Rackspace Reports Second Quarter Results
/EINPresswire.com/ -- SAN ANTONIO, TX--(Marketwired - August 08, 2016) -
- Revenue grew 7.0 percent on a GAAP basis compared to Q2 2015
- Revenue grew 8.9 percent on a normalized basis compared to Q2 2015
- Net income margin was 6.8 percent
- Adjusted EBITDA margin was 35.8 percent
- Cash flow from operating activities was $165 million
- Free Cash Flow was $98 million
- On a fully diluted basis, GAAP EPS was 28 cents and Non-GAAP EPS was 38 cents
Rackspace
On a GAAP basis, net revenue for the second quarter of 2016 was $524 million, up 7.0 percent from the second quarter of 2015. These results were adversely affected by shifts in currency exchange rates and the sale of its Jungle Disk business. Adjusted for those factors, on a normalized basis, net revenue grew 8.9 percent from the second quarter of 2015.
Net income for the second quarter of 2016 was $36 million, for a margin of 6.8 percent, up from 5.8 percent in the second quarter of 2015. Adjusted EBITDA for the second quarter of 2016 was $187 million, for a margin of 35.8 percent, up from 32.8 percent in the second quarter of 2015.
For the second quarter of 2016, cash flow from operating activities was $165 million and capital expenditures were $82 million. Free Cash Flow was $98 million. At the end of the second quarter of 2016, cash and cash equivalents were $544 million, and interest-bearing debt including capital lease obligations totaled $501 million. Return on Assets was 7.1 percent in the second quarter of 2016 compared to 6.4 percent in the second quarter of 2015. Return on Capital was 16.4 percent in the second quarter of 2016 compared to 11.8 percent in the second quarter of 2015. The company repurchased $66 million in shares in the second quarter of 2016.
"Demand is scaling rapidly for the expertise and managed services that we provide to businesses that use AWS, the Microsoft Cloud, and our OpenStack private cloud," said Taylor Rhodes, president and CEO of Rackspace. "We now serve almost 600 customers on these platforms, including some of the world's largest companies. During the second quarter, we demonstrated continued revenue growth, along with higher profitability, higher capital efficiency, strong operating cash flow and record free cash flow."
As Rackspace continues to focus on delivering expertise and Fanatical Support® for the world's leading clouds, while serving more enterprise customers, it has been divesting services that are not core to this strategy. Rackspace signed an agreement in July to sell its Cloud Sites business to Liquid Web. Liquid Web is a global provider of professional cloud and application hosting services with over $90 million in annual revenue. The transaction is expected to close in the third quarter of 2016.
For the third quarter of 2016, Rackspace expects revenue to be between $510 million and $515 million. Excluding the expected negative impact of currency movements and asset divestitures, Rackspace expects its normalized year-over-year growth rate for the quarter to range between 5 percent and 6 percent. For the full year of 2016, Rackspace expects revenue to be between $2.06 billion and $2.08 billion. These revenue estimates factor in approximately $70 million of negative impact from currency movements and asset divestitures. Excluding the expected negative impact, Rackspace expects its normalized growth rate for the year to range between 6.5 percent and 7.5 percent. Adjusted EBITDA margins are expected to range between 33 percent and 35 percent for the third quarter and the full year. Capital expenditures as a percent of revenue are expected to range between 16 percent and 18 percent for the full year.
Recent Highlights
- Rackspace achieved AWS Marketing and Commerce Competency, and can help AWS customers architect, deploy and manage e-commerce solutions more effectively.
- Rackspace announced Fanatical Support® for Amazon Web Services (AWS) is now available for customers with Payment Card Industry (PCI) and Health Insurance Portability and Accountability Act (HIPAA) workloads on AWS.
- Fortune ranked Rackspace in its top 100 best places to work for millennials, who represent a major part of the talent pool in the cloud computing industry.
- Rackspace completed the $500 million share buyback commitment that was announced last August.
- Rackspace signed an agreement to sell its Cloud Sites business to Liquid Web, which is expected to close in the third quarter of 2016.
