Rackspace Hosting Reports First Quarter 2014 Results

  Rackspace Hosting Reports First Quarter 2014 Results

Business Wire

SAN ANTONIO -- May 12, 2014

Rackspace^® Hosting, Inc. (NYSE: RAX) announced financial results for the
quarter ended March31, 2014.

Net revenue for the first quarter of 2014 was $421 million, up 3.2% from the
previous quarter and 16% from the first quarter of 2013. Net revenue for the
first quarter of 2014 was positively impacted by currency exchange rates when
compared to the previous quarter by $2.4million and positively impacted when
compared to the first quarter of 2013 by $6.6 million.

For the second quarter of 2014, the company is forecasting
quarter-over-quarter sequential net revenue growth of 3% to 4.5%, resulting in
net revenue in the range of $434 million to $440 million.

“Our first quarter revenue growth came in as expected and we expect growth to
improve in the second quarter,” said Graham Weston, Chairman and CEO. “We are
encouraged by qualitative factors, including the thousands of new customers we
added in the quarter, including one of the largest we’ve ever landed. We also
added significant new workloads for existing customers including Alex and Ani,
Appboy, Clarks shoes, Under Armour and SunPower. Each of these customers
values our managed cloud approach and chose us over providers of less
expensive unmanaged infrastructure.”

Total server count increased to 106,229, up from 103,886 servers at the end of
the previous quarter.

Adjusted EBITDA^(1) for the quarter was $140 million, a 5.8% increase compared
to the fourth quarter of 2013. Adjusted EBITDA margin for the quarter was
33.2% compared to 32.4% in the previous quarter.

The company expects Adjusted EBITDA margin to be in the range of 32% to 34% in
the second quarter of 2014.

Net income was $25 million for the quarter, up 22.3% from the previous
quarter. Net income margin for the quarter was 6.0% compared to 5.1% for the
previous quarter.

Cash flow from operating activities was $142 million for the first quarter of
2014. Capital expenditures were $101million, including $61 million for
purchases of customer gear, $11 million for data center build outs, $9 million
for office build outs and $20 million for capitalized software and other
projects.

Adjusted Free Cash Flow^(1) for the quarter was $40 million. Return on
Capital^(1) was 11.4% in the first quarter, compared to 9.6% in the prior
quarter. Average monthly revenue per server was $1,336, compared to $1,322 in
the prior quarter.

At the end of the first quarter of 2014, cash and cash equivalents were $314
million, and interest-bearing debt including capital lease obligations totaled
$53 million.

On a worldwide basis, Rackspace employed 5,743 Rackers as of March31, 2014,
up from 5,651 in the previous quarter.

Rackspace Business Highlights

  *Rackspace appointed Ryan Neading chief information officer.Neading will
    be responsible for the Rackspace billing systems, internal IT systems and
    tools, technology operations, operational metrics and interfacing with
    external suppliers and resource providers. Neading brings with him over a
    decade of leadership experience and specialization in the high tech
    industry. Prior to joining Rackspace, Neading served as the co-leader of
    eBay’s development site in Austin.
  *Rackspace launched its Digital Services Practice to provide digital
    marketing expertise. Rackspace Digital delivers expertise to help
    companies more effectively engage with customers via a website,
    portal/extranet, mobile app or online store. By working hand-in-hand with
    software platforms and system integrators, Rackspace Digital provides
    reliable, fully managed service to help ensure the customer’s brand is
    never compromised.
  *Rackspace ranked No. 26 on the Sunday Times "Top 100 Best Companies to
    Work for in London" list. This is the ninth consecutive year Rackspace has
    received this award. The Sunday Times recognized Rackspace for its
    attitude towards Racker training and personal development and reports that
    Rackspace employees love their jobs, have competitive salaries, and have
    opportunities for personal career development.
  *Rackspace, along with Digital Realty Trust, Inc., broke ground on a new
    130,000 square foot data center facility located in Crawley, West Sussex.
    The 15 acre campus will eventually consist of four data suites with 10 MW
    of total capacity. The initial outlay, which provides 6 MW across two data
    suites, is due to be delivered in the first half of 2015.
  *Rackspace launched ObjectRocket, its NoSQL MongoDB Database-as-a-Service
    (DBaaS), in its UK data center. With the open source-based MongoDB
    solution, Rackspace will broaden its portfolio to offer European customers
    a NoSQL DBaaS for big data applications. This offering will be built upon
    hardware optimized specifically for MongoDB and will be easily accessed
    and integrated into existing systems. ObjectRocket is a sharded and fully
    managed MongoDB service built with a set of tools and APIs designed to
    maximize uptime and reduce administration time - all supported by
    Rackspace 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 from the United States and
Canada please dial 877-246-4118, from the United Kingdom please dial
0800-496-0445, and from Hong Kong please dial 800-900-872.

