Rackspace Hosting Reports First Quarter 2013 Results

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Rackspace Hosting Reports First Quarter 2013 Results

For the quarter ended March 31, 2013:

  • Net revenue of $362 million grew 20% year-over-year and 2.6% from Q4 2012
  • Adjusted EBITDA(1) of $125 million grew 24% year-over-year and declined 3.6% from Q4 2012
  • Achieved adjusted EBITDA margin of 34.5%, compared to 33.4% in Q1 2012 and 36.8% in Q4 2012
  • Net income of $27 million grew 18% year-over-year and declined 8.8% from Q4 2012


SAN ANTONIO--(BUSINESS WIRE)-- Rackspace® Hosting, Inc. (NYS: RAX) , the open cloud company, announced financial results for the quarter ended March 31, 2013.

Net revenue for the first quarter of 2013 was $362 million, up 2.6% from the previous quarter and 20% from the first quarter of 2012. Net revenue for the first quarter of 2013 was negatively impacted by currency exchange rates when compared to the previous quarter by $2.9 million and negatively impacted when compared to the first quarter of 2012 by $1.0 million.

Total server count increased to 94,122, up from 90,524 servers at the end of the previous quarter.

"We got off to a slow start for the year. Building a lasting, successful business is our number one priority. However, our immediate focus is on restoring our growth trajectory. We are excited to see the industry momentum behind OpenStack and we are determined to claim the service leadership position in the Open Cloud movement," said Karl Pichler, chief financial officer.

Adjusted EBITDA for the quarter was $125 million, a 3.6% decrease compared to the fourth quarter of 2012 and a 24% increase compared to the first quarter of 2012. The adjusted EBITDA margin for the quarter was 34.5% compared to 36.8% in the previous quarter and 33.4% for the first quarter of 2012.

Consistent with prior periods, adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge relating to data center operating leases. During the first quarter of 2013, the non-cash data center lease charge was $4.0 million.

Net income was $27 million for the quarter, down 8.8% from the previous quarter and up 18% from the first quarter of 2012. Net income margin for the quarter was 7.5% compared to 8.5% for the previous quarter and 7.7% in the first quarter of 2012.

Cash flow from operating activities was $114 million for the first quarter of 2013. Capital expenditures were $125 million, including $86 million for purchases of customer gear, $13 million for data center build outs, $8 million for office build outs and $19 million for capitalized software and other projects.

Adjusted free cash flow(1) for the quarter was $(1) million. Return on capital(1) was 15.1% in the first quarter, compared to 16.9% in the prior quarter and 15.0% in the first quarter of 2012. Average monthly revenue per server was $1,308, compared to $1,310 in the prior quarter and $1,238 in the first quarter of 2012.

At the end of the first quarter of 2013, cash and cash equivalents were $279 million, and debt including capital lease obligations totaled $106 million.

On a worldwide basis, Rackspace employed 5,043 Rackers as of March 31, 2013, up from 4,852 in the previous quarter.

"We are optimistic about our long-term position in the market and our future opportunity as the world moves to a new model of computing," said Lanham Napier, chief executive officer.

Rackspace Developments and Business Highlights

  • Rackspace acquired ObjectRocket, a MongoDB database as a service (DBaaS) provider. With ObjectRocket's open source-based MongoDB solution, Rackspace will broaden its OpenStack-based open cloud platform to offer customers a NoSQL DBaaS. The ObjectRocket offering also immediately expands Rackspace's capability to help customers shoulder big data in the cloud for today's most demanding applications.
  • Rackspace acquired Exceptional Cloud Services to enhance its tool set for developers deploying and managing applications in the open cloud. Through this deal, Rackspace will expand its portfolio of developer solutions to include error tracking and Redis-as-a-Service capabilities. These solutions from Exceptional Cloud Services are currently used by more than 50,000 application developers. The acquisition of Exceptional Cloud Services will also help advance Rackspace's recent push into the MongoDB market, as the company plans to integrate its newly acquired Redis To Go solution with the MongoDB database as a service from ObjectRocket. By aligning these two solutions, Rackspace will provide developers with a choice of open source-based data platforms delivered as reliable, managed services that increase the speed and reduce the complexity of building powerful applications on the Rackspace Open Cloud.
  • Rackspace was named, along with one other vendor, a Top Performer by Forrester Research Inc. in its new report, "The Forrester Wave™: Hosted Private Cloud Q1 2013." The report evaluated Rackspace's full Private Cloud portfolio including Managed Virtualization and Rackspace Private Cloud powered by OpenStack®. As part of the research firm's analysis, Forrester evaluated the strengths and weaknesses of eight selected cloud computing companies against 25 criteria. Rackspace received among the highest scores of the eight cloud companies when evaluated in the subcategory for planned enhancements and the highest score among all vendors for third-party ecosystem. The Forrester report also noted that "Rackspace brings its experience from the hosting and public cloud space to this market, giving it significant geographic presence, a reputation for fantastic customer support, and a large existing customer base from which to draw."
  • Rackspace was positioned by Gartner, Inc. as a leader in the Leaders quadrant of the "Magic Quadrant for Managed Hosting in North America." The Gartner assessment, performed by the firm's IT industry experts, evaluates providers based on the completeness of their vision and their ability to execute. It categorizes providers in quadrants labeled Niche Players, Challengers, Visionaries, and Leaders. Rackspace was among the 15 providers assessed by Gartner.
  • Rackspace announced major new features in its free and open source Rackspace Private Cloud Software, powered by OpenStack and supported by its own Fanatical Support® services. Key among the new functionality in this release is OpenCenter™, a single interface for deploying, configuring and operating clouds at scale in an enterprise data center. Rackspace continues to introduce new open cloud capabilities that will enable customers to have a true 'cloud anywhere' experience through continuous integration and delivery, workload portability and network interoperability.
  • Rackspace received global security certifications and compliance verifications for Service Organization Controls SOC 2 Type II and SOC 3, in addition to complying with the ISO 27001 standard. These credentials demonstrate Rackspace's commitment to delivering a secure, open cloud experience for customers. Rackspace has a dedicated focus on ensuring that its IT infrastructure meets the most stringent security requirements by staying closely aligned with the latest industry standards and best practices.