Conference Call and Webcast
Rackspace's executive management will host a conference call to discuss the results for the second quarter of 2016 starting today at 4:30 p.m. ET.
To access the conference call from the United States and Canada, please dial 800-954-0696; from the United Kingdom, dial 0800-528-0984; and from Hong Kong, dial 800-968-283.
A live webcast and a replay of the conference call, along with an earnings slide presentation, will be available on Rackspace's website, located at ir.rackspace.com.
Non-GAAP Financial Information
Adjusted EBITDA, revenue growth adjusted for foreign currency and asset divestitures, Return on Capital, Free Cash Flow, and Non-GAAP EPS are non-GAAP financial measures. Rackspace believes these measures provide helpful information with respect to evaluating the company's performance. Other companies may calculate non-GAAP measures differently, limiting their usefulness as a comparative measure. The financial statement tables that accompany this press release include reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures.
With respect to our third quarter of 2016 and full year 2016 expectations given above, reconciliations of revenue growth adjusted for foreign currency and asset divestitures to net revenue are included in the financial statement tables that accompany this press release. A reconciliation of Adjusted EBITDA margin to net income margin cannot be provided without unreasonable efforts due to high variability in net non-operating foreign currency exchange gains or losses and the inability to predict future acquisitions, dispositions, and certain other items that arise from time to time, the impact of which is excluded from Adjusted EBITDA margin. The Company is unable to address the probable significance of the unavailable information.
About Rackspace
Rackspace (NYSE: RAX), the #1 managed cloud company, helps businesses tap the power of cloud computing without the complexity and cost of managing it on their own. Rackspace engineers deliver specialized expertise, easy-to-use tools, and Fanatical Support® for leading technologies developed by AWS, Google, Microsoft, OpenStack, VMware and others. The company serves customers in 120 countries, including more than half of the FORTUNE 100. Rackspace was named a leader in the 2015 Gartner Magic Quadrant for Cloud-Enabled Managed Hosting and has been honored by Fortune, Forbes, and others as one of the best companies to work for. Learn more at 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 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 impact of divestitures, or 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's Form 10-K/A for the year ended December 31, 2015, filed with the SEC on June 13, 2016, and subsequent filings and in the 10-Q for the quarter ended June 30, 2016, expected to be filed no later than August 9, 2016. Except as required by law, Rackspace 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 Six Months Ended
-------------------------- ------------------
June March June June
(In millions, except per share 30, 31, 30, 30, June 30,
data) 2015 2016 2016 2015 2016
-------- -------- -------- -------- ---------
Net revenue $ 489.4 $ 518.1 $ 523.6 $ 969.6 $1,041.7
Costs and expenses:
Cost of revenue 165.4 180.4 171.5 328.2 351.9
Research and development 33.2 27.6 26.9 65.2 54.5
