when assessing our liquidity, capital structure and
leverage and provides insight into a company's ability to assume more debt if
and when required. A negative Net Leverage indicates that our cash and cash
equivalents is greater than our total debt as of the balance sheet date. See
our Net Leverage calculation below.

                                         
                                           As of
(Dollars in thousands)                     June 30, 2012
Obligations under capital leases           $  147,149
Debt                                         2,077    
Total debt                                 $  149,226
Less: Cash and cash equivalents              (215,448 )
Net debt                                   $  (66,222  )
Adjusted EBITDA (trailing twelve months)   $  402,808
                                                         
Net leverage                                  (0.16    ) x

Contact:

Rackspace Hosting
Investor Relations
Bryan McGrath, 210-312-5230
ir@rackspace.com
or
Corporate Communications
Rachel Ferry, 210-312-3732
rachel.ferry@rackspace.com