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 888-298-3511 from the United States and Canada or dial 719-457-2731 from abroad and reference pass code 7355090. 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 (NYS: RAX)  is the open cloud company, delivering open technologies and powering more than 200,000 customers worldwide. Rackspace provides its renowned Fanatical Support® across a portfolio of IT products, including Public Cloud, Private Cloud, Hybrid Hosting and Dedicated Hosting. The company offers choice, flexibility and freedom from vendor lock-in. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company, is featured on Fortune's list of 100 Best Companies to Work For and is included on the Dow Jones Sustainability Index. Rackspace was positioned in the Leaders quadrant by Gartner Inc. in the 2012 "Magic Quadrant for Managed Hosting in North America." 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-K for the year ended December 31, 2012, filed with the SEC on March 1, 2013, and in Rackspace Hosting's Form 10-Q for the quarter ended March 31, 2013, expected to be filed later this week. Except as required by law, Rackspace Hosting assumes no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 
Consolidated Statements of Income
(Unaudited)
    
Three Months Ended
(In thousands, except per share data)March 31,
2012
  December 31,
2012
  March 31,
2013
Net revenue$301,355$352,909$362,200
Costs and expenses:

Cost of revenue (1)

100,081

109,012

113,610

Research and development (1)

13,44720,21122,773

Sales and marketing (1)

40,28643,46749,814

General and administrative (1)

55,30661,682

63,079

Depreciation and amortization55,151 

68,914

 70,111 
Total costs and expenses264,271 303,286 319,387 
Income from operations37,084 49,623 42,813 
Other income (expense):
Interest expense(1,272)(991)(940)
Interest and other income (expense)137 245 199 
Total other income (expense)(1,135)(746)(741)
Income before income taxes35,94948,87742,072
Income taxes12,769 18,970 14,811 
Net income$23,180 $29,907 $27,261 
 
Net income per share
Basic$0.17 $0.22 $0.20 
Diluted$0.17 $0.21 $0.19 
 
Weighted average number of shares outstanding
Basic133,062 137,055 

137,742

 
Diluted139,964 142,549 

143,177

 
 
(1) Certain reclassifications have been made to prior period amounts in order to conform to the current year's presentation. For more information, refer to our Form 10-Q for the quarter ended March 31, 2013.
 
     

Consolidated Balance Sheets

 
(In thousands)December 31, 2012March 31, 2013
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents$292,061$278,627
Accounts receivable, net of allowance for doubtful accounts and customer credits of $4,236 as of December 31, 2012 and $3,428 as of March 31, 201392,83496,666
Deferred income taxes10,3207,366
Prepaid expenses25,19527,217
Other current assets 4,835  8,270 
Total current assets425,245418,146
 
Property and equipment, net724,985770,694
Goodwill68,74275,872
Intangible assets, net23,80229,197
Other non-current assets 52,777  54,441 
Total assets$1,295,551 $1,348,350 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses

$

105,174

$

132,626

Accrued compensation and benefits

48,404

49,561

Income and other taxes payable

21,550

15,499

Current portion of deferred revenue17,26517,995
Current portion of obligations under capital leases61,30255,579
Current portion of debt 1,744  1,770 
Total current liabilities255,439273,030
 

Non-current liabilities:

Deferred revenue

3,6953,816

Obligations under capital leases

60,33546,493

Debt

1,9911,965

Deferred income taxes

71,08176,051

Deferred rent

32,29335,798

Other liabilities

 27,070  32,162 
Total liabilities451,904469,315
 
COMMITMENTS AND CONTINGENCIES
 
Stockholders' equity:
Common stock138138
Additional paid-in capital515,188533,384
Accumulated other comprehensive loss(8,089)(18,158)
Retained earnings 336,410  363,671 
Total stockholders' equity 843,647  879,035 
Total liabilities and stockholders' equity$1,295,551 $1,348,350 
 
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Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
(in thousands)March 31,
2012
  December 31,
2012
  March 31,
2013
Cash Flows From Operating Activities
Net income$23,180$29,907$27,261
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization55,15168,91470,111
Loss on disposal of equipment, net279624240
Provision for bad debts and customer credits1,4551,7411,060
Deferred income taxes4,275(4,568)6,553
Deferred rent1,9302,9303,965
Share-based compensation expense8,50911,24412,183
Excess tax benefits from share-based compensation arrangements(20,235)(11,065)(4,299)
Changes in certain assets and liabilities
Accounts receivable(9,008)(162)(6,268)
Prepaid expenses and other current assets1,7086,127(5,637)
Accounts payable and accrued expenses6,85815,0623,062
Deferred revenue1,4962,4771,242
All other operating activities(820)(2,443)4,320 
Net cash provided by operating activities74,778120,788113,793