Sales and marketing 64.4 63.7 63.8 123.4 127.5
General and administrative 86.5 85.7 92.5 173.1 178.2
Depreciation and
amortization 97.7 104.0 104.6 194.6 208.6
-------- -------- -------- -------- ---------
Total costs and expenses 447.2 461.4 459.3 884.5 920.7
-------- -------- -------- -------- ---------
Gain on sale - 24.5 - - 24.5
-------- -------- -------- -------- ---------
Income from operations 42.2 81.2 64.3 85.1 145.5
-------- -------- -------- -------- ---------
Other income (expense):
Interest expense (1.9) (10.5) (10.3) (2.3) (20.8)
Interest and other income
(expense) 1.4 1.1 0.4 (0.6) 1.5
-------- -------- -------- -------- ---------
Total other income
(expense) (0.5) (9.4) (9.9) (2.9) (19.3)
-------- -------- -------- -------- ---------
Income before income
taxes 41.7 71.8 54.4 82.2 126.2
Income taxes 13.4 23.0 18.6 26.4 41.6
-------- -------- -------- -------- ---------
Net income $ 28.3 $ 48.8 $ 35.8 $ 55.8 $ 84.6
======== ======== ======== ======== =========
Net income per share
Basic $ 0.20 $ 0.37 $ 0.28 $ 0.39 $ 0.66
======== ======== ======== ======== =========
Diluted $ 0.20 $ 0.37 $ 0.28 $ 0.39 $ 0.66
======== ======== ======== ======== =========
Weighted average number of
shares outstanding
Basic 142.4 130.3 126.1 141.9 128.2
======== ======== ======== ======== =========
Diluted 144.5 131.0 127.0 144.4 129.0
======== ======== ======== ======== =========
Consolidated Balance Sheets
(In millions) December
31, June 30,
2015 2016
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 484.7 $ 544.3
Accounts receivable, net of allowance for
doubtful accounts and customer credits of $7.3
as of December 31, 2015 and $8.0 as of June 30,
2016 174.4 168.6
Prepaid expenses 46.6 45.1
Other current assets 12.7 14.6
------------ ------------
Total current assets 718.4 772.6
Property and equipment, net 1,148.0 1,071.6
Goodwill 81.1 80.4
Intangible assets, net 9.1 4.8
Other non-current assets 57.6 67.4
------------ ------------
Total assets $ 2,014.2 $ 1,996.8
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 136.3 $ 155.6
Accrued compensation and benefits 57.3 54.7
Income and other taxes payable 12.0 8.8
Deferred revenue 29.6 28.6
Capital lease obligations 1.7 0.5
------------ ------------
Total current liabilities 236.9 248.2
Non-current liabilities:
Debt 492.4 492.8
Finance lease obligations for build-to-suit
leases 164.3 153.0
Deferred income taxes 54.8 60.9
Deferred rent 49.5 49.3
Deferred revenue 1.6 1.6
Capital lease obligations 0.2 0.3
Other liabilities 46.4 33.2
------------ ------------
Total liabilities 1,046.1 1,039.3
Commitments and Contingencies
Stockholders' equity:
Common stock 0.1 0.1
Additional paid-in capital 834.5 859.7
Accumulated other comprehensive loss (36.2) (62.8)
Retained earnings 169.7 160.5
------------ ------------
Total stockholders' equity 968.1 957.5
------------ ------------
Total liabilities and stockholders' equity $ 2,014.2 $ 1,996.8
============ ============
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- -----------------
June March June June June
30, 31, 30, 30, 30,
(In millions) 2015 2016 2016 2015 2016
-------- -------- -------- -------- --------
Cash Flows From Operating
Activities
Net income $ 28.3 $ 48.8 $ 35.8 $ 55.8 $ 84.6
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 97.7 104.0 104.6 194.6 208.6
Deferred income taxes (15.0) 2.4 2.5 (30.3) 4.9
