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| 8-K - RESULTS OF OPERATIONS AND FINANCIAL CONDITION - RACKSPACE HOSTING, INC. | rax8k_q42013.htm |
Rackspace Hosting Reports Fourth Quarter 2013 Results
SAN ANTONIO - February 10, 2014 - Rackspace® Hosting, Inc. (NYSE: RAX), the open cloud company, announced financial results for the quarter ended December 31, 2013.
Net revenue for the fourth quarter of 2013 was $408 million, up 5.0% from the previous quarter and up 16% from the fourth quarter of 2012. Net revenue for the fourth quarter of 2013 was positively impacted by currency exchange rates when compared to the previous quarter by $4.2 million and positively impacted when compared to the fourth quarter of 2012 by $0.8 million.
Total server count increased to 103,886, up from 101,967 servers at the end of the previous quarter.
Adjusted EBITDA(1) for the quarter was $132 million, a 5.2% increase compared to the third quarter of 2013 and a 2% increase compared to the fourth quarter of 2012. The Adjusted EBITDA margin for the quarter was 32.4% compared to 32.3% in the previous quarter and 36.8% in the fourth 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 fourth quarter of 2013, the non-cash data center lease charge was $2.3 million, compared to $3.8 million in the previous quarter and $2.9 million in the fourth quarter of 2012.
Net income was $21 million for the quarter, up 27.5% from the previous quarter and down 30% from the fourth quarter of 2012. Net income margin for the quarter was 5.1% compared to 4.2% for the previous quarter and 8.5% in the fourth quarter of 2012.
Cash flow from operating activities was $110 million for the fourth quarter of 2013. Capital expenditures were $116 million, including $65 million for purchases of customer gear, $23 million for data center build outs, $8 million for office build outs and $20 million for capitalized software and other projects.
Adjusted Free Cash Flow(1) for the quarter was $15 million. Return on Capital(1) was 9.6%, compared to 8.0% in the prior quarter and 16.9% in the fourth quarter of 2012. Average monthly revenue per server was $1,322, compared to $1,290 in the prior quarter and $1,310 in the fourth quarter of 2012.
At the end of the fourth quarter of 2013, cash and cash equivalents were $260 million, and debt including capital lease obligations totaled $58 million.
On a worldwide basis, Rackspace employed 5,651 Rackers as of December 31, 2013, up from 5,450 in the previous quarter.
"With the leadership team and strategy we have in place, and the powerful position that we’ve established in the marketplace, I’m confident that we can make 2014 one of the best years in Rackspace history. In 2014, we will take the next step to carve out our differentiated position and help the next adoption wave of customers reach a hybrid cloud world. We will continue to invest in our portfolio of services and reinforce our differentiation in the market. We will win as we always have - one delighted customer at a time," said Graham Weston, Chairman and CEO.
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Rackspace Developments and Business Highlights
• | Rackspace announced that Taylor Rhodes, the company’s Chief Customer Officer (CCO), has been appointed President, effective immediately. Mr. Rhodes joined Rackspace in 2007 and has served in a variety of leadership positions within the company. Prior to his role as CCO, Mr. Rhodes served as Senior Vice President and Managing Director of Rackspace International. In his various roles, Mr. Rhodes has guided the company towards its mission of bringing the power of Rackspace’s hybrid cloud portfolio, backed by Fanatical Support®, to global markets. Additionally, he has played an integral role in evolving Fanatical Support for the benefit of customers worldwide, which has enabled Rackspace to advance its position as the service leader in the industry. |
• | Rackspace announced it has been ranked 29 on the 2014 FORTUNE 100 Best Companies to Work For® list. FORTUNE has named Rackspace as one of America’s top workplaces in six of the past seven years. Rackspace was selected among hundreds of companies vying for a place on the list this year. Great Place to Work® chose Rackspace using its unique methodology based on five dimensions: credibility, respect, fairness, pride and camaraderie. |
• | Rackspace announced it is extending its Fanatical Support® to help customers automate their cloud infrastructure with a new managed support service for DevOps tools. The new DevOps Automation Service will help developers automate the process of deploying and scaling hybrid cloud infrastructure for fast-growing applications, while advancing the adoption of the DevOps methodology among software and IT teams. |
• | Rackspace announced it has given nearly £250,000 worth of cloud hosting services and support for free to 300 members of the Rackspace Startup Programme since it started in the UK six months ago. This is in addition to many other benefits members have received, such as mentoring, expert technical advice and access to networking events. All of these benefits are helping power new UK businesses to succeed and are provided by Rackspace through over 50 partners, including premier incubators, accelerators, associations and investors. The high profile partners involved in the Rackspace Startup Programme include Techstars, Dreamstake, Wayra, Seedcamp, Oxygen Accelerator and Accelerator Academy. Partners located outside of London - ensuring program access for startups throughout the UK - include ignite100 in Newcastle, dotForge in Sheffield and four organizations in Ireland: Wayra, NDRC, Propeller Venture Accelerator and Ustart. |
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 800-946-0712 from the United States and Canada or dial 719-325-2328 from abroad and reference pass code 2801570. 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
Rackspace (NYSE: RAX) is the global leader in hybrid 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.
