Attached files
| file | filename |
|---|---|
| 8-K - RESULTS OF OPERATIONS AND FINANCIAL CONDITION - RACKSPACE HOSTING, INC. | rax8k_q32011.htm |
Rackspace Hosting Reports Third Quarter 2011 Results
For the quarter ended September 30, 2011:
• | Net revenue of $265 million grew 32.5% year-over-year and 7.0% from Q2 2011 |
• | Adjusted EBITDA (1) of $88 million grew 28.5% year-over-year and 7.8% from Q2 2011 |
• | Net income of $20 million grew 69.2% year-over-year and 13.8% from Q2 2011 |
SAN ANTONIO - November 7, 2011 - Rackspace® Hosting, Inc. (NYSE: RAX), the service leader in cloud computing, announced financial results for the quarter ended September 30, 2011.
Net revenue for the third quarter of 2011 was $265 million, up 7.0% from the previous quarter and 32.5% from the third quarter of 2010. Net revenue for the third quarter of 2011 was negatively impacted by currency exchange rates when compared to the second quarter of 2011 by $0.8 million and favorably impacted by currency exchange rates when compared to the third quarter of 2010 by $2.4 million.
Total server count increased to 78,717, up from 74,028 servers at the end of the previous quarter, and total customers increased to 161,422, up from 152,578 at the end of the previous quarter.
“In summary, we are very pleased with this quarter's results. We are focused on finishing the year on a strong note and will give you a more in depth look into our 2012 plans when we report our full year results in February,” said Karl Pichler, chief financial officer.
Adjusted EBITDA for the quarter was $88 million, a 7.8% increase compared to the second quarter of 2011 and a 28.5% increase compared to the third quarter of 2010. The adjusted EBITDA margin for the quarter was 33.3% compared to 33.0% for the previous quarter and 34.3% for the third quarter of 2010. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge of $2.5 million for the quarter relating to non-cash rent for data center operating leases.
Net income was $20 million for the quarter, up 13.8% from the previous quarter and 69.2% from the third quarter of 2010. Net income margin for the quarter was 7.6% compared to 7.1% for the previous quarter and 5.9% in the third quarter of 2010.
Cash flow from operating activities was $70 million for the third quarter of 2011. Capital expenditures were $94 million, including $54 million for purchases of customer gear, $17 million for data center build outs, $9 million for office build outs and $14 million for capitalized software and other projects.
Adjusted free cash flow (1) for the quarter was $(5) million.
At the end of the third quarter of 2011, cash and cash equivalents were $125 million. Debt obligations totaled $144 million, consisting of $143 million related to capital leases and $1 million related to current debt.
On a worldwide basis, Rackspace employed 3,799 Rackers as of September 30, 2011, up from 3,712 Rackers as of June 30, 2011 and 3,130 Rackers as of September 30, 2010.
“In the third quarter we improved upon the solid results that we delivered in the first and second quarters by continuing our strong pace of revenue growth while boosting margins and returns,” said Lanham Napier, president and chief executive officer.
- 1 -
Rackspace Developments and Business Highlights
• | Rackspace Cloud: Private Edition: Today, Rackspace announced that, through its new product offering, Rackspace Cloud: Private Edition, enterprise customers will have the ability to replicate the power of the Rackspace Cloud in their own data centers. Rackspace Cloud: Private Edition is the combination of a proven, OpenStack-powered reference architecture with Rackspace cloud operations and software support. Rackspace Cloud: Private Edition will be able to be deployed and run in any qualifying data center, including customer-premise and partner data centers that allows Rackspace to offer remote support and cloud management for any cloud built on the standardized OpenStack architecture. We've already helped more than a dozen customers build OpenStack clouds including eBay for its X.commerce venture. |
• | Growing Momentum for OpenStack: Backed by more than 130 companies including Citrix, Dell, Cisco, HP and Microsoft, traction for OpenStack continues to rapidly gain traction each quarter. OpenStack held its third public Conference & Design Summit in October and had an OpenStack record number of participants with over 600 attendees, more than 150 companies and 16 countries represented. The summit was five days of intense technology and business discussions with a majority of the conversation focused on actual deployments and uses of OpenStack. The formation of a future OpenStack Foundation to govern the project was announced from the conference along with planning the next software release, Essex. |
• | Expanding Partner Program Reach: Rackspace continues to have strong channel partnerships that allow them to better serve the enterprise and Global IT markets. Last week, Rackspace announced the expansion of its relationship with EMC by joining the EMC Velocity™ Service Provider Program to develop new cloud-based service offerings. |
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 888-287-5530 from the United States or dial 719-325-2310 from abroad and reference pass code 2410975. A live webcast and a replay of the conference call will be available on Rackspace's website, located at ir.rackspace.com.
