Rackspace Hosting Reports Fourth Quarter 2012 Results

  Rackspace Hosting Reports Fourth Quarter 2012 Results

For the quarter ended December31, 2012:

  *Net revenue of $353 million grew 25% year-over-year and 5.0% from Q3 2012
  *Adjusted EBITDA^(1) of $130 million grew 27% year-over-year and 6.6% from
    Q3 2012
  *Achieved adjusted EBITDA margin of 36.8%, up from 36.1% year-over-year and
    36.2% in Q3 2012
  *Net income of $30 million grew 19% year-over-year and 10.0% from Q3 2012

Business Wire

SAN ANTONIO -- February 12, 2013

Rackspace^® Hosting, Inc. (NYSE: RAX), the open cloud company, announced
financial results for the quarter ended December31, 2012.

Net revenue for the fourth quarter of 2012 was $353 million, up 5.0% from the
previous quarter and 25% from the fourth quarter of 2011. Net revenue for the
fourth quarter of 2012 was positively impacted by currency exchange rates when
compared to the fourth quarter of 2011 by $1.8 million and positively impacted
when compared to the previous quarter by $1.4 million.

Total server count increased to 90,524, up from 89,051 servers at the end of
the previous quarter, and total customers increased to 205,538, up from
197,635 at the end of the previous quarter.

“We are very pleased with the financial results we have delivered in 2012.
Even more importantly, we are excited about the growth opportunities that our
new set of open cloud products will provide us in the future,” said Karl
Pichler, chief financial officer.

Adjusted EBITDA for the quarter was $130 million, a 6.6% increase compared to
the third quarter of 2012 and a 27% increase compared to the fourth quarter of
2011. The adjusted EBITDA margin for the quarter was 36.8% compared to 36.2%
in the previous quarter and 36.1% for the fourth 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 fourth quarter of 2012, the non-cash data center lease
charge was $2.9 million.

Net income was $30 million for the quarter, up 10.0% from the previous quarter
and up 19% from the fourth quarter of 2011. Net income margin for the quarter
was 8.5% compared to 8.1% for the previous quarter and 8.8% in the fourth
quarter of 2011.

Cash flow from operating activities was $121 million for the fourth quarter of
2012. Capital expenditures were $88 million, including $60 million for
purchases of customer gear, $8 million for data center build outs, $2 million
for office build outs and $18 million for capitalized software and other
projects.

Adjusted free cash flow^(1) for the quarter was $39 million. Return on
capital^(1) improved to 16.9% in the fourth quarter, compared to 16.0% in the
prior quarter and 17.2% in the fourth quarter of 2011. Average monthly revenue
per server grew for the fourteenth consecutive quarter to $1,310 from $1,287
in the prior quarter and $1,191 in the fourth quarter of 2011.

At the end of the fourth quarter of 2012, cash and cash equivalents were $292
million, and debt including capital lease obligations totaled $125 million.

On a worldwide basis, Rackspace employed 4,852 Rackers as of December31,
2012, up from 4,596 in the previous quarter.

“During 2012 we made significant investments across the business to bolster
our systems, products, and service delivery capabilities. One of the most
important projects we completed in 2012 was the launch of our Open Cloud
platform,” said Lanham Napier, chief executive officer.