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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 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 anticipated operational and financial benefits from Rackspace strategies related to additions or changes in leadership, the success of leadership transition, company growth or success of new operational initiatives, any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the integration and effectiveness of new leadership into the Rackspace culture and business operations, instability or downturns in the economy, the effectiveness of managing company growth, infrastructure failures and other risks that are described in Rackspace Hosting's Form 10-Q for the quarter ended September 30, 2013, filed with the SEC on November 12, 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.
Contact:
Investor Relations | Corporate Communications |
Jessica Drought | Brandon Brunson |
210-312-4191 | 210-312-1357 |
ir@rackspace.com | brandon.brunson@rackspace.com |
- 3 -
Consolidated Statements of Income
(Unaudited)
Three Months Ended | Year Ended | |||||||||||||||||||
(In thousands, except per share data) | December 31, 2012 | September 30, 2013 | December 31, 2013 | December 31, 2012 | December 31, 2013 | |||||||||||||||
Net revenue | $ | 352,909 | $ | 388,636 | $ | 408,103 | $ | 1,309,239 | $ | 1,534,786 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of revenue (1) | 109,012 | 127,404 | 133,821 | 419,013 | 492,493 | |||||||||||||||
Research and development (1) | 16,942 | 23,773 | 24,849 | 56,736 | 90,213 | |||||||||||||||
Sales and marketing (1) | 43,467 | 50,869 | 55,465 | 166,172 | 208,417 | |||||||||||||||
General and administrative (1) | 64,951 | 78,075 | 79,128 | 244,732 | 297,520 | |||||||||||||||
Depreciation and amortization | 68,914 | 80,753 | 87,683 | 249,845 | 313,007 | |||||||||||||||
Total costs and expenses | 303,286 | 360,874 | 380,946 | 1,136,498 | 1,401,650 | |||||||||||||||
Income from operations | 49,623 | 27,762 | 27,157 | 172,741 | 133,136 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (991 | ) | (689 | ) | (656 | ) | (4,749 | ) | (3,118 | ) | ||||||||||
Interest and other income (expense) | 245 | 440 | 405 | 15 | 741 | |||||||||||||||
Total other income (expense) | (746 | ) | (249 | ) | (251 | ) | (4,734 | ) | (2,377 | ) | ||||||||||
Income before income taxes | 48,877 | 27,513 | 26,906 | 168,007 | 130,759 | |||||||||||||||
Income taxes | 18,970 | 11,202 | 6,108 | 62,589 | 44,022 | |||||||||||||||
Net income | $ | 29,907 | $ | 16,311 | $ | 20,798 | $ | 105,418 | $ | 86,737 | ||||||||||
Net income per share | ||||||||||||||||||||
Basic | $ | 0.22 | $ | 0.12 | $ | 0.15 | $ | 0.78 | $ | 0.63 | ||||||||||
Diluted | $ | 0.21 | $ | 0.11 | $ | 0.14 | $ | 0.75 | $ | 0.61 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||
Basic | 137,055 | 138,714 | 139,875 | 135,279 | 138,577 | |||||||||||||||
Diluted | 142,549 | 143,543 | 144,024 | 141,265 | 143,011 | |||||||||||||||
(1) | As previously reported in the Company's 10-Q filing for the three months ended September 30, 2013, certain reclassifications have been made to amounts reported for the periods ended December 31, 2012 in order to conform to the current period's presentation. |
- 4 -
Consolidated Balance Sheets
(In thousands) | December 31, 2012 | December 31, 2013 | |||||
(Unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 292,061 | $ | 259,733 | |||
Accounts receivable, net of allowance for doubtful accounts and customer credits of $4,236 as of December 31, 2012 and $3,891 as of December 31, 2013 | 92,834 | 123,898 | |||||