About Rackspace Hosting
Rackspace Hosting is the service leader in cloud computing, and a founder of OpenStack, an open source cloud platform. The San Antonio-based company provides Fanatical Support® to its customers, across a portfolio of IT services, including Managed Hosting and Cloud Computing. 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. The company was also positioned in the Leaders Quadrant by Gartner Inc. in the “2010 Magic Quadrant for Cloud Infrastructure as a Service and Web Hosting.” For more information, visit www.rackspace.com.
- 2 -
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, 2010, filed with the SEC on February 22, 2011 and in Rackspace Hosting's Form 10-Q for the quarter ended September 30, 2011, expected to be filed later this month. 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.
Contact:
Investor Relations | Corporate Communications | |
Bryan McGrath | Rachel Ferry | |
210-312-5230 | 210-312-3732 | |
ir@rackspace.com | rachel.ferry@rackspace.com | |
- 3 -
Consolidated Statements of Income
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||
(In thousands, except per share data) | September 30, 2010 | June 30, 2011 | September 30, 2011 | September 30, 2010 | September 30, 2011 | |||||||||||||||
Net revenue | $ | 199,710 | $ | 247,229 | $ | 264,572 | $ | 565,829 | $ | 741,803 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of revenue | 64,616 | 74,057 | 82,445 | 183,093 | 226,244 | |||||||||||||||
Sales and marketing | 24,651 | 31,477 | 31,838 | 69,913 | 93,053 | |||||||||||||||
General and administrative | 49,131 | 66,090 | 69,701 | 142,263 | 198,232 | |||||||||||||||
Depreciation and amortization | 39,677 | 46,952 | 49,518 | 114,366 | 140,568 | |||||||||||||||
Total costs and expenses | 178,075 | 218,576 | 233,502 | 509,635 | 658,097 | |||||||||||||||
Income from operations | 21,635 | 28,653 | 31,070 | 56,194 | 83,706 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (2,068 | ) | (1,522 | ) | (1,531 | ) | (6,087 | ) | (4,544 | ) | ||||||||||
Interest and other income (expense) | (1,263 | ) | (614 | ) | (276 | ) | (264 | ) | (968 | ) | ||||||||||
Total other income (expense) | (3,331 | ) | (2,136 | ) | (1,807 | ) | (6,351 | ) | (5,512 | ) | ||||||||||
Income before income taxes | 18,304 | 26,517 | 29,263 | 49,843 | 78,194 | |||||||||||||||
Income taxes | 6,495 | 8,956 | 9,281 | 17,024 | 26,830 | |||||||||||||||
Net income | $ | 11,809 | $ | 17,561 | $ | 19,982 | $ | 32,819 | $ | 51,364 | ||||||||||
Net income per share | ||||||||||||||||||||
Basic | $ | 0.09 | $ | 0.14 | $ | 0.15 | $ | 0.26 | $ | 0.40 | ||||||||||
Diluted | $ | 0.09 | $ | 0.13 | $ | 0.14 | $ | 0.25 | $ | 0.37 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||
Basic | 125,312 | 129,706 | 130,662 | 124,633 | 129,414 | |||||||||||||||
Diluted | 133,439 | 137,880 | 138,453 | 132,824 | 137,751 | |||||||||||||||
- 4 -
Consolidated Balance Sheets
(In thousands) | December 31, 2010 | September 30, 2011 | |||||
(Unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 104,941 | $ | 124,680 | |||