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 (NYSE: RAX) is a leader in managed cloud and founder of OpenStack®,
the open-source operating system for the cloud. Hundreds of thousands of
customers look to Rackspace to deliver the best-fit infrastructure for their
IT needs, leveraging a product portfolio that allows workloads to run where
they perform best—whether on the public cloud, private cloud, dedicated
servers, or a combination of platforms. The company’s award-winning Fanatical
Support® helps customers successfully architect, deploy and run their most
critical applications. Headquartered in San Antonio, TX, Rackspace operates
data centers on four continents. Rackspace is featured on Fortune’s list of
100 Best Companies to Work For. 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
December31, 2013, filed with the SEC on March3, 2014, and in Rackspace
Hosting’s Form 10-Q for the quarter ended March31, 2014. 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
(In thousands, except per         March 31,     December 31,   March 31,
share data)                       2013            2013             2014
Net revenue                       $ 362,200       $  408,103       $ 421,047
Costs and expenses:
Cost of revenue (1)                 113,610          133,821         140,417
Research and development (1)        18,375           24,849          25,192
Sales and marketing (1)             49,814           55,465          57,359
General and administrative          67,477           79,128          71,150
(1)
Depreciation and amortization      70,111         87,683        87,805  
Total costs and expenses           319,387        380,946       381,923 
Income from operations             42,813         27,157        39,124  
Other income (expense):
Interest expense                    (940    )        (656    )       (495    )
Interest and other income          199            405           265     
(expense)
Total other income (expense)       (741    )       (251    )      (230    )
Income before income taxes          42,072           26,906          38,894
Income taxes                       14,811         6,108         13,448  
Net income                        $ 27,261       $  20,798       $ 25,446  
                                                                   
Net income per share
Basic                             $ 0.20         $  0.15         $ 0.18    
Diluted                           $ 0.19         $  0.14         $ 0.18    
                                                                   
Weighted average number of
shares outstanding
Basic                              137,742        139,875       141,048 
Diluted                            143,177        144,024       143,815 
                                                                             

(1) As previously reported in the 10-Q filing for the three months ended March
31, 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 March31, 2014.

                                                            
Consolidated Balance Sheets
                                                                 
(In thousands)                                 December 31,      March 31,
                                               2013              2014
                                                                 (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents                      $ 259,733         $ 313,835
Accounts receivable, net of allowance for
doubtful accounts and customer credits of        123,898           118,507
$3,891 as of December 31, 2013 and $4,548
as of March 31, 2014
Deferred income taxes                            12,637            11,592
Prepaid expenses                                 30,782            27,175
Other current assets                            11,918          12,277    
Total current assets                             438,968           483,386
                                                                 
Property and equipment, net                      890,776           925,136
Goodwill                                         81,084            81,084
Intangible assets, net                           23,880            21,863
Other non-current assets                        57,089          55,480    
Total assets                                   $ 1,491,797      $ 1,566,949 
                                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses          $ 122,047         $ 148,180
Accrued compensation and benefits                62,459            57,316
Income and other taxes payable                   11,388            18,927
Current portion of deferred revenue              22,868            21,550
Current portion of capital lease                 37,885            31,462
obligations
Current portion of debt                         1,861           1,888     
Total current liabilities                        258,508           279,323
                                                                 