Rackspace Developments and Business Highlights

  *Rackspace was featured at #34 on FORTUNE Magazine’s “100 Best Companies to
    Work For” List. This is Rackspace’s fifth time in six years making the
    list. We were chosen for enhanced pay and leave practices, all while
    preserving and improving the company’s unique culture, even during growth.
  *Rackspace also enhanced its service offerings for its open cloud platform
    through Managed and Critical Application Services. Critical Application
    Services allows companies to focus on their core business while Rackspace
    keeps their vital applications running smoothly. Rackspace’s Managed Cloud
    Services became available for seven new products launched during the year
    as part of the open cloud platform. It offers customers access to a team
    that can help them plan, deploy, and run websites or applications on the
    Rackspace open cloud.
  *Rackspace also improved its SharePoint Services, offering a complete
    end-to-end SharePoint solution that provides design, development, support
    and training services.
  *Rackspace announced a strategic agreement with Hortonworks, a leader in
    Apache Hadoop development, implementation, support, operations and
    training, to empower customers with an enterprise-ready Hadoop platform
    that is easy to use in the Cloud. Together, Rackspace and Hortonworks will
    focus on eliminating the complexities that are required for implementing a
    Big Data solution. The joint effort will pursue an OpenStack-based Hadoop
    solution for the public and private cloud, which can easily be deployed in
    minutes.
  *Rackspace expanded its OpenStack^® training offering by launching the
    industry’s first certification program for the open source cloud computing
    software. Since launching the program for OpenStack in 2011, Rackspace has
    trained hundreds of students across North America, Europe, Asia, Africa
    and Australia. Rackspace currently offers a variety of public and private
    classes in which students learn how to use and operate OpenStack
    technology both in a public and private cloud environment.
  *Rackspace won the prestigious UK Customer Experience Award for IT &
    Telecoms. Rackspace was recognized as an outstanding leader among
    organizations that place customer service at the forefront of their
    commercial operation, which Rackspace delivers through a service approach
    we refer to as 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 888-857-6932 from the United States
and Canada or dial 719-325-2352 from abroad and reference pass code 9729354. 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 and was 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 for 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, the performance or market
share relating to products and services; any statements of expectation or
belief; and any statements or assumptions underlying any of the foregoing.
Risks, uncertainties and assumptions include infrastructure failures, the
deterioration of economic conditions or fluctuations, disruptions, instability
or downturns in the economy, the effectiveness of managing company growth,
technological and competitive factors, regulatory factors, and other risks
that are described in Rackspace Hosting's Form 10-Q for the quarter ended
September 30, 2012, filed with the SEC on November 7, 2012, and in Rackspace
Hosting's Form 10-K for the year ended December31, 2012, expected to be filed
by March 1, 2013. 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
                                                                   
                   Three Months Ended                              Year Ended
                   (Unaudited)                                                    (Unaudited)
(In thousands,     December        September       December        December 31,      December 31,
except per         31,           30,           31,             2011              2012
share data)        2011            2012            2012
Net revenue        $ 283,261       $ 335,985       $ 352,909       $ 1,025,064       $ 1,309,239
Costs and
expenses:
Cost of            82,851          94,731          95,456          309,095           367,479
revenue
Sales and          33,452          38,924          41,069          126,505           158,108
marketing
General and        72,349          93,028          97,847          270,581           361,066
administrative
Depreciation
and                54,844         63,972         68,914         195,412          249,845     
amortization
Total costs        243,496        290,655        303,286        901,593          1,136,498   
and expenses
Income from        39,765         45,330         49,623         123,471          172,741     
operations
Other income
(expense):
Interest           (1,304    )     (1,253    )     (991      )     (5,848      )     (4,749      )
expense
Interest and
other income       (226      )     38             245            (1,194      )     15          
(expense)
Total other
income             (1,530    )     (1,215    )     (746      )     (7,042      )     (4,734      )
(expense)
Income before      38,235          44,115          48,877          116,429           168,007
income taxes
Income taxes       13,188         16,918         18,970         40,018           62,589      
Net income         $ 25,047       $ 27,197       $ 29,907       $ 76,411         $ 105,418   
                                                                                     
Net income per
share
Basic              $ 0.19         $ 0.20         $ 0.22         $ 0.59           $ 0.78      
Diluted            $ 0.18         $ 0.19         $ 0.21         $ 0.55           $ 0.75      
                                                                                     
Weighted
average number
of shares
outstanding
Basic              131,423        135,946        137,055        129,922          135,279     
Diluted            138,912        141,474        142,549        138,064          141,265     