Share-based compensation
expense 20.4 17.8 18.4 40.4 36.2
Excess tax benefits from
share-based compensation
arrangements (18.6) (15.8) (10.2) (38.8) (26.0)
Gain on sale - (24.5) - - (24.5)
Other operating activities 2.2 4.0 2.3 5.0 6.3
Changes in operating assets
and liabilities:
Accounts receivable (6.5) (0.5) (2.5) (8.3) (3.0)
Prepaid expenses and
other current assets (8.1) (1.0) 0.1 (7.3) (0.9)
Accounts payable, accrued
expenses, and other
current liabilities 16.0 20.8 20.4 42.9 41.2
Deferred revenue 2.7 (2.0) 1.6 7.0 (0.4)
Deferred rent (0.4) (0.3) (0.2) - (0.5)
Other non-current assets
and liabilities 4.2 2.5 (7.9) 7.2 (5.4)
-------- -------- -------- -------- --------
Net cash provided by
operating activities 122.9 156.2 164.9 268.2 321.1
Cash Flows From Investing
Activities
Purchases of property and
equipment (104.7) (82.9) (76.7) (197.2) (159.6)
Proceeds from sale - 27.0 - - 27.0
Other investing activities 0.7 (3.0) (10.9) 1.4 (13.9)
-------- -------- -------- -------- --------
Net cash used in investing
activities (104.0) (58.9) (87.6) (195.8) (146.5)
Cash Flows From Financing
Activities
Repayments of debt - - - (25.1) -
Payments for debt issuance
costs - (0.4) - - (0.4)
Principal payments of capital
and build-to-suit leases (4.4) (0.8) (0.6) (10.0) (1.4)
Payments for deferred
acquisition obligations - - - (0.1) -
Repurchase of common stock - (60.8) (72.4) - (133.2)
Shares of common stock
withheld for employee taxes - (0.3) (0.2) - (0.5)
Proceeds from employee stock
plans 6.7 0.2 2.7 28.5 2.9
Excess tax benefits from
share-based compensation
arrangements 18.6 15.8 10.2 38.8 26.0
-------- -------- -------- -------- --------
Net cash provided by (used
in) financing activities 20.9 (46.3) (60.3) 32.1 (106.6)
Effect of exchange rate
changes on cash and cash
equivalents 1.6 (1.5) (6.9) (0.9) (8.4)
-------- -------- -------- -------- --------
Increase in cash and cash
equivalents 41.4 49.5 10.1 103.6 59.6
Cash and cash equivalents,
beginning of period 275.7 484.7 534.2 213.5 484.7
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of period $ 317.1 $ 534.2 $ 544.3 $ 317.1 $ 544.3
======== ======== ======== ======== ========
Supplemental Cash Flow
Information
Non-cash purchases of
property and equipment (1) $ 46.9 $ (4.1) $ 5.4 $ 44.6 $ 1.3
Increase (decrease) in
accrual for repurchases of
common stock not yet settled $ - $ 6.8 $ (6.8) $ - $ -
(1) Non-cash purchases of property and equipment primarily represents
changes in amounts accrued but not yet paid.
Key Metrics - Quarter to Date
(Unaudited)
Three Months Ended
------------------------------------------------------
(Dollar amounts in
millions, except September December
average monthly June 30, 30, 31, March 31, June 30,
revenue per server) 2015 2015 2015 2016 2016
---------- ---------- ---------- ---------- ----------
Growth
Net revenue $ 489.4 $ 508.9 $ 522.8 $ 518.1 $ 523.6
Revenue growth
(year over year) 11.0% 10.7% 10.7% 7.9% 7.0%
Constant currency
revenue growth
(year over year)
(1) 13.7% 12.9% 12.0% 9.2% 8.2%
Revenue growth
adjusted for
foreign currency
and asset
divestiture (year
over year) (1) N/A N/A N/A 9.9% 8.9%
Number of employees
(Rackers) at
period end 6,115 6,177 6,189 6,203 6,199
Number of servers
deployed at period
end (2) 116,329 118,654 118,177 116,507 114,231
Average monthly
revenue per server $ 1,416 $ 1,444 $ 1,472 $ 1,472 $ 1,513
Profitability