Deferred income taxes | 10,320 | 12,637 | |||||
Prepaid expenses | 25,195 | 30,782 | |||||
Other current assets | 4,835 | 11,918 | |||||
Total current assets | 425,245 | 438,968 | |||||
Property and equipment, net | 724,985 | 884,001 | |||||
Goodwill | 68,742 | 81,084 | |||||
Intangible assets, net | 23,802 | 23,880 | |||||
Other non-current assets | 52,777 | 57,089 | |||||
Total assets | $ | 1,295,551 | $ | 1,485,022 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 105,174 | $ | 122,047 | |||
Accrued compensation and benefits | 48,404 | 62,459 | |||||
Income and other taxes payable | 21,550 | 11,388 | |||||
Current portion of deferred revenue | 17,265 | 22,868 | |||||
Current portion of obligations under capital leases | 61,302 | 37,885 | |||||
Current portion of debt | 1,744 | 1,861 | |||||
Total current liabilities | 255,439 | 258,508 | |||||
Non-current liabilities: | |||||||
Deferred revenue | 3,695 | 3,662 | |||||
Obligations under capital leases | 60,335 | 18,273 | |||||
Debt | 1,991 | 124 | |||||
Deferred income taxes | 71,081 | 69,729 | |||||
Deferred rent | 32,293 | 43,046 | |||||
Other liabilities | 27,070 | 36,268 | |||||
Total liabilities | 451,904 | 429,610 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
Stockholders' equity: | |||||||
Common stock | 138 | 141 | |||||
Additional paid-in capital | 515,188 | 636,660 | |||||
Accumulated other comprehensive loss | (8,089 | ) | (4,536 | ) | |||
Retained earnings | 336,410 | 423,147 | |||||
Total stockholders’ equity | 843,647 | 1,055,412 | |||||
Total liabilities and stockholders’ equity | $ | 1,295,551 | $ | 1,485,022 | |||
- 5 -
Consolidated Statements of Cash Flows
Three Months Ended | Year Ended | ||||||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||||
(in thousands) | December 31, 2012 | September 30, 2013 | December 31, 2013 | December 31, 2012 | December 31, 2013 | ||||||||||||||
Cash Flows From Operating Activities | |||||||||||||||||||
Net income | $ | 29,907 | $ | 16,311 | $ | 20,798 | $ | 105,418 | $ | 86,737 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||
Depreciation and amortization | 68,914 | 80,753 | 87,683 | 249,845 | 313,007 | ||||||||||||||
Loss on disposal of equipment, net | 624 | 667 | 100 | 1,586 | 992 | ||||||||||||||
Provision for bad debts and customer credits | 1,741 | 1,482 | 655 | 6,300 | 4,498 | ||||||||||||||
Deferred income taxes | (4,568 | ) | 12,196 | (12,407 | ) | (775 | ) | (2,102 | ) | ||||||||||
Deferred rent | 2,930 | 3,801 | 2,279 | 9,259 | 11,564 | ||||||||||||||
Share-based compensation expense | 11,244 | 16,959 | 17,188 | 41,546 | 59,645 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | (11,065 | ) | (1,186 | ) | (16,156 | ) | (46,046 | ) | (33,539 | ) | |||||||||
Changes in certain assets and liabilities: | |||||||||||||||||||
Accounts receivable | (162 | ) | (10,641 | ) | (10,344 | ) | (29,265 | ) | (34,473 | ) | |||||||||
Prepaid expenses and other current assets | 6,127 | (18,004 | ) | 6,290 | (4,903 | ) | (12,270 | ) | |||||||||||
Accounts payable and accrued expenses | 15,062 | 11,413 | 8,355 | 66,268 | 35,303 | ||||||||||||||
Deferred revenue | 2,477 | (874 | ) | 4,176 | 2,185 | 5,367 | |||||||||||||
All other operating activities | (2,443 | ) | 1,673 | 901 | (1,919 | ) | 9,331 | ||||||||||||
Net cash provided by operating activities | 120,788 | 114,550 | 109,518 | 399,499 | 444,060 | ||||||||||||||
Cash Flows From Investing Activities | |||||||||||||||||||