                                                        
Consolidated Balance Sheets
                                                             
(In thousands)                         December 31, 2011     December 31, 2012
                                                             (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents              $   159,856           $   292,061
Accounts receivable, net of
allowance for doubtful accounts
and customer credits of $3,420 as      68,709                92,834
of December 31, 2011 and $4,236 as
of December 31, 2012
Deferred income taxes                  9,841                 10,320
Prepaid expenses                       22,006                25,195
Other current assets                   2,953                4,835          
Total current assets                   263,365               425,245
                                                             
Property and equipment, net            627,490               724,985
Goodwill                               59,993                68,742
Intangible assets, net                 26,034                23,802
Other non-current assets               49,600               52,777         
Total assets                           $   1,026,482        $   1,295,551  
                                                             
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued           $   156,004           $   175,128
expenses
Current portion of deferred            14,835                17,265
revenue
Current portion of obligations         66,031                61,302
under capital leases
Current portion of debt                879                  1,744          
Total current liabilities              237,749               255,439
                                                             
Non-current deferred revenue           3,446                 3,695
Non-current obligations under          72,216                60,335
capital leases
Non-current debt                       —                     1,991
Non-current deferred income taxes      68,781                71,081
Non-current deferred rent              23,343                32,293
Other non-current liabilities          21,524               27,070         
Total liabilities                      427,059               451,904
                                                             
COMMITMENTS AND CONTINGENCIES
                                                             
Stockholders' equity:
Common stock                           132                   138
Additional paid-in capital             383,031               515,188
Accumulated other comprehensive        (14,732        )      (8,089         )
loss
Retained earnings                      230,992              336,410        
Total stockholders’ equity             599,423              843,647        
Total liabilities and                  $   1,026,482        $   1,295,551  
stockholders’ equity

                                                             
Consolidated Statements of Cash Flows
                                                                  
                  Three Months Ended                              Year Ended
                  (Unaudited)                                                  (Unaudited)
(in               December        September       December        December        December
thousands)        31,           30,           31,             31,             31,
                  2011            2012            2012            2011            2012
Cash Flows
From
Operating
Activities
Net income        $ 25,047        $ 27,197        $ 29,907        $ 76,411        $ 105,418
Adjustments
to reconcile
net income to
net cash
provided by
operating
activities
Depreciation
and               54,844          63,972          68,914          195,412         249,845
amortization
Loss on
disposal of       (110      )     597             624             247             1,586
equipment,
net
Provision for
bad debts and     1,451           1,426           1,741           5,913           6,300
customer
credits
Deferred          4,802           1,120           (4,568    )     13,991          (775      )
income taxes
Deferred rent     1,200           2,279           2,930           9,471           9,259
Share-based
compensation      7,585           12,418          11,244          28,773          41,546
expense
Excess tax
benefits from
share-based       (8,711    )     (5,145    )     (11,065   )     (20,627   )     (46,046   )
compensation
arrangements
Changes in
certain
assets and
liabilities
Accounts          (9,442    )     (9,789    )     (162      )     (26,805   )     (29,265   )
receivable
Income taxes      —               —               —               4,397           —
receivable
Prepaid
expenses and      7,494           (18,910   )     6,127           (2,597    )     (4,903    )
other current
assets
Accounts
payable and       15,626          25,027          15,062          38,886          66,268
accrued
expenses
Deferred          614             (997      )     2,477           (482      )     2,185
revenue
All other
operating         888            (190      )     (2,443    )     1,405          (1,919    )
activities
Net cash
provided by       101,288         99,005          120,788         324,395         399,499
operating
activities
                                                                                  
Cash Flows
From
Investing
Activities
Purchases of
property and      (63,385   )     (53,449   )     (82,919   )     (251,214  )     (270,374  )
equipment
Acquisitions,
net of cash       —               (5,233    )     —               (952      )     (5,945    )
acquired
All other
investing         63             3              56             168            98        
activities
Net cash used
in investing      (63,322   )     (58,679   )     (82,863   )     (251,998  )     (276,221  )
activities
                                                                                  