Non-current liabilities:
Deferred revenue                                 3,662             2,935
Capital lease obligations                        25,048            19,905
Finance lease obligations for assets under       —                 17,604
construction
Debt                                             124               71
Deferred income taxes                            69,729            61,282
Deferred rent                                    43,046            45,377
Other liabilities                               36,268          40,440    
Total liabilities                                436,385           466,937
                                                                 
COMMITMENTS AND CONTINGENCIES
                                                                 
Stockholders' equity:
Common stock                                     141               142
Additional paid-in capital                       636,660           652,994
Accumulated other comprehensive loss             (4,536    )       (1,717    )
Retained earnings                               423,147         448,593   
Total stockholders’ equity                      1,055,412       1,100,012 
Total liabilities and stockholders’ equity     $ 1,491,797      $ 1,566,949 
                                                                             

                              
Consolidated Statements of Cash Flows
(Unaudited)
                                 
                                 Three Months Ended
(in thousands)                   March 31,      December 31,   March 31,
                                 2013             2013             2014
Cash Flows From Operating
Activities
Net income                       $ 27,261         $ 20,798         $ 25,446
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and                   70,111           87,683           87,805
amortization
Loss on disposal of                240              100              228
equipment, net
Provision for bad debts and        1,060            655              1,813
customer credits
Deferred income taxes              6,553            (12,407  )       (10,119 )
Deferred rent                      3,965            2,279            2,256
Share-based compensation           12,183           17,188           12,732
expense
Excess tax benefits from
share-based compensation           (4,299   )       (16,156  )       (15,100 )
arrangements
Changes in certain assets
and liabilities:
Accounts receivable                (6,268   )       (10,344  )       3,870
Prepaid expenses and other         (5,637   )       6,290            3,337
current assets
Accounts payable and accrued       3,062            8,355            30,251
expenses
Deferred revenue                   1,242            4,176            (2,110  )
All other operating               4,320          901            1,250   
activities
Net cash provided by               113,793          109,518          141,659
operating activities
                                                                   
Cash Flows From Investing
Activities
Purchases of property and          (105,541 )       (126,723 )       (84,953 )
equipment
Acquisitions, net of cash          (6,203   )       (3,727   )       —
acquired
All other investing               8              110            455     
activities
Net cash used in investing         (111,736 )       (130,340 )       (84,498 )
activities
                                                                   
Cash Flows From Financing
Activities
Principal payments of              (18,938  )       (14,652  )       (12,586 )
capital leases
Principal payments of notes        (51      )       (52      )       (52     )
payable
Payments for deferred              (1,179   )       (57      )       (57     )
acquisition obligations
Receipt of Texas Enterprise        —                —                5,500
Fund grant
Common shares withheld for         —                —                (13,620 )
employee withholding taxes
Proceeds from employee stock       1,714            8,971            2,122
plans
Excess tax benefits from
share-based compensation          4,299          16,156         15,100  
arrangements
Net cash provided by (used         (14,155  )       10,366           (3,593  )
in) financing activities
                                                                   
Effect of exchange rate
changes on cash and cash           (1,336   )       194              534
equivalents
                                                                 
Increase (decrease) in cash        (13,434  )       (10,262  )       54,102
and cash equivalents
                                                                   
Cash and cash equivalents,         292,061          269,995          259,733
beginning of period
                                                                 
Cash and cash equivalents,       $ 278,627       $ 259,733       $ 313,835 
end of period
                                                                   
Supplemental Cash Flow
Information:
Non-cash purchases of            $ 19,858         $ (4,116   )     $ 15,741
property and equipment
                                                                             

                
Key Metrics - Quarter to Date
(Unaudited)
                   