Accounts receivable, net of allowance for doubtful accounts and customer credits of $2,846 as of December 31, 2010 and $3,355 as of September 30, 2011 | 47,734 | 61,054 | |||||
Income taxes receivable | 4,397 | — | |||||
Deferred income taxes | 6,416 | 9,022 | |||||
Prepaid expenses | 16,738 | 29,175 | |||||
Other current assets | 5,219 | 3,304 | |||||
Total current assets | 185,445 | 227,235 | |||||
Property and equipment, net | 495,228 | 620,156 | |||||
Goodwill | 57,147 | 59,993 | |||||
Intangible assets, net | 9,675 | 10,385 | |||||
Other non-current assets | 14,082 | 52,908 | |||||
Total assets | $ | 761,577 | $ | 970,677 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 111,645 | $ | 148,464 | |||
Current portion of deferred revenue | 15,822 | 14,407 | |||||
Current portion of obligations under capital leases | 59,763 | 65,781 | |||||
Current portion of debt | 1,912 | 1,316 | |||||
Total current liabilities | 189,142 | 229,968 | |||||
Non-current deferred revenue | 2,927 | 3,365 | |||||
Non-current obligations under capital leases | 69,173 | 77,055 | |||||
Non-current debt | 879 | — | |||||
Non-current deferred income taxes | 35,238 | 66,115 | |||||
Non-current deferred rent | 14,595 | 22,187 | |||||
Other non-current liabilities | 10,760 | 20,938 | |||||
Total liabilities | 322,714 | 419,628 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
Stockholders' equity: | |||||||
Common stock | 127 | 131 | |||||
Additional paid-in capital | 296,571 | 358,022 | |||||
Accumulated other comprehensive loss | (12,416 | ) | (13,049 | ) | |||
Retained earnings | 154,581 | 205,945 | |||||
Total stockholders’ equity | 438,863 | 551,049 | |||||
Total liabilities and stockholders’ equity | $ | 761,577 | $ | 970,677 | |||
- 5 -
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||
(in thousands) | September 30, 2010 | June 30, 2011 | September 30, 2011 | September 30, 2010 | September 30, 2011 | ||||||||||||||
Cash Flows From Operating Activities | |||||||||||||||||||
Net income | $ | 11,809 | $ | 17,561 | $ | 19,982 | $ | 32,819 | $ | 51,364 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||||||||||
Depreciation and amortization | 39,677 | 46,952 | 49,518 | 114,366 | 140,568 | ||||||||||||||
Loss on disposal of equipment, net | 295 | 90 | 85 | 569 | 357 | ||||||||||||||
Provision for bad debts and customer credits | 1,592 | 1,635 | 1,224 | 2,976 | 4,462 | ||||||||||||||
Deferred income taxes | 9,614 | 2,179 | 3,330 | 2,982 | 9,189 | ||||||||||||||
Deferred rent | 1,051 | 2,783 | 2,457 | 4,171 | 8,271 | ||||||||||||||
Share-based compensation expense | 7,183 | 5,983 | 7,395 | 19,537 | 21,188 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | 15,453 | (692 | ) | (10,326 | ) | — | (11,916 | ) | |||||||||||
Changes in certain assets and liabilities | |||||||||||||||||||
Accounts receivable | (2,346 | ) | (12,154 | ) | 507 | (9,074 | ) | (17,363 | ) | ||||||||||
Income taxes receivable | (7,633 | ) | 1,928 | 2,469 | 4,352 | 4,397 | |||||||||||||
Prepaid expenses and other current assets | (13,811 | ) | 1,268 | (12,569 | ) | (14,604 | ) | (10,091 | ) | ||||||||||
Accounts payable and accrued expenses | 2,912 | 14,048 | 7,477 | 12,982 | 38,215 | ||||||||||||||