Cash Flows
From
Financing
Activities
Principal
payments of       (16,924   )     (17,928   )     (22,958   )     (65,778   )     (75,928   )
capital
leases
Principal
payments of       (437      )     (1,032    )     (51       )     (1,913    )     (1,962    )
notes payable
Payments for
debt issuance     —               —               —               (1,114    )     —
costs
Payments for
deferred          (2,399    )     —               (1,450    )     (5,299    )     (6,176    )
acquisition
obligations
Proceeds from     —               691             —               —               691
notes payable
Receipt of
Texas             —               —               —               —               3,500
Enterprise
Fund Grant
Proceeds from
employee          8,505           13,671          9,770           36,287          41,284
stock plans
Excess tax
benefits from
share-based       8,711          5,145          11,065         20,627         46,046    
compensation
arrangements
Net cash
provided by
(used in)         (2,544    )     547             (3,624    )     (17,190   )     7,455
financing
activities
                                                                                  
Effect of
exchange rate
changes on        (246      )     1,330           109             (292      )     1,472
cash and cash
equivalents
                                                                              
Increase in
cash and cash     35,176          42,203          34,410          54,915          132,205
equivalents
Cash and cash
equivalents,      124,680        215,448        257,651        104,941        159,856   
beginning of
period
Cash and cash
equivalents,      $ 159,856      $ 257,651      $ 292,061      $ 159,856      $ 292,061 
end of period
                                                                                  
Supplemental
cash flow
information:
Non-cash
purchases of      $ 15,970        $ 31,934        $ 5,096         $ 93,680        $ 67,308
property and
equipment

                     
Key Metrics - Quarter to Date

(Unaudited)
                                                                                                        
                         Three Months Ended
      (Dollar
      amounts in
      thousands,         December 31,     March 31,        June 30,         September        December 31,
      except average     2011           2012           2012           30,            2012
      monthly                                                               2012
      revenue per
      server)
      Growth
      Dedicated
      Cloud, net         $ 224,808        $ 236,604        $ 246,417        $ 256,559        $ 265,585
      revenue
      Public Cloud,      $ 58,453        $ 64,751        $ 72,573        $ 79,426        $ 87,324   
      net revenue
      Net revenue        $ 283,261        $ 301,355        $ 318,990        $ 335,985        $ 352,909
      Revenue growth
      (year over         31.9       %     31.0       %     29.0       %     27.0       %     24.6       %
      year)
                                                                                                        
      Net upgrades
      (monthly           2.0        %     1.5        %     1.7        %     1.6        %     1.2        %
      average)
      Churn (monthly     -0.8       %     -0.8       %     -0.8       %     -0.8       %     -0.7       %
      average)
      Growth in
      installed base     1.2        %     0.7        %     1.0        %     0.8        %     0.5        %
      (monthly
      average) (2)
                                                                                                        
      Number of
      customers at       172,510          180,866          190,958          197,635          205,538
      period end (3)
      Number of
      employees          4,040            4,335            4,528            4,596            4,852
      (Rackers) at
      period end
                                                                                                        
      Number of
      servers            79,805           82,438           84,978           89,051           90,524
      deployed at
      period end
      Average
      monthly            $ 1,191          $ 1,238          $ 1,270          $ 1,287          $ 1,310
      revenue per
      server
                                                                                                        
      Profitability
      Income from        $ 39,765         $ 37,084         $ 40,704         $ 45,330         $ 49,623
      operations
      Depreciation
      and                $ 54,844         $ 55,151         $ 61,808         $ 63,972         $ 68,914
      amortization
      Share-based
      compensation
      expense
      Cost of            $ 1,047          $ 1,236          $ 1,113          $ 1,282          $ 1,499
      revenue
      Sales and          $ 839            $ 1,114          $ 1,393          $ 1,943          $ 1,647
      marketing
      General and        $ 5,699         $ 6,159         $ 6,869         $ 9,193         $ 8,098    
      administrative
      Total
      share-based        $ 7,585         $ 8,509         $ 9,375         $ 12,418        $ 11,244   
      compensation
      expense
      Adjusted           $ 102,194        $ 100,744        $ 111,887        $ 121,720        $ 129,781
      EBITDA (1)
                                                                                                        