Purchases of property and equipment | (82,919 | ) | (100,496 | ) | (126,723 | ) | (270,374 | ) | (452,596 | ) | |||||||||
Acquisitions, net of cash acquired | — | — | (3,727 | ) | (5,945 | ) | (9,930 | ) | |||||||||||
All other investing activities | 56 | (1,436 | ) | 110 | 98 | (1,698 | ) | ||||||||||||
Net cash used in investing activities | (82,863 | ) | (101,932 | ) | (130,340 | ) | (276,221 | ) | (464,224 | ) | |||||||||
Cash Flows From Financing Activities | |||||||||||||||||||
Principal payments of capital leases | (22,958 | ) | (15,658 | ) | (14,652 | ) | (75,928 | ) | (65,860 | ) | |||||||||
Principal payments of notes payable | (51 | ) | (966 | ) | (52 | ) | (1,962 | ) | (1,915 | ) | |||||||||
Payments for deferred acquisition obligations | (1,450 | ) | (58 | ) | (57 | ) | (6,176 | ) | (1,353 | ) | |||||||||
Proceeds from notes payable | — | — | — | 691 | — | ||||||||||||||
Receipt of Texas Enterprise Fund Grant | — | — | — | 3,500 | — | ||||||||||||||
Proceeds from employee stock plans | 9,770 | 8,446 | 8,971 | 41,284 | 23,817 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | 11,065 | 1,186 | 16,156 | 46,046 | 33,539 | ||||||||||||||
Net cash provided by (used in) financing activities | (3,624 | ) | (7,050 | ) | 10,366 | 7,455 | (11,772 | ) | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | 109 | 1,375 | 194 | 1,472 | (392 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents | 34,410 | 6,943 | (10,262 | ) | 132,205 | (32,328 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 257,651 | 263,052 | 269,995 | 159,856 | 292,061 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 292,061 | $ | 269,995 | $ | 259,733 | $ | 292,061 | $ | 259,733 | |||||||||
Supplemental cash flow information: | |||||||||||||||||||
Non-cash purchases of property and equipment | $ | 5,096 | $ | 17,062 | $ | (10,891 | ) | $ | 67,308 | $ | 12,718 | ||||||||
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Key Metrics - Quarter to Date (Unaudited) | |||||||||||||||||||
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except average monthly revenue per server) | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | ||||||||||||||
Growth | |||||||||||||||||||
Dedicated cloud, net revenue | $ | 265,585 | $ | 271,311 | $ | 276,845 | $ | 280,215 | $ | 291,265 | |||||||||
Public cloud, net revenue | $ | 87,324 | $ | 90,889 | $ | 99,002 | $ | 108,421 | $ | 116,838 | |||||||||
Net revenue | $ | 352,909 | $ | 362,200 | $ | 375,847 | $ | 388,636 | $ | 408,103 | |||||||||
Revenue growth (year over year) | 24.6 | % | 20.2 | % | 17.8 | % | 15.7 | % | 15.6 | % | |||||||||
Net upgrades (monthly average) | 1.2 | % | 0.9 | % | 1.5 | % | 1.5 | % | 1.1 | % | |||||||||
Churn (monthly average) | -0.7 | % | -0.8 | % | -0.8 | % | -0.8 | % | -0.7 | % | |||||||||
Growth in installed base (monthly average) (2) | 0.5 | % | 0.1 | % | 0.7 | % | 0.7 | % | 0.4 | % | |||||||||
Number of employees (Rackers) at period end | 4,852 | 5,043 | 5,272 | 5,450 | 5,651 | ||||||||||||||
Number of servers deployed at period end | 90,524 | 94,122 | 98,884 | 101,967 | 103,886 | ||||||||||||||
Average monthly revenue per server | $ | 1,310 | $ | 1,308 | $ | 1,298 | $ | 1,290 | $ | 1,322 | |||||||||
Profitability | |||||||||||||||||||
Income from operations | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | $ | 27,157 | |||||||||
Depreciation and amortization | $ | 68,914 | $ | 70,111 | $ | 74,460 | $ | 80,753 | $ | 87,683 | |||||||||
Share-based compensation expense: | |||||||||||||||||||
Cost of revenue | $ | 2,759 | $ | 2,519 | $ | 2,735 | $ | 3,453 | $ | 3,877 | |||||||||