                   Three Months Ended
(Dollar
amounts in
thousands,         March 31,        June 30,         September        December 31,      March 31,
except average     2013           2013           30,            2013            2014
monthly                                              2013
revenue per
server)
Growth
Dedicated
cloud, net         $ 271,311        $ 276,845        $ 280,215        $ 291,265         $ 299,689
revenue
Public cloud,      $ 90,889        $ 99,002        $ 108,421       $ 116,838        $ 121,358   
net revenue
Net revenue        $ 362,200        $ 375,847        $ 388,636        $ 408,103         $ 421,047
Revenue growth
(year over           20.2     %       17.8     %       15.7     %       15.6      %       16.2      %
year)
                                                                                        
Net upgrades
(monthly             0.9      %       1.5      %       1.5      %       1.1       %       0.9       %
average)
Churn (monthly      -0.8     %      -0.8     %      -0.8     %      -0.7      %      -0.6      %
average)
Growth in
installed base       0.1      %       0.7      %       0.7      %       0.4       %       0.3       %
(monthly
average) (2)
                                                                                        
Number of
employees            5,043            5,272            5,450            5,651             5,743
(Rackers) at
period end
Number of
servers              94,122           98,884           101,967          103,886           106,229
deployed at
period end
Average
monthly            $ 1,308          $ 1,298          $ 1,290          $ 1,322           $ 1,336
revenue per
server
                                                                                        
Profitability
Income from        $ 42,813         $ 35,404         $ 27,762         $ 27,157          $ 39,124
operations
Depreciation
and                $ 70,111         $ 74,460         $ 80,753         $ 87,683          $ 87,805
amortization
Share-based
compensation
expense
Cost of            $ 2,519          $ 2,735          $ 3,453          $ 3,877           $ 3,791
revenue
Research and       $ 1,528          $ 1,813          $ 2,306          $ 2,521           $ 2,780
development
Sales and          $ 1,658          $ 1,744          $ 2,149          $ 1,766           $ 2,091
marketing
General and        $ 6,478         $ 7,023         $ 9,051         $ 9,024          $ 4,070     
administrative
Total
share-based        $ 12,183        $ 13,315        $ 16,959        $ 17,188         $ 12,732    
compensation
expense
Adjusted           $ 125,107        $ 123,179        $ 125,474        $ 132,028         $ 139,661
EBITDA (1)
                                                                                        
Adjusted             34.5     %       32.8     %       32.3     %       32.4      %       33.2      %
EBITDA margin
                                                                                        
Operating            11.8     %       9.4      %       7.1      %       6.7       %       9.3       %
income margin
                                                                                        
Income from        $ 42,813         $ 35,404         $ 27,762         $ 27,157          $ 39,124
operations
Effective tax       35.2     %      34.7     %      40.7     %      22.7      %      34.6      %
rate
Net operating
profit after       $ 27,743         $ 23,119         $ 16,463         $ 20,992          $ 25,587
tax (NOPAT)
(1)
NOPAT margin         7.7      %       6.2      %       4.2      %       5.1       %       6.1       %
                                                                                        
Capital
efficiency and
returns
Interest           $ 105,807        $ 88,434         $ 72,579         $ 64,918          $ 53,326
bearing debt
Stockholders'      $ 879,035        $ 933,897        $ 988,708        $ 1,055,412       $ 1,100,012
equity
Less: Excess       $ (235,163 )     $ (217,950 )     $ (223,359 )     $ (210,761  )     $ (263,309  )
cash
Capital base       $ 749,679        $ 804,381        $ 837,928        $ 909,569         $ 890,029
Average            $ 734,493        $ 777,030        $ 821,155        $ 873,749         $ 899,799
capital base
Capital
turnover             1.97             1.93             1.89             1.87              1.87
(annualized)
                                                                                        
Return on
capital              15.1     %       11.9     %       8.0      %       9.6       %       11.4      %
(annualized)
(1)
                                                                                        
Capital
expenditures
Cash purchases
of property        $ 105,541        $ 119,836        $ 100,496        $ 126,723         $ 84,953
and equipment
Non-cash
purchases of       $ 19,858        $ (13,311  )     $ 17,062        $ (4,116    )     $ 15,741    
property and
equipment (3)
Total capital      $ 125,399        $ 106,525        $ 117,558        $ 122,607         $ 100,694
expenditures
                                                                                        