      Adjusted           36.1       %     33.4       %     35.1       %     36.2       %     36.8       %
      EBITDA margin
                                                                                                        
      Operating          14.0       %     12.3       %     12.8       %     13.5       %     14.1       %
      income margin
                                                                                                        
      Income from        $ 39,765         $ 37,084         $ 40,704         $ 45,330         $ 49,623
      operations
      Effective tax      34.5       %     35.5       %     35.7       %     38.3       %     38.8       %
      rate
      Net operating
      profit after       $ 26,046         $ 23,919         $ 26,173         $ 27,969         $ 30,369
      tax (NOPAT)
      (1)
      NOPAT margin       9.2        %     7.9        %     8.2        %     8.3        %     8.6        %
                                                                                                        
      Capital
      efficiency and
      returns
      Interest           $ 139,126        $ 143,978        $ 149,226        $ 150,112        $ 125,372
      bearing debt
      Stockholders'      $ 599,423        $ 668,436        $ 714,819        $ 781,934        $ 843,647
      equity
      Less: Excess       $ (125,865 )     $ (150,368 )     $ (177,169 )     $ (217,333 )     $ (249,712 )
      cash
      Capital base       $ 612,684        $ 662,046        $ 686,876        $ 714,713        $ 719,307
      Average            $ 607,477        $ 637,365        $ 674,461        $ 700,795        $ 717,010
      capital base
      Capital
      turnover           1.87             1.89             1.89             1.92             1.97
      (annualized)
                                                                                                        
      Return on
      capital            17.2       %     15.0       %     15.5       %     16.0       %     16.9       %
      (annualized)
      (1)
                                                                                                        
      Capital
      expenditures
      Purchases of
      property and       $ 63,385         $ 64,621         $ 69,385         $ 53,449         $ 82,919
      equipment
      Non-cash
      purchases of       $ 15,970        $ 17,695        $ 12,583        $ 31,934        $ 5,096    
      property and
      equipment
      Total capital      $ 79,355         $ 82,316         $ 81,968         $ 85,383         $ 88,015
      expenditures
                                                                                                        
      Customer gear      $ 47,376         $ 52,999         $ 53,746         $ 51,026         $ 60,099
      Data center        $ 6,568          $ 9,473          $ 3,285          $ 5,767          $ 7,768
      build outs
      Office build       $ 9,915          $ 4,666          $ 4,015          $ 3,413          $ 2,288
      outs
      Capitalized
      software and       $ 15,496        $ 15,178        $ 20,922        $ 25,177        $ 17,860   
      other projects
      Total capital      $ 79,355         $ 82,316         $ 81,968         $ 85,383         $ 88,015
      expenditures
                                                                                                        
      Infrastructure
      capacity and
      utilization
      Megawatts
      under contract     48.1             47.8             58.0             58.0             61.1
      at period end
      Megawatts
      available for      30.7             32.2             32.7             33.7             36.9
      use at period
      end
      Megawatts
      utilized at        20.9             21.4             22.7             23.5             24.0
      period end
      Annualized net
      revenue per
      average            $ 55,136         $ 56,994         $ 57,867         $ 58,179         $ 59,437
      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
(3)   us is included as more than one 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.
                                                                                                        

                             
      Key Metrics - Year to Date

      (Unaudited)
                                                                            
                                   Year Ended December 31,
      (Dollar amounts in
      thousands, except            2011                     2012
      average monthly
      revenue per server)
      Growth
      Dedicated Cloud, net         $   835,877                $  1,005,165
      revenue
      Public Cloud, net            $   189,187               $  304,074    
      revenue
      Net revenue                  $   1,025,064              $  1,309,239
      Revenue growth (year         31.3            %          27.7          %
      over year)
                                                                            