Research and development | $ | 1,237 | $ | 1,528 | $ | 1,813 | $ | 2,306 | $ | 2,521 | |||||||||
Sales and marketing | $ | 1,764 | $ | 1,658 | $ | 1,744 | $ | 2,149 | $ | 1,766 | |||||||||
General and administrative | $ | 5,484 | $ | 6,478 | $ | 7,023 | $ | 9,051 | $ | 9,024 | |||||||||
Total share-based compensation expense | $ | 11,244 | $ | 12,183 | $ | 13,315 | $ | 16,959 | $ | 17,188 | |||||||||
Adjusted EBITDA (1) | $ | 129,781 | $ | 125,107 | $ | 123,179 | $ | 125,474 | $ | 132,028 | |||||||||
Adjusted EBITDA margin | 36.8 | % | 34.5 | % | 32.8 | % | 32.3 | % | 32.4 | % | |||||||||
Operating income margin | 14.1 | % | 11.8 | % | 9.4 | % | 7.1 | % | 6.7 | % | |||||||||
Income from operations | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | $ | 27,157 | |||||||||
Effective tax rate | 38.8 | % | 35.2 | % | 34.7 | % | 40.7 | % | 22.7 | % | |||||||||
Net operating profit after tax (NOPAT) (1) | $ | 30,369 | $ | 27,743 | $ | 23,119 | $ | 16,463 | $ | 20,992 | |||||||||
NOPAT margin | 8.6 | % | 7.7 | % | 6.2 | % | 4.2 | % | 5.1 | % | |||||||||
Capital efficiency and returns | |||||||||||||||||||
Interest bearing debt | $ | 125,372 | $ | 105,807 | $ | 88,434 | $ | 72,579 | $ | 58,143 | |||||||||
Stockholders' equity | $ | 843,647 | $ | 879,035 | $ | 933,897 | $ | 988,708 | $ | 1,055,412 | |||||||||
Less: Excess cash | $ | (249,712 | ) | $ | (235,163 | ) | $ | (217,950 | ) | $ | (223,359 | ) | $ | (210,761 | ) | ||||
Capital base | $ | 719,307 | $ | 749,679 | $ | 804,381 | $ | 837,928 | $ | 902,794 | |||||||||
Average capital base | $ | 717,010 | $ | 734,493 | $ | 777,030 | $ | 821,155 | $ | 870,361 | |||||||||
Capital turnover (annualized) | 1.97 | 1.97 | 1.93 | 1.89 | 1.88 | ||||||||||||||
Return on capital (annualized) (1) | 16.9 | % | 15.1 | % | 11.9 | % | 8.0 | % | 9.6 | % | |||||||||
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Key Metrics - Quarter to Date (Unaudited) | |||||||||||||||||||
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except average monthly revenue per server) | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | ||||||||||||||
Capital expenditures | |||||||||||||||||||
Cash purchases of property and equipment | $ | 82,919 | $ | 105,541 | $ | 119,836 | $ | 100,496 | $ | 126,723 | |||||||||
Non-cash purchases of property and equipment (3) | $ | 5,096 | $ | 19,858 | $ | (13,311 | ) | $ | 17,062 | $ | (10,891 | ) | |||||||
Total capital expenditures | $ | 88,015 | $ | 125,399 | $ | 106,525 | $ | 117,558 | $ | 115,832 | |||||||||
Customer gear | $ | 60,099 | $ | 85,690 | $ | 73,022 | $ | 73,784 | $ | 65,291 | |||||||||
Data center build outs | $ | 7,768 | $ | 13,228 | $ | 10,085 | $ | 12,441 | $ | 22,524 | |||||||||
Office build outs | $ | 2,288 | $ | 7,860 | $ | 1,683 | $ | 6,700 | $ | 8,085 | |||||||||
Capitalized software and other projects | $ | 17,860 | $ | 18,621 | $ | 21,735 | $ | 24,633 | $ | 19,932 | |||||||||
Total capital expenditures | $ | 88,015 | $ | 125,399 | $ | 106,525 | $ | 117,558 | $ | 115,832 | |||||||||
Infrastructure capacity and utilization | |||||||||||||||||||
Megawatts under contract at period end | 61.1 | 59.4 | 59.6 | 60.0 | 60.0 | ||||||||||||||
Megawatts available for use at period end | 36.9 | 38.8 | 44.4 | 46.9 | 46.9 | ||||||||||||||
Megawatts utilized at period end | 24.0 | 24.7 | 26.0 | 27.0 | 27.4 | ||||||||||||||
Annualized net revenue per average Megawatt of power utilized | $ | 59,437 | $ | 59,499 | $ | 59,305 | $ | 58,662 | $ | 60,015 | |||||||||
(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.