Deferred revenue | (264 | ) | (476 | ) | (773 | ) | (2,689 | ) | (1,096 | ) | |||||||||
All other operating activities | 1,578 | (1,611 | ) | (461 | ) | 1,578 | 517 | ||||||||||||
Net cash provided by operating activities | 67,110 | 79,494 | 70,315 | 169,965 | 238,062 | ||||||||||||||
Cash Flows From Investing Activities | |||||||||||||||||||
Purchases of property and equipment, net | (29,222 | ) | (74,754 | ) | (70,379 | ) | (97,894 | ) | (202,784 | ) | |||||||||
Acquisitions, net of cash acquired | — | — | — | — | (952 | ) | |||||||||||||
Earn-out payments for acquisitions | — | — | — | (490 | ) | — | |||||||||||||
All other investing activities | — | — | 105 | (75 | ) | 105 | |||||||||||||
Net cash used in investing activities | (29,222 | ) | (74,754 | ) | (70,274 | ) | (98,459 | ) | (203,631 | ) | |||||||||
Cash Flows From Financing Activities | |||||||||||||||||||
Principal payments of capital leases | (12,194 | ) | (16,198 | ) | (17,434 | ) | (37,947 | ) | (48,854 | ) | |||||||||
Principal payments of notes payable | (684 | ) | (433 | ) | (435 | ) | (4,029 | ) | (1,476 | ) | |||||||||
Payments for debt issuance costs | — | — | (1,114 | ) | — | (1,114 | ) | ||||||||||||
Payments of earn-out provisions for acquisitions | — | — | (2,900 | ) | — | (2,900 | ) | ||||||||||||
Proceeds from employee stock plans | 6,323 | 9,216 | 4,815 | 11,373 | 27,782 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | (15,453 | ) | 692 | 10,326 | — | 11,916 | |||||||||||||
Net cash used in financing activities | (22,008 | ) | (6,723 | ) | (6,742 | ) | (30,603 | ) | (14,646 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 2,181 | 140 | (644 | ) | 229 | (46 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents | 18,061 | (1,843 | ) | (7,345 | ) | 41,132 | 19,739 | ||||||||||||
Cash and cash equivalents, beginning of period | 148,496 | 133,868 | 132,025 | 125,425 | 104,941 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 166,557 | $ | 132,025 | $ | 124,680 | $ | 166,557 | $ | 124,680 | |||||||||
Supplemental cash flow information: | |||||||||||||||||||
Acquisition of property and equipment by capital leases | $ | 23,208 | $ | 20,567 | $ | 23,179 | $ | 54,767 | $ | 62,755 | |||||||||
Shares issued in business combinations | $ | — | $ | — | $ | — | $ | 510 | $ | — | |||||||||
Cash payments for interest, net of amount capitalized | $ | 1,846 | $ | 1,313 | $ | 1,580 | $ | 5,851 | $ | 4,356 | |||||||||
Cash payments for income taxes | $ | 3,822 | $ | 7,065 | $ | 3,782 | $ | 15,761 | $ | 15,417 | |||||||||
- 6 -
Key Metrics - Quarter to Date
(Unaudited)
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except annualized net revenue per average technical square foot) | September 30, 2010 | December 31, 2010 | March 31, 2011 | June 30, 2011 | September 30, 2011 | ||||||||||||||
Growth | |||||||||||||||||||
Managed hosting, net revenue | $ | 172,947 | $ | 183,311 | $ | 192,895 | $ | 204,275 | $ | 213,899 | |||||||||
Cloud, net revenue | $ | 26,763 | $ | 31,415 | $ | 37,107 | $ | 42,954 | $ | 50,673 | |||||||||