      Net upgrades                 1.9             %          1.5           %
      (monthly average)
      Churn (monthly               -0.9            %          -0.8          %
      average)
      Growth in installed
      base (monthly                1.0             %          0.8           %
      average) (2)
                                                                            
      Number of customers          172,510                    205,538
      at period end (3)
      Number of employees
      (Rackers) at period          4,040                      4,852
      end
                                                                            
      Number of servers
      deployed at period           79,805                     90,524
      end
      Average monthly              $   1,157                  $  1,278
      revenue per server
                                                                            
      Profitability
      Income from                  $   123,471                $  172,741
      operations
      Depreciation and             $   195,412                $  249,845
      amortization
      Share-based
      compensation expense
      Cost of revenue              $   4,220                  $  5,130
      Sales and marketing          $   2,313                  $  6,097
      General and                  $   22,240                $  30,319     
      administrative
      Total share-based            $   28,773                $  41,546     
      compensation expense
      Adjusted EBITDA (1)          $   347,656                $  464,132
                                                                            
      Adjusted EBITDA              33.9            %          35.5          %
      margin
                                                                            
      Operating income             12.0            %          13.2          %
      margin
                                                                            
      Income from                  $   123,471                $  172,741
      operations
      Effective tax rate           34.4            %          37.3          %
      Net operating profit
      after tax (NOPAT)            $   80,997                 $  108,309
      (1)
      NOPAT margin                 7.9             %          8.3           %
                                                                            
      Capital efficiency
      and returns
      Interest bearing             $   139,126                $  125,372
      debt
      Stockholders' equity         $   599,423                $  843,647
      Less: Excess cash            $   (125,865    )          $  (249,712   )
      Capital base                 $   612,684                $  719,307
      Average capital base         $   552,328                $  679,125
      Capital turnover             1.86                       1.93
                                                                            
      Return on capital            14.7            %          15.9          %
      (1)
                                                                            
      Capital expenditures
      Purchases of
      property and                 $   251,214                $  270,374
      equipment
      Non-cash purchases
      of property and              $   93,680                $  67,308     
      equipment
      Total capital                $   344,894                $  337,682
      expenditures
                                                                            
      Customer gear                $   196,096                $  217,870
      Data center build            $   49,947                 $  26,293
      outs
      Office build outs            $   35,752                 $  14,382
      Capitalized software         $   63,099                $  79,137     
      and other projects
      Total capital                $   344,894                $  337,682
      expenditures
                                                                            
      Infrastructure
      capacity and
      utilization
      Megawatts under
      contract at period           48.1                       61.1
      end
      Megawatts available
      for use at period            30.7                       36.9
      end
      Megawatts utilized           20.9                       24.0
      at period end
      Annual net revenue
      per average Megawatt         $   54,065                 $  58,188
      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 is included as more than one customer.
(3)   Furthermore, amounts include SaaS customers for Jungle Disk using a
      Rackspace storage solution. Jungle Disk customers using a third-party
      storage solution are excluded.

                
Consolidated Quarterly Statements of Income

(Unaudited)
                   
                   Three Months Ended
                   December 31,     March 31,        June 30,         September        December 31,
(In thousands)     2011           2012           2012           30,            2012
                                                                      2012
Net revenue        $ 283,261        $ 301,355        $ 318,990        $ 335,985        $ 352,909
Costs and
expenses:
Cost of            82,851           87,240           90,052           94,731           95,456
revenue
Sales and          33,452           38,502           39,613           38,924           41,069
marketing
General and        72,349           83,378           86,813           93,028           97,847
administrative
Depreciation
and                54,844          55,151          61,808          63,972          68,914    
amortization
Total costs        243,496         264,271         278,286         290,655         303,286   
and expenses
Income from        39,765          37,084          40,704          45,330          49,623    
operations
Other income
(expense):
Interest           (1,304    )      (1,272    )      (1,233    )      (1,253    )      (991      )
expense
Interest and
other income       (226      )      137             (405      )      38              245       
(expense)
Total other
income             (1,530    )      (1,135    )      (1,638    )      (1,215    )      (746      )
(expense)
Income before      38,235           35,949           39,066           44,115           48,877
income taxes
Income taxes       13,188          12,769          13,932          16,918          18,970    
Net income         $ 25,047        $ 23,180        $ 25,134        $ 27,197        $ 29,907  
                                                                                       