- 8 -
Key Metrics - Year to Date (Unaudited) | |||||||
Year Ended December 31, | |||||||
(Dollar amounts in thousands, except average monthly revenue per server) | 2012 | 2013 | |||||
Growth | |||||||
Dedicated cloud, net revenue | $ | 1,005,165 | $ | 1,119,636 | |||
Public cloud, net revenue | $ | 304,074 | $ | 415,150 | |||
Net revenue | $ | 1,309,239 | $ | 1,534,786 | |||
Revenue growth (year over year) | 27.7 | % | 17.2 | % | |||
Net upgrades (monthly average) | 1.5 | % | 1.3 | % | |||
Churn (monthly average) | -0.8 | % | -0.8 | % | |||
Growth in installed base (monthly average) (2) | 0.8 | % | 0.5 | % | |||
Number of employees (Rackers) at period end | 4,852 | 5,651 | |||||
Number of servers deployed at period end | 90,524 | 103,886 | |||||
Average monthly revenue per server | $ | 1,278 | $ | 1,307 | |||
Profitability | |||||||
Income from operations | $ | 172,741 | $ | 133,136 | |||
Depreciation and amortization | $ | 249,845 | $ | 313,007 | |||
Share-based compensation expense: | |||||||
Cost of revenue | $ | 9,592 | $ | 12,584 | |||
Research and development | $ | 4,856 | $ | 8,168 | |||
Sales and marketing | $ | 6,379 | $ | 7,317 | |||
General and administrative | $ | 20,719 | $ | 31,576 | |||
Total share-based compensation expense | $ | 41,546 | $ | 59,645 | |||
Adjusted EBITDA (1) | $ | 464,132 | $ | 505,788 | |||
Adjusted EBITDA margin | 35.5 | % | 33.0 | % | |||
Operating income margin | 13.2 | % | 8.7 | % | |||
Income from operations | $ | 172,741 | $ | 133,136 | |||
Effective tax rate | 37.3 | % | 33.7 | % | |||
Net operating profit after tax (NOPAT) (1) | $ | 108,309 | $ | 88,269 | |||
NOPAT margin | 8.3 | % | 5.8 | % | |||
Capital efficiency and returns | |||||||
Interest bearing debt | $ | 125,372 | $ | 58,143 | |||
Stockholders' equity | $ | 843,647 | $ | 1,055,412 | |||
Less: Excess cash | $ | (249,712 | ) | $ | (210,761 | ) | |
Capital base | $ | 719,307 | $ | 902,794 | |||
Average capital base | $ | 679,125 | $ | 802,818 | |||
Capital turnover | 1.93 | 1.91 | |||||
Return on capital (1) | 15.9 | % | 11.0 | % | |||
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Key Metrics - Year to Date (Unaudited) | |||||||
Year Ended December 31, | |||||||
(Dollar amounts in thousands, except average monthly revenue per server) | 2012 | 2013 | |||||
Capital expenditures | |||||||
Cash purchases of property and equipment | $ | 270,374 | $ | 452,596 | |||
Non-cash purchases of property and equipment (3) | $ | 67,308 | $ | 12,718 | |||
Total capital expenditures | $ | 337,682 | $ | 465,314 | |||
Customer gear | $ | 217,870 | $ | 297,787 | |||
Data center build outs | $ | 26,293 | $ | 58,278 | |||
Office build outs | $ | 14,382 | $ | 24,328 | |||
Capitalized software and other projects | $ | 79,137 | $ | 84,921 | |||
Total capital expenditures | $ | 337,682 | $ | 465,314 | |||
Infrastructure capacity and utilization | |||||||
Megawatts under contract at period end | 61.1 | 60.0 | |||||
Megawatts available for use at period end | 36.9 | 46.9 | |||||
Megawatts utilized at period end | 24.0 | 27.4 | |||||
Net revenue per average Megawatt of power utilized | $ | 58,188 | $ | 59,442 | |||
(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.
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Consolidated Quarterly Statements of Income
(Unaudited)
Three Months Ended | |||||||||||||||||||
(In thousands) | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | ||||||||||||||
Net revenue | $ | 352,909 | $ | 362,200 | $ | 375,847 | $ | 388,636 | $ | 408,103 | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 109,012 | 113,610 | 117,658 | 127,404 | 133,821 | ||||||||||||||
Research and development | 16,942 | 18,375 | 23,216 | 23,773 | 24,849 | ||||||||||||||
Sales and marketing | 43,467 | 49,814 | 52,269 | 50,869 | 55,465 | ||||||||||||||
General and administrative | 64,951 | 67,477 | 72,840 | 78,075 | 79,128 | ||||||||||||||
Depreciation and amortization | 68,914 | 70,111 | 74,460 | 80,753 | 87,683 | ||||||||||||||
Total costs and expenses | 303,286 | 319,387 | 340,443 | 360,874 | 380,946 | ||||||||||||||
Income from operations | 49,623 | 42,813 | 35,404 | 27,762 | 27,157 | ||||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (991 | ) | (940 | ) | (833 | ) | (689 | ) | (656 | ) | |||||||||
Interest and other income (expense) | 245 | 199 | (303 | ) | 440 | 405 | |||||||||||||