Net revenue | $ | 199,710 | $ | 214,726 | $ | 230,002 | $ | 247,229 | $ | 264,572 | |||||||||
Revenue growth (year over year) | 23.0 | % | 26.7 | % | 28.6 | % | 32.0 | % | 32.5 | % | |||||||||
Net upgrades (monthly average) | 1.6 | % | 1.6 | % | 1.8 | % | 1.8 | % | 1.8 | % | |||||||||
Churn (monthly average) | -1.1 | % | -1.0 | % | -0.9 | % | -0.9 | % | -0.9 | % | |||||||||
Growth in installed base (monthly average) (2) | 0.5 | % | 0.6 | % | 0.9 | % | 0.9 | % | 0.9 | % | |||||||||
Number of customers at period end (3) | 118,732 | 130,291 | 142,441 | 152,578 | 161,422 | ||||||||||||||
Number of employees (Rackers) at period end | 3,130 | 3,262 | 3,492 | 3,712 | 3,799 | ||||||||||||||
Number of servers deployed at period end | 63,996 | 66,015 | 70,473 | 74,028 | 78,717 | ||||||||||||||
Profitability | |||||||||||||||||||
Income from operations | $ | 21,635 | $ | 23,408 | $ | 23,983 | $ | 28,653 | $ | 31,070 | |||||||||
Depreciation and amortization | $ | 39,677 | $ | 41,529 | $ | 44,098 | $ | 46,952 | $ | 49,518 | |||||||||
Share-based compensation expense | |||||||||||||||||||
Cost of revenue | $ | 1,305 | $ | 1,223 | $ | 1,412 | $ | 756 | $ | 1,005 | |||||||||
Sales and marketing (4) | $ | 1,209 | $ | 1,052 | $ | 1 | $ | 609 | $ | 864 | |||||||||
General and administrative | $ | 4,669 | $ | 4,812 | $ | 6,397 | $ | 4,618 | $ | 5,526 | |||||||||
Total share-based compensation expense | $ | 7,183 | $ | 7,087 | $ | 7,810 | $ | 5,983 | $ | 7,395 | |||||||||
Adjusted EBITDA (1) | $ | 68,495 | $ | 72,024 | $ | 75,891 | $ | 81,588 | $ | 87,983 | |||||||||
Adjusted EBITDA margin | 34.3 | % | 33.5 | % | 33.0 | % | 33.0 | % | 33.3 | % | |||||||||
Operating income margin | 10.8 | % | 10.9 | % | 10.4 | % | 11.6 | % | 11.7 | % | |||||||||
Income from operations | $ | 21,635 | $ | 23,408 | $ | 23,983 | $ | 28,653 | $ | 31,070 | |||||||||
Effective tax rate | 35.5 | % | 37.2 | % | 38.3 | % | 33.8 | % | 31.7 | % | |||||||||
Net operating profit after tax (NOPAT) (1) | $ | 13,955 | $ | 14,700 | $ | 14,798 | $ | 18,968 | $ | 21,221 | |||||||||
NOPAT margin | 7.0 | % | 6.8 | % | 6.4 | % | 7.7 | % | 8.0 | % | |||||||||
Capital efficiency and returns | |||||||||||||||||||
Interest bearing debt | $ | 180,177 | $ | 131,727 | $ | 134,905 | $ | 138,841 | $ | 144,152 | |||||||||
Stockholders' equity | $ | 413,237 | $ | 438,863 | $ | 478,307 | $ | 511,843 | $ | 551,049 | |||||||||
Less: Excess cash | $ | (142,592 | ) | $ | (79,174 | ) | $ | (106,268 | ) | $ | (102,358 | ) | $ | (92,931 | ) | ||||
Capital base | $ | 450,822 | $ | 491,416 | $ | 506,944 | $ | 548,326 | $ | 602,270 | |||||||||
Average capital base | $ | 446,323 | $ | 471,119 | $ | 499,180 | $ | 527,635 | $ | 575,298 | |||||||||
Capital turnover (annualized) | 1.79 | 1.82 | 1.84 | 1.87 | 1.84 | ||||||||||||||
Return on capital (annualized) (1) | 12.5 | % | 12.5 | % | 11.9 | % | 14.4 | % | 14.8 | % | |||||||||
- 7 -
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except annualized net revenue per average technical square foot) | September 30, 2010 | December 31, 2010 | March 31, 2011 | June 30, 2011 | September 30, 2011 | ||||||||||||||
Capital expenditures | |||||||||||||||||||