                   Three Months Ended
(Percent of        December 31,     March 31,        June 30,         September        December 31,
net revenue)       2011             2012             2012             30,              2012
                                                                      2012
Net revenue        100.0     %      100.0     %      100.0     %      100.0     %      100.0     %
Costs and
expenses:
Cost of            29.2      %      28.9      %      28.2      %      28.2      %      27.0      %
revenue
Sales and          11.8      %      12.8      %      12.4      %      11.6      %      11.6      %
marketing
General and        25.5      %      27.7      %      27.2      %      27.7      %      27.7      %
administrative
Depreciation
and                19.4      %      18.3      %      19.4      %      19.0      %      19.5      %
amortization
Total costs        86.0      %      87.7      %      87.2      %      86.5      %      85.9      %
and expenses
Income from        14.0      %      12.3      %      12.8      %      13.5      %      14.1      %
operations
Other income
(expense):
Interest           (0.5      )%     (0.4      )%     (0.4      )%     (0.4      )%     (0.3      )%
expense
Interest and
other income       (0.1      )%     0.0       %      (0.1      )%     0.0       %      0.1       %
(expense)
Total other
income             (0.5      )%     (0.4      )%     (0.5      )%     (0.4      )%     (0.2      )%
(expense)
Income before      13.5      %      11.9      %      12.2      %      13.1      %      13.8      %
income taxes
Income taxes       4.7       %      4.2       %      4.4       %      5.0       %      5.4       %
Net income         8.8       %      7.7       %      7.9       %      8.1       %      8.5       %
                                                                                                 
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      December        March 31,       June 30,        September       December
thousands)       31,           2012          2012          30,           31,
                 2011                                            2012            2012
Net revenue      $ 283,261       $ 301,355       $ 318,990       $ 335,985       $ 352,909
                                                                                 
Income from      $ 39,765        $ 37,084        $ 40,704        $ 45,330        $ 49,623
operations
                                                                                 
Net income       $ 25,047        $ 23,180        $ 25,134        $ 27,197        $ 29,907
Plus: Income     13,188          12,769          13,932          16,918          18,970
taxes
Plus: Total
other            1,530           1,135           1,638           1,215           746
(income)
expense
Plus:
Depreciation     54,844          55,151          61,808          63,972          68,914
and
amortization
Plus:
Share-based      7,585          8,509          9,375          12,418         11,244    
compensation
expense
Adjusted         $ 102,194       $ 100,744       $ 111,887       $ 121,720       $ 129,781
EBITDA
                                                                                 
Operating
income           14.0      %     12.3      %     12.8      %     13.5      %     14.1      %
margin
                                                                                 
Adjusted
EBITDA           36.1      %     33.4      %     35.1      %     36.2      %     36.8      %
margin

                                        
                                           Year Ended December 31,
(Dollars in thousands)                     2011            2012
Net revenue                                $ 1,025,064       $ 1,309,239
                                                             
Income from operations                     $ 123,471         $ 172,741
                                                             
Net income                                 $ 76,411          $ 105,418
Plus: Income taxes                         40,018            62,589
Plus: Total other (income) expense         7,042             4,734
Plus: Depreciation and amortization        195,412           249,845
Plus: Share-based compensation expense     28,773           41,546      
Adjusted EBITDA                            $ 347,656         $ 464,132
                                                             
Operating income margin                    12.0        %     13.2        %
                                                             
Adjusted EBITDA margin                     33.9        %     35.5        %
                                                                         

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).

