Rackspace: Fiscal 2Q08 Financial Results

Rackspace Hosting, Inc., hosting services provider, reported quarterly results for the quarter ended June 30, 2008. Summary results were provided in the company’s S-1 filed on August 5, 2008 for its subsequent Initial Public Offering.

Rackspace continued to deliver on its growth strategy in the second quarter of 2008. Net revenues for the second quarter ended June 30, 2008 were $130.8 million, up 9.4% from the first quarter of 2008 and up 55.7% from the quarter ended June 30, 2007. Net revenues for the first six months of 2008 were $250.4 million, an increase of 57.3% relative to net revenues for the first six months of 2007. The installed base continued to provide a significant portion of growth during the second quarter 2008, growing at an average rate of 1.0% per month. Relative to the quarter ended March 31, 2008, customer count increased by 6.1% to more than 33,600 customers (including more than 13,800 mail customers) and server count increased by 6.7% to more than 42,400.

"We delivered strong growth despite a challenging macroeconomic environment, which demonstrates the strength of Rackspace’s Fanatical Support and its ability to win and keep customers in a tough climate," said Lanham Napier, president and chief executive officer, Rackspace Hosting. "We are seeing significant global growth, and we will continue to make disciplined, long-term investments in order to capitalize on the demand for hosting.”

Adjusted EBITDA was $33.8 million for the second quarter, a 5.9% increase compared to the previous quarter and a 56.5% increase compared to the same quarter last year. Net income was $4.2 million for the second quarter, a 23.2% decline compared to the previous quarter and a 13.1% decline compared to the same quarter last year. The reduction in net income was due mainly to current infrastructure projects and the associated increases in depreciation and amortization and interest expenses.

Cash flow from operating activities was $32.8 million for the second quarter of 2008. Capital expenditures were $66.3 million, including $27.3 million for purchases of customer gear, $18.5 million for data center buildouts, $12.8 million for office buildouts, and $7.7 million for capitalized software and other expenditures. Of the $66.3 million in capital expenditures, $26.0 million were vendor financed equipment purchases.

The company is reducing its anticipated capital expenditures estimate for 2008 to $310 million from $335 million. Of this reduction, $10 million is for office space that has been deferred to 2009. The remaining $15 million is in Other Capital that was originally budgeted for unspecified price increases that the company no longer anticipates to occur. This new estimate also includes the capital to build out the Hong Kong datacenter. Of the $20 million investment referred to in the company’s September 8, 2008 press release, $10 million is scheduled to be spent this year, most of which is capital.

At the end of the second quarter, cash and cash equivalents were $35.1 million. Debt obligations totaled $183.6 million. Of those, $109.9 million were related to current and non-current debt, and $73.7 million were related to obligations under capital and finance method leases.

On a worldwide basis, Rackspace employed 2,422 Rackers as of June 30, 2008, up from 2,254 Rackers as of March 31, 2008, and 1,663 Rackers as of June 30, 2007.

Significant Developments During the Second Quarter of 2008

• Named Best Place to Work in IT: IDG’s Computerworld magazine named Rackspace as one of the best places to work in the information technology field. This is solid recognition of the company’s culture, and Rackspace’s ability to retain and hire a skilled workforce that continually goes above and beyond to develop solutions for its customers.
• Slough, U.K. Data Center Opened: June 9 marked the opening of a new data center in Slough, U.K. This unique facility with approximately 50,000 square feet is powered by renewable resources and is consistent with Rackspace’s goal to minimize energy requirements and the burning of fossil fuel. This opening marks Rackspace’s first solely managed data center in Europe, which will serve as the foundation of the company’s expansion in the region. In the initial phase, 18,713 square feet of technical space were deployed.

Significant Recent Developments (after June 30, 2008)

• Initial Public Offering: On August 8, Rackspace began trading its shares on the New York Stock Exchange under the symbol RAX. Through this offering, the company received net proceeds of $144.9 million, which will be primarily used to fund the company’s growth initiatives.
• Launch of Hong Kong Operations: On September 8, Rackspace opened its Asian headquarters and data center in Hong Kong to meet global demand. This expansion into Asia marks the company’s continued investment in superior customer service and exhibits its confidence in the business opportunity that Asia represents.

“We have marked a major milestone in Rackspace’s history,” said Bruce Knooihuizen, senior vice president and chief financial officer, Rackspace Hosting. “Completing the initial public offering provides us with the financial flexibility to pursue our growth plans. The proceeds of this offering, together with the committed debt capital available to us, allow for the necessary infrastructure investments to support our growth and the development of new products, geographies and markets. While the U.S. remains the most important market for the company for the foreseeable future, we are excited about the company’s prospects in EMEA and Asia, which are attractive markets for us. Our returns in the core managed hosting services remain strong, and we continue to invest in this area as well as in our newer technologies such as email and cloud hosting services.”