Purchases of property and equipment, net | $ | 29,222 | $ | 46,884 | $ | 57,651 | $ | 74,754 | $ | 70,379 | |||||||||
Vendor-financed equipment purchases | $ | 23,208 | $ | 16,596 | $ | 19,009 | $ | 20,567 | $ | 23,179 | |||||||||
Total capital expenditures | $ | 52,430 | $ | 63,480 | $ | 76,660 | $ | 95,321 | $ | 93,558 | |||||||||
Customer gear | $ | 36,219 | $ | 38,052 | $ | 46,300 | $ | 48,777 | $ | 53,643 | |||||||||
Data center build outs | $ | 6,162 | $ | 9,754 | $ | 9,173 | $ | 17,491 | $ | 16,715 | |||||||||
Office build outs | $ | 1,271 | $ | 5,145 | $ | 2,957 | $ | 14,074 | $ | 8,806 | |||||||||
Capitalized software and other projects | $ | 8,778 | $ | 10,529 | $ | 18,230 | $ | 14,979 | $ | 14,394 | |||||||||
Total capital expenditures | $ | 52,430 | $ | 63,480 | $ | 76,660 | $ | 95,321 | $ | 93,558 | |||||||||
Infrastructure capacity and utilization | |||||||||||||||||||
Technical square feet of data center space at period end (5) | 177,148 | 180,173 | 181,848 | 198,868 | 227,988 | ||||||||||||||
Annualized net revenue per average technical square foot | $ | 4,602 | $ | 4,807 | $ | 5,083 | $ | 5,195 | $ | 4,959 | |||||||||
Utilization rate at period end | 68.9 | % | 72.0 | % | 76.7 | % | 72.9 | % | 69.0 | % | |||||||||
(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. |
(3) | Customers continue to be counted on an account basis, and therefore a customer with more than one account with us would be 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. |
(4) | During the three months ended March 31, 2011, share-based compensation expense within Sales and Marketing was positively impacted by the reversal of previously recorded expense related to terminated employees. The offset of the reversal was a true-up of the forfeiture rate across Cost of Revenue and General and Administrative expenses for options that fully vested within the quarter, negatively impacting these categories. |
(5) | Technical square footage as of September 30, 2011 excludes 36,260 square feet for unused portions of our data center facilities. |
- 8 -
Consolidated Quarterly Statements of Income
(Unaudited)
Three Months Ended | |||||||||||||||||||
(In thousands) | September 30, 2010 | December 31, 2010 | March 31, 2011 | June 30, 2011 | September 30, 2011 | ||||||||||||||
Net revenue | $ | 199,710 | $ | 214,726 | $ | 230,002 | $ | 247,229 | $ | 264,572 | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 64,616 | 66,747 | 69,742 | 74,057 | 82,445 | ||||||||||||||
Sales and marketing | 24,651 | 26,294 | 29,738 | 31,477 | 31,838 | ||||||||||||||
General and administrative | 49,131 | 56,748 | 62,441 | 66,090 | 69,701 | ||||||||||||||
Depreciation and amortization | 39,677 | 41,529 | 44,098 | 46,952 | 49,518 | ||||||||||||||
Total costs and expenses | 178,075 | 191,318 | 206,019 | 218,576 | 233,502 | ||||||||||||||
Income from operations | 21,635 | 23,408 | 23,983 | 28,653 | 31,070 | ||||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (2,068 | ) | (1,897 | ) | (1,491 | ) | (1,522 | ) | (1,531 | ) | |||||||||
Interest and other income (expense) | (1,263 | ) | 57 | (78 | ) | (614 | ) | (276 | ) | ||||||||||