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

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

We believe that ROC is an important metric for investors in evaluating our
company’s performance. ROC relates after-tax operating profits with the
capital that is placed into service. It is therefore a performance metric that
incorporates both the Statement of 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 ROC reconciliation to return on assets below.

              
                 Three Months Ended
(Dollars in      December 31,    March 31,       June 30,        September 30,   December 31,
thousands)       2011              2012              2012              2012              2012
Income from      $ 39,765          $ 37,084          $ 40,704          $ 45,330          $ 49,623
operations
Effective        34.5        %     35.5        %     35.7        %     38.3        %     38.8        %
tax rate
Net
operating        $ 26,046          $ 23,919          $ 26,173          $ 27,969          $ 30,369
profit after
tax (NOPAT)
                                                                                         
Net income       $ 25,047          $ 23,180          $ 25,134          $ 27,197          $ 29,907
                                                                                         
Total assets
at period        $ 1,026,482       $ 1,089,393       $ 1,138,728       $ 1,241,765       $ 1,295,551
end
Less: Excess     (125,865    )     (150,368    )     (177,169    )     (217,333    )     (249,712    )
cash
Less:
Accounts
payable and      (156,004    )     (153,668    )     (148,091    )     (177,328    )     (175,128    )
accrued
expenses
Less:
Deferred
revenue          (18,281     )     (20,195     )     (19,227     )     (18,483     )     (20,960     )
(current and
non-current)
Less: Other
non-current
liabilities,
deferred         (113,648    )     (103,116    )     (107,365    )     (113,908    )     (130,444    )
income
taxes, and
deferred
rent
Capital base     $ 612,684         $ 662,046         $ 686,876         $ 714,713         $ 719,307
                                                                                         
Average          $ 998,580         $ 1,057,938       $ 1,114,061       $ 1,190,247       $ 1,268,658
total assets
Average          $ 607,477         $ 637,365         $ 674,461         $ 700,795         $ 717,010
capital base
                                                                                         
Return on
assets           10.0        %     8.8         %     9.0         %     9.1         %     9.4         %
(annualized)
Return on
capital          17.2        %     15.0        %     15.5        %     16.0        %     16.9        %
(annualized)

                                            
                                               Year Ended December 31,
(Dollars in thousands)                         2011            2012
Income from operations                         $ 123,471         $ 172,741
Effective tax rate                             34.4        %     37.3        %
Net operating profit after tax (NOPAT)         $ 80,997          $ 108,309
                                                                 
Net income                                     $ 76,411          $ 105,418
                                                                 
Total assets at period end                     $ 1,026,482       $ 1,295,551
Less: Excess cash                              (125,865    )     (249,712    )
Less: Accounts payable and accrued             (156,004    )     (175,128    )
expenses
Less: Deferred revenue (current and            (18,281     )     (20,960     )
non-current)
Less: Other non-current liabilities,           (113,648    )     (130,444    )
deferred income taxes, and deferred rent
Capital base                                   $ 612,684         $ 719,307
                                                                 
Average total assets                           $ 895,545         $ 1,158,384
Average capital base                           $ 552,328         $ 679,125
                                                                 
Return on assets (Net income/Average total     8.5         %     9.1         %
assets)
Return on capital (NOPAT/Average capital       14.7        %     15.9        %
base)

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     Year Ended
(In thousands)                        December 31, 2012      December 31, 2012
Adjusted EBITDA                       $    129,781           $   464,132
Non-cash deferred rent                2,930                  9,259
Total capital expenditures            (88,015        )       (337,682      )
Cash payments for interest, net       (1,283         )       (4,809        )
Cash payments for income taxes,       (4,706         )      (11,906       )
net
Adjusted free cash flow               $    38,707            $   118,994

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)                       December 31, 2012
Obligations under capital leases             $   121,637
Debt                                         3,735          
Total debt                                   $   125,372
Less: Cash and cash equivalents              (292,061       )
Net debt                                     $   (166,689   )
Adjusted EBITDA (trailing twelve months)     $   464,132
Net leverage                                 (0.36          )  x

Contact:

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