Rackspace Hosting Reports Fourth Quarter 2012 Results

Rackspace Hosting Reports Fourth Quarter 2012 Results

For the quarter ended December 31, 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

SAN ANTONIO--(BUSINESS WIRE)-- Rackspace® Hosting, Inc. (NYS: RAX) , the open cloud company, announced financial results for the quarter ended December 31, 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 December 31, 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 (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 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 December 31, 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 EndedYear Ended
(Unaudited)   (Unaudited)
(In thousands, except per share data)

December 31,


September 30,


December 31,

December 31,

December 31,

Net revenue$283,261$335,985$352,909$1,025,064$1,309,239
Costs and expenses:
Cost of revenue82,85194,73195,456309,095367,479
Sales and marketing33,45238,92441,069126,505158,108
General and administrative72,34993,02897,847270,581361,066
Depreciation and amortization54,844 63,972 68,914 195,412 249,845 
Total costs and expenses243,496 290,655 303,286 901,593 1,136,498 
Income from operations39,765 45,330 49,623 123,471 172,741 
Other income (expense):
Interest expense(1,304)(1,253)(991)(5,848)(4,749)
Interest and other income (expense)(226)38 245 (1,194)15 
Total other income (expense)(1,530)(1,215)(746)(7,042)(4,734)
Income before income taxes38,23544,11548,877116,429168,007
Income taxes13,188 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
Basic131,423 135,946 137,055 129,922 135,279 
Diluted138,912 141,474 142,549 138,064 141,265 

Consolidated Balance Sheets

(In thousands)December 31, 2011December 31, 2012
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 of December 31, 2011 and $4,236 as of December 31, 201268,70992,834
Deferred income taxes9,84110,320
Prepaid expenses22,00625,195
Other current assets2,953 4,835 
Total current assets263,365425,245
Property and equipment, net627,490724,985
Intangible assets, net26,03423,802
Other non-current assets49,600 52,777 
Total assets$1,026,482 $1,295,551 
Current liabilities:
Accounts payable and accrued expenses$156,004$175,128
Current portion of deferred revenue14,83517,265
Current portion of obligations under capital leases66,03161,302
Current portion of debt879 1,744 
Total current liabilities237,749255,439
Non-current deferred revenue3,4463,695
Non-current obligations under capital leases72,21660,335
Non-current debt1,991
Non-current deferred income taxes68,78171,081
Non-current deferred rent23,34332,293
Other non-current liabilities21,524 27,070 
Total liabilities427,059451,904
Stockholders' equity:
Common stock132138
Additional paid-in capital383,031515,188
Accumulated other comprehensive loss(14,732)(8,089)
Retained earnings230,992 336,410 
Total stockholders' equity599,423 843,647 
Total liabilities and stockholders' equity$1,026,482 $1,295,551 

Consolidated Statements of Cash Flows

Three Months EndedYear Ended
(Unaudited)   (Unaudited)
(in thousands)

December 31,


September 30,


December 31,

December 31,

December 31,

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 amortization54,84463,97268,914195,412249,845
Loss on disposal of equipment, net(110)5976242471,586
Provision for bad debts and customer credits1,4511,4261,7415,9136,300
Deferred income taxes4,8021,120(4,568)13,991(775)
Deferred rent1,2002,2792,9309,4719,259
Share-based compensation expense7,58512,41811,24428,77341,546
Excess tax benefits from share-based compensation arrangements(8,711)(5,145)(11,065)(20,627)