Total other income (expense) | (3,331 | ) | (1,840 | ) | (1,569 | ) | (2,136 | ) | (1,807 | ) | |||||||||
Income before income taxes | 18,304 | 21,568 | 22,414 | 26,517 | 29,263 | ||||||||||||||
Income taxes | 6,495 | 8,029 | 8,593 | 8,956 | 9,281 | ||||||||||||||
Net income | $ | 11,809 | $ | 13,539 | $ | 13,821 | $ | 17,561 | $ | 19,982 | |||||||||
Three Months Ended | |||||||||||||||||||
(Percent of net revenue) | September 30, 2010 | December 31, 2010 | March 31, 2011 | June 30, 2011 | September 30, 2011 | ||||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 32.4 | % | 31.1 | % | 30.3 | % | 30.0 | % | 31.2 | % | |||||||||
Sales and marketing | 12.3 | % | 12.2 | % | 12.9 | % | 12.7 | % | 12.0 | % | |||||||||
General and administrative | 24.6 | % | 26.4 | % | 27.1 | % | 26.7 | % | 26.3 | % | |||||||||
Depreciation and amortization | 19.9 | % | 19.3 | % | 19.2 | % | 19.0 | % | 18.7 | % | |||||||||
Total costs and expenses | 89.2 | % | 89.1 | % | 89.6 | % | 88.4 | % | 88.3 | % | |||||||||
Income from operations | 10.8 | % | 10.9 | % | 10.4 | % | 11.6 | % | 11.7 | % | |||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | -1.0 | % | -0.9 | % | -0.6 | % | -0.6 | % | -0.6 | % | |||||||||
Interest and other income (expense) | -0.6 | % | 0.0 | % | 0.0 | % | -0.2 | % | -0.1 | % | |||||||||
Total other income (expense) | -1.7 | % | -0.9 | % | -0.7 | % | -0.9 | % | -0.7 | % | |||||||||
Income before income taxes | 9.2 | % | 10.0 | % | 9.7 | % | 10.7 | % | 11.1 | % | |||||||||
Income taxes | 3.3 | % | 3.7 | % | 3.7 | % | 3.6 | % | 3.5 | % | |||||||||
Net income | 5.9 | % | 6.3 | % | 6.0 | % | 7.1 | % | 7.6 | % | |||||||||
Due to rounding, totals may not equal the sum of the line items in the table above. | |||||||||||||||||||
- 9 -
(1) Non-GAAP Financial Measures
Adjusted EBITDA (Non-GAAP financial measure)
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 thousands) | September 30, 2010 | December 31, 2010 | March 31, 2011 | June 30, 2011 | September 30, 2011 | ||||||||||||||
Net revenue | $ | 199,710 | $ | 214,726 | $ | 230,002 | $ | 247,229 | $ | 264,572 | |||||||||
Income from operations | $ | 21,635 | $ | 23,408 | $ | 23,983 | $ | 28,653 | $ | 31,070 | |||||||||
Net income | $ | 11,809 | $ | 13,539 | $ | 13,821 | $ | 17,561 | $ | 19,982 | |||||||||
Plus: Income taxes | 6,495 | 8,029 | 8,593 | 8,956 | 9,281 | ||||||||||||||
Plus: Total other (income) expense | 3,331 | 1,840 | 1,569 | 2,136 | 1,807 | ||||||||||||||
Plus: Depreciation and amortization | 39,677 | 41,529 | 44,098 | 46,952 | 49,518 | ||||||||||||||
Plus: Share-based compensation expense | 7,183 | 7,087 | 7,810 | 5,983 | 7,395 | ||||||||||||||
Adjusted EBITDA | $ | 68,495 | $ | 72,024 | $ | 75,891 | $ | 81,588 | $ | 87,983 | |||||||||
Operating income margin | 10.8 | % | 10.9 | % | 10.4 | % | 11.6 | % | 11.7 | % | |||||||||
Adjusted EBITDA margin | 34.3 | % | 33.5 | % | 33.0 | % | 33.0 | % | 33.3 | % | |||||||||
- 10 -
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 revenues – other non-current liabilities, deferred income taxes, and deferred rent); calculated on a quarterly basis.