Customer gear      $ 85,690         $ 73,022         $ 73,784         $ 65,291          $ 60,688
Data center        $ 13,228         $ 10,085         $ 12,441         $ 22,524          $ 10,963
build outs
Office build       $ 7,860          $ 1,683          $ 6,700          $ 14,860          $ 9,212
outs
Capitalized
software and       $ 18,621        $ 21,735        $ 24,633        $ 19,932         $ 19,831    
other projects
Total capital      $ 125,399        $ 106,525        $ 117,558        $ 122,607         $ 100,694
expenditures
                                                                                        
Infrastructure
capacity and
utilization
Megawatts
under contract       59.4             59.6             60.0             60.0              58.1
at period end
Megawatts
available for        38.8             44.4             46.9             46.9              45.3
use at period
end
Megawatts
utilized at          24.7             26.0             27.0             27.4              28.1
period end
Annualized net
revenue per
average            $ 59,499         $ 59,305         $ 58,662         $ 60,015          $ 60,691
Megawatt of
power utilized
                                                                                                    

(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
                   March 31,        June 30,         September        December 31,     March 31,
(In thousands)     2013           2013           30,            2013           2014
                                                     2013
Net revenue        $ 362,200        $ 375,847        $ 388,636        $ 408,103        $ 421,047
Costs and
expenses:
Cost of              113,610          117,658          127,404          133,821          140,417
revenue
Research and         18,375           23,216           23,773           24,849           25,192
development
Sales and            49,814           52,269           50,869           55,465           57,359
marketing
General and          67,477           72,840           78,075           79,128           71,150
administrative
Depreciation
and                 70,111         74,460         80,753         87,683         87,805  
amortization
Total costs         319,387        340,443        360,874        380,946        381,923 
and expenses
Income from         42,813         35,404         27,762         27,157         39,124  
operations
Other income
(expense):
Interest             (940    )        (833    )        (689    )        (656    )        (495    )
expense
Interest and
other income        199            (303    )       440            405            265     
(expense)
Total other
income              (741    )       (1,136  )       (249    )       (251    )       (230    )
(expense)
Income before        42,072           34,268           27,513           26,906           38,894
income taxes
Income taxes        14,811         11,901         11,202         6,108          13,448  
Net income         $ 27,261        $ 22,367        $ 16,311        $ 20,798        $ 25,446  
                                                                                       
                   
                   Three Months Ended
(Percent of        March 31,        June 30,         September        December 31,     March 31,
net revenue)       2013             2013             30,              2013             2014
                                                     2013
Net revenue          100.0   %        100.0   %        100.0   %        100.0   %        100.0   %
Costs and
expenses:
Cost of              31.4    %        31.3    %        32.8    %        32.8    %        33.3    %
revenue
Research and         5.1     %        6.2     %        6.1     %        6.1     %        6.0     %
development
Sales and            13.8    %        13.9    %        13.1    %        13.6    %        13.6    %
marketing
General and          18.6    %        19.4    %        20.1    %        19.4    %        16.9    %
administrative
Depreciation
and                 19.4    %       19.8    %       20.8    %       21.5    %       20.9    %
amortization
Total costs         88.2    %       90.6    %       92.9    %       93.3    %       90.7    %
and expenses
Income from         11.8    %       9.4     %       7.1     %       6.7     %       9.3     %
operations
Other income
(expense):
Interest             (0.3    )%       (0.2    )%       (0.2    )%       (0.2    )%       (0.1    )%
expense
Interest and
other income        0.1     %       (0.1    )%      0.1     %       0.1     %       0.1     %
(expense)
Total other
income              (0.2    )%      (0.3    )%      (0.1    )%      (0.1    )%      (0.1    )%
(expense)
Income before        11.6    %        9.1     %        7.1     %        6.6     %        9.2     %
income taxes
Income taxes        4.1     %       3.2     %       2.9     %       1.5     %       3.2     %
Net income          7.5     %       6.0     %       4.2     %       5.1     %       6.0     %