Total other income (expense) | (746 | ) | (741 | ) | (1,136 | ) | (249 | ) | (251 | ) | |||||||||
Income before income taxes | 48,877 | 42,072 | 34,268 | 27,513 | 26,906 | ||||||||||||||
Income taxes | 18,970 | 14,811 | 11,901 | 11,202 | 6,108 | ||||||||||||||
Net income | $ | 29,907 | $ | 27,261 | $ | 22,367 | $ | 16,311 | $ | 20,798 | |||||||||
Three Months Ended | |||||||||||||||||||
(Percent of net revenue) | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | ||||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 30.9 | % | 31.4 | % | 31.3 | % | 32.8 | % | 32.8 | % | |||||||||
Research and development | 4.8 | % | 5.1 | % | 6.2 | % | 6.1 | % | 6.1 | % | |||||||||
Sales and marketing | 12.3 | % | 13.8 | % | 13.9 | % | 13.1 | % | 13.6 | % | |||||||||
General and administrative | 18.4 | % | 18.6 | % | 19.4 | % | 20.1 | % | 19.4 | % | |||||||||
Depreciation and amortization | 19.5 | % | 19.4 | % | 19.8 | % | 20.8 | % | 21.5 | % | |||||||||
Total costs and expenses | 85.9 | % | 88.2 | % | 90.6 | % | 92.9 | % | 93.3 | % | |||||||||
Income from operations | 14.1 | % | 11.8 | % | 9.4 | % | 7.1 | % | 6.7 | % | |||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (0.3 | )% | (0.3 | )% | (0.2 | )% | (0.2 | )% | (0.2 | )% | |||||||||
Interest and other income (expense) | 0.1 | % | 0.1 | % | (0.1 | )% | 0.1 | % | 0.1 | % | |||||||||
Total other income (expense) | (0.2 | )% | (0.2 | )% | (0.3 | )% | (0.1 | )% | (0.1 | )% | |||||||||
Income before income taxes | 13.8 | % | 11.6 | % | 9.1 | % | 7.1 | % | 6.6 | % | |||||||||
Income taxes | 5.4 | % | 4.1 | % | 3.2 | % | 2.9 | % | 1.5 | % | |||||||||
Net income | 8.5 | % | 7.5 | % | 6.0 | % | 4.2 | % | 5.1 | % | |||||||||
Due to rounding, totals may not equal the sum of the line items in the table above. | |||||||||||||||||||
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(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 tables below:
Three Months Ended | |||||||||||||||||||
(Dollars in thousands) | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | ||||||||||||||
Net revenue | $ | 352,909 | $ | 362,200 | $ | 375,847 | $ | 388,636 | $ | 408,103 | |||||||||
Income from operations | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | $ | 27,157 | |||||||||
Net income | $ | 29,907 | $ | 27,261 | $ | 22,367 | $ | 16,311 | $ | 20,798 | |||||||||
Plus: Income taxes | 18,970 | 14,811 | 11,901 | 11,202 | 6,108 | ||||||||||||||
Plus: Total other (income) expense | 746 | 741 | 1,136 | 249 | 251 | ||||||||||||||
Plus: Depreciation and amortization | 68,914 | 70,111 | 74,460 | 80,753 | 87,683 | ||||||||||||||
Plus: Share-based compensation expense | 11,244 | 12,183 | 13,315 | 16,959 | 17,188 | ||||||||||||||
Adjusted EBITDA | $ | 129,781 | $ | 125,107 | $ | 123,179 | $ | 125,474 | $ | 132,028 | |||||||||
Operating income margin | 14.1 | % | 11.8 | % | 9.4 | % | 7.1 | % | 6.7 | % | |||||||||
Adjusted EBITDA margin | 36.8 | % | 34.5 | % | 32.8 | % | 32.3 | % | 32.4 | % | |||||||||
Year Ended December 31, | |||||||
(Dollars in thousands) | 2012 | 2013 | |||||
Net revenue | $ | 1,309,239 | $ | 1,534,786 | |||
Income from operations | $ | 172,741 | $ | 133,136 | |||
Net income | $ | 105,418 | $ | 86,737 | |||
Plus: Income taxes | 62,589 | 44,022 | |||||
Plus: Total other (income) expense | 4,734 | 2,377 | |||||
Plus: Depreciation and amortization | 249,845 | 313,007 | |||||
Plus: Share-based compensation expense | 41,546 | 59,645 | |||||
Adjusted EBITDA | $ | 464,132 | $ | 505,788 | |||
Operating income margin | 13.2 | % | 8.7 | % | |||
Adjusted EBITDA margin | 35.5 | % | 33.0 | % | |||
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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, accrued compensation and benefits, and income and other taxes payable – deferred revenue – other non-current liabilities, deferred income taxes, and deferred rent).
Year-to-date average balances are based on an average calculated using the quarter-end balances at the beginning of the period and all other quarter ending balances included in the period.
We define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which is calculated as three percent of our annualized net revenue for the three months prior to the period end. We will periodically review the calculation and adjust it to reflect our projected cash requirements for the upcoming year.