We define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which is calculated as three percent of our annualized net revenue for the three months prior to 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 a 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 Income and the Balance Sheet. ROC measures how successfully capital is deployed within a company.
Note that ROC is not a measure of financial performance under GAAP and should not be considered a substitute for return on assets, which we consider to be the most directly comparable GAAP measure, and may not be comparable to similarly titled measures reported by other companies. See our ROC reconciliation to return on assets below.
Three Months Ended | |||||||||||||||||||
(Dollars in thousands) | September 30, 2010 | December 31, 2010 | March 31, 2011 | June 30, 2011 | September 30, 2011 | ||||||||||||||
Income from operations | $ | 21,635 | $ | 23,408 | $ | 23,983 | $ | 28,653 | $ | 31,070 | |||||||||
Effective tax rate | 35.5 | % | 37.2 | % | 38.3 | % | 33.8 | % | 31.7 | % | |||||||||
Net operating profit after tax (NOPAT) | $ | 13,955 | $ | 14,700 | $ | 14,798 | $ | 18,968 | $ | 21,221 | |||||||||
Net income | $ | 11,809 | $ | 13,539 | $ | 13,821 | $ | 17,561 | $ | 19,982 | |||||||||
Total assets at period end | $ | 760,198 | $ | 761,577 | $ | 831,414 | $ | 887,576 | $ | 970,677 | |||||||||
Less: Excess cash | (142,592 | ) | (79,174 | ) | (106,268 | ) | (102,358 | ) | (92,931 | ) | |||||||||
Less: Accounts payable and accrued expenses | (101,427 | ) | (111,645 | ) | (132,308 | ) | (145,609 | ) | (148,464 | ) | |||||||||
Less: Deferred revenue (current and non-current) | (16,685 | ) | (18,749 | ) | (19,149 | ) | (18,687 | ) | (17,772 | ) | |||||||||
Less: Other non-current liabilities, deferred income taxes, and deferred rent | (48,672 | ) | (60,593 | ) | (66,745 | ) | (72,596 | ) | (109,240 | ) | |||||||||
Capital base | $ | 450,822 | $ | 491,416 | $ | 506,944 | $ | 548,326 | $ | 602,270 | |||||||||
Average total assets | $ | 740,328 | $ | 760,888 | $ | 796,496 | $ | 859,495 | $ | 929,127 | |||||||||
Average capital base | $ | 446,323 | $ | 471,119 | $ | 499,180 | $ | 527,635 | $ | 575,298 | |||||||||
Return on assets (annualized) | 6.4 | % | 7.1 | % | 6.9 | % | 8.2 | % | 8.6 | % | |||||||||
Return on capital (annualized) | 12.5 | % | 12.5 | % | 11.9 | % | 14.4 | % | 14.8 | % | |||||||||
- 11 -
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 vendor-financed equipment purchases), 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 | Nine Months Ended | ||||||
(In thousands) | September 30, 2011 | September 30, 2011 | |||||
Adjusted EBITDA | $ | 87,983 | $ | 245,462 | |||
Non-cash deferred rent | 2,457 | 8,271 | |||||
Total capital expenditures | (93,558 | ) | (265,539 | ) | |||
Cash payments for interest, net | (1,541 | ) | (4,237 | ) | |||
Cash payments for income taxes, net | (781 | ) | (10,525 | ) | |||
Adjusted free cash flow | $ | (5,440 | ) | $ | (26,568 | ) | |
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. See our Net Leverage calculation below.
As of | ||||
(Dollars in thousands) | September 30, 2011 | |||
Obligations under capital leases | $ | 142,836 | ||
Debt | 1,316 | |||
Total debt | $ | 144,152 | ||
Less: Cash and cash equivalents | (124,680 | ) | ||
Net debt | $ | 19,472 | ||
Adjusted EBITDA (trailing twelve months) | $ | 317,486 | ||
Net leverage | 0.06 | x | ||
- 12 -