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      March 31,       June 30,        September       December        March 31,
thousands)       2013          2013          30,           31,           2014
                                                 2013            2013
Net revenue      $ 362,200       $ 375,847       $ 388,636       $ 408,103       $ 421,047
                                                                                 
Income from      $ 42,813        $ 35,404        $ 27,762        $ 27,157        $ 39,124
operations
                                                                                 
Net income       $ 27,261        $ 22,367        $ 16,311        $ 20,798        $ 25,446
Plus: Income       14,811          11,901          11,202          6,108           13,448
taxes
Plus: Total
other              741             1,136           249             251             230
(income)
expense
Plus:
Depreciation       70,111          74,460          80,753          87,683          87,805
and
amortization
Plus:
Share-based       12,183        13,315        16,959        17,188        12,732  
compensation
expense
Adjusted         $ 125,107       $ 123,179       $ 125,474       $ 132,028       $ 139,661
EBITDA
                                                                                 
Operating
income             11.8    %       9.4     %       7.1     %       6.7     %       9.3     %
margin
                                                                                 
Adjusted
EBITDA             34.5    %       32.8    %       32.3    %       32.4    %       33.2    %
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
payable and accrued expenses, accrued compensation and benefits, and income
and other taxes payable – deferred revenue – other non-current liabilities,
deferred income taxes, deferred rent and finance lease obligations for assets
under construction); 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      March 31,       June 30,        September 30,   December 31,    March 31,
thousands)       2013              2013              2013              2013              2014
Income from      $ 42,813          $ 35,404          $ 27,762          $ 27,157          $ 39,124
operations
Effective         35.2      %      34.7      %      40.7      %      22.7      %      34.6      %
tax rate
Net
operating        $ 27,743          $ 23,119          $ 16,463          $ 20,992          $ 25,587
profit after
tax (NOPAT)
                                                                                         
Net income       $ 27,261          $ 22,367          $ 16,311          $ 20,798          $ 25,446
                                                                                         
Total assets
at period        $ 1,348,350       $ 1,377,928       $ 1,451,769       $ 1,491,797       $ 1,566,949
end
Less: Excess       (235,163  )       (217,950  )       (223,359  )       (210,761  )       (263,309  )
cash
Less:
Accounts
payable and
accrued
expenses,
accrued
compensation       (197,686  )       (178,552  )       (213,268  )       (195,894  )       (224,423  )
and
benefits,
and income
and other
taxes
payable
Less:
Deferred
revenue            (21,811   )       (22,636   )       (22,211   )       (26,530   )       (24,485   )
(current and
non-current)
Less: Other
non-current
liabilities,
deferred
income
taxes,
deferred          (144,011  )      (154,409  )      (155,003  )      (149,043  )      (164,703  )
rent, and
finance
lease
obligations
for assets
under
construction
Capital base     $ 749,679         $ 804,381         $ 837,928         $ 909,569         $ 890,029
                                                                                         
Average          $ 1,321,951       $ 1,363,139       $ 1,414,849       $ 1,471,783       $ 1,529,373
total assets
Average          $ 734,493         $ 777,030         $ 821,155         $ 873,749         $ 899,799
capital base
                                                                                         
Return on
assets             8.2       %       6.6       %       4.6       %       5.7       %       6.7       %
(annualized)
Return on
capital            15.1      %       11.9      %       8.0       %       9.6       %       11.4      %
(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 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   Three Months Ended
(In thousands)                       March 31, 2013         March 31, 2014
Adjusted EBITDA                      $   125,107            $   139,661
Non-cash deferred rent                   3,965                  2,256
Total capital expenditures               (125,399   )           (100,694   )
Cash payments for interest, net          (1,051     )           (432       )
Cash payments for income taxes,         (3,839     )          (886       )
net
Adjusted free cash flow              $   (1,217     )       $   39,905     

Contact:

Rackspace Hosting, Inc.
Investor Relations:
Jessica Drought, 210-312-4191
ir@rackspace.com
or
Corporate Communications:
Brandon Brunson, 210-312-1357
brandon.brunson@rackspace.com
 
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