We believe that ROC is an important metric for investors in evaluating our company’s performance. ROC relates after-tax operating profits with the capital that is placed into service. It is therefore a performance metric that incorporates both the Statement of Comprehensive Income and the Balance Sheet. ROC measures how successfully capital is deployed within a company.
Note that ROC is not a measure of financial performance under GAAP and should not be considered a substitute for return on assets, which we calculate directly from amounts on the Statement of Comprehensive Income and the Balance Sheet. ROC has limitations as an analytical tool, and when assessing our operating performance, you should not consider ROC in isolation or as a substitute for other financial data prepared in accordance with GAAP. Other companies may calculate ROC differently than we do, limiting its usefulness as a comparative measure.
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See our reconciliation of the calculation of ROC to the calculation of return on assets in the tables below:
Three Months Ended | |||||||||||||||||||
(Dollars in thousands) | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | ||||||||||||||
Income from operations | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | $ | 27,157 | |||||||||
Effective tax rate | 38.8 | % | 35.2 | % | 34.7 | % | 40.7 | % | 22.7 | % | |||||||||
Net operating profit after tax (NOPAT) | $ | 30,369 | $ | 27,743 | $ | 23,119 | $ | 16,463 | $ | 20,992 | |||||||||
Net income | $ | 29,907 | $ | 27,261 | $ | 22,367 | $ | 16,311 | $ | 20,798 | |||||||||
Total assets at period end | $ | 1,295,551 | $ | 1,348,350 | $ | 1,377,928 | $ | 1,451,769 | $ | 1,485,022 | |||||||||
Less: Excess cash | (249,712 | ) | (235,163 | ) | (217,950 | ) | (223,359 | ) | (210,761 | ) | |||||||||
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable | (175,128 | ) | (197,686 | ) | (178,552 | ) | (213,268 | ) | (195,894 | ) | |||||||||
Less: Deferred revenue (current and non-current) | (20,960 | ) | (21,811 | ) | (22,636 | ) | (22,211 | ) | (26,530 | ) | |||||||||
Less: Other non-current liabilities, deferred income taxes, and deferred rent | (130,444 | ) | (144,011 | ) | (154,409 | ) | (155,003 | ) | (149,043 | ) | |||||||||
Capital base | $ | 719,307 | $ | 749,679 | $ | 804,381 | $ | 837,928 | $ | 902,794 | |||||||||
Average total assets | $ | 1,268,658 | $ | 1,321,951 | $ | 1,363,139 | $ | 1,414,849 | $ | 1,468,396 | |||||||||
Average capital base | $ | 717,010 | $ | 734,493 | $ | 777,030 | $ | 821,155 | $ | 870,361 | |||||||||
Return on assets (annualized) | 9.4 | % | 8.2 | % | 6.6 | % | 4.6 | % | 5.7 | % | |||||||||
Return on capital (annualized) | 16.9 | % | 15.1 | % | 11.9 | % | 8.0 | % | 9.6 | % | |||||||||
Year Ended December 31, | |||||||
(Dollars in thousands) | 2012 | 2013 | |||||
Income from operations | $ | 172,741 | $ | 133,136 | |||
Effective tax rate | 37.3 | % | 33.7 | % | |||
Net operating profit after tax (NOPAT) | $ | 108,309 | $ | 88,269 | |||
Net income | $ | 105,418 | $ | 86,737 | |||
Total assets at period end | $ | 1,295,551 | $ | 1,485,022 | |||
Less: Excess cash | (249,712 | ) | (210,761 | ) | |||
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable | (175,128 | ) | (195,894 | ) | |||
Less: Deferred revenue (current and non-current) | (20,960 | ) | (26,530 | ) | |||
Less: Other non-current liabilities, deferred income taxes, and deferred rent | (130,444 | ) | (149,043 | ) | |||
Capital base | $ | 719,307 | $ | 902,794 | |||
Average total assets | $ | 1,158,384 | $ | 1,391,724 | |||
Average capital base | $ | 679,125 | $ | 802,818 | |||
Return on assets (Net income/Average total assets) | 9.1 | % | 6.2 | % | |||
Return on capital (NOPAT/Average capital base) | 15.9 | % | 11.0 | % | |||
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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 | Year Ended | ||||||
(In thousands) | December 31, 2013 | December 31, 2013 | |||||
Adjusted EBITDA | $ | 132,028 | $ | 505,788 | |||
Non-cash deferred rent | 2,279 | 11,564 | |||||
Total capital expenditures | (115,832 | ) | (465,314 | ) | |||
Cash payments for interest, net | (609 | ) | (3,096 | ) | |||
Cash payments for income taxes, net | (2,575 | ) | (14,930 | ) | |||
Adjusted free cash flow | $ | 15,291 | $ | 34,012 | |||
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