Net income $ 28.3 $ 35.5 $ 31.1 $ 48.8 $ 35.8
Net income margin 5.8% 7.0% 6.0% 9.4% 6.8%
Income from
operations $ 42.2 $ 55.0 $ 59.9 $ 81.2 $ 64.3
Depreciation and
amortization $ 97.7 $ 101.3 $ 104.0 $ 104.0 $ 104.6
Share-based
compensation
expense:
Cost of revenue $ 4.1 $ 4.2 $ 4.5 $ 4.1 $ 4.4
Research and
development $ 5.7 $ 2.4 $ 2.4 $ 2.2 $ 2.4
Sales and
marketing $ 2.8 $ 2.7 $ 1.5 $ 2.6 $ 2.8
General and
administrative $ 7.8 $ 10.3 $ 9.7 $ 8.9 $ 8.8
---------- ---------- ---------- ---------- ----------
Total share-
based
compensation
expense $ 20.4 $ 19.6 $ 18.1 $ 17.8 $ 18.4
Gain on sale $ - $ - $ - $ (24.5) $ -
---------- ---------- ---------- ---------- ----------
Adjusted EBITDA
(1) $ 160.3 $ 175.9 $ 182.0 $ 178.5 $ 187.3
Adjusted EBITDA
margin 32.8% 34.6% 34.8% 34.5% 35.8%
Operating income
margin 8.6% 10.8% 11.5% 15.7% 12.3%
Income from
operations $ 42.2 $ 55.0 $ 59.9 $ 81.2 $ 64.3
Adjustment for gain
on sale $ - $ - $ - $ (24.5) $ -
Adjustment for
build-to-suit
lease impact (3) $ (0.4) $ (1.1) $ (2.3) $ (2.2) $ (2.6)
---------- ---------- ---------- ---------- ----------
Income from
operations,
adjusted $ 41.8 $ 53.9 $ 57.6 $ 54.5 $ 61.7
Effective tax rate 32.2% 30.4% 42.6% 32.1% 34.0%
---------- ---------- ---------- ---------- ----------
Net operating
profit after tax
(NOPAT) (1) $ 28.4 $ 37.5 $ 33.1 $ 37.0 $ 40.7
NOPAT margin 5.8% 7.4% 6.3% 7.1% 7.8%
Capital efficiency
and returns
Average total
assets $ 1,756.0 $ 1,787.9 $ 1,881.7 $ 2,019.8 $ 2,011.1
Return on assets
(annualized) 6.4% 8.0% 6.6% 9.7% 7.1%
Interest bearing
debt (4) $ 6.9 $ 143.6 $ 501.9 $ 501.3 $ 500.8
Stockholders'
equity $ 1,233.9 $ 1,042.0 $ 968.1 $ 975.9 $ 957.5
Less: Excess cash $ (258.4) $ (128.0) $ (422.0) $ (472.0) $ (481.5)
---------- ---------- ---------- ---------- ----------
Capital base $ 982.4 $ 1,057.6 $ 1,048.0 $ 1,005.2 $ 976.8
Average capital
base $ 961.2 $ 1,020.0 $ 1,052.8 $ 1,026.6 $ 991.0
Capital turnover
(annualized) 2.04 2.00 1.99 2.02 2.11
Return on capital
(annualized) (1) 11.8% 14.7% 12.6% 14.4% 16.4%
Capital expenditures
Cash purchases of
property and
equipment $ 104.7 $ 134.7 $ 143.0 $ 82.9 $ 76.7
Non-cash purchases
of property and
equipment (5) $ 46.9 $ (7.0) $ (46.5) $ (4.1) $ 5.4
---------- ---------- ---------- ---------- ----------
Total capital
expenditures $ 151.6 $ 127.7 $ 96.5 $ 78.8 $ 82.1
Customer gear $ 117.3 $ 87.1 $ 61.8 $ 46.2 $ 47.4
Data center build
outs $ 15.8 $ 18.8 $ 10.6 $ 13.1 $ 9.7
Office build outs $ 3.3 $ 6.1 $ 7.8 $ 0.3 $ 1.1
Capitalized
software and other
projects $ 15.2 $ 15.7 $ 16.3 $ 19.2 $ 23.9
---------- ---------- ---------- ---------- ----------
Total capital
expenditures $ 151.6 $ 127.7 $ 96.5 $ 78.8 $ 82.1
Infrastructure
capacity and
utilization
Megawatts under
contract at period
end (6) 63.6 63.6 62.2 62.2 62.2
Megawatts available
for customer use
at period end (7) 54.1 55.3 54.4 56.0 56.4
Megawatts utilized
at period end 31.6 32.7 32.2 32.1 32.0
Annualized net
revenue per
average Megawatt
of power utilized $ 62.5 $ 63.3 $ 64.5 $ 64.5 $ 65.3
(1) See discussion and reconciliation of our Non-GAAP financial measures
to the most comparable GAAP measures.
(2) During the fourth quarter of 2015, we decommissioned approximately
2,400 servers in order to replace older, less efficient gear and also
as part of the migration of customers from existing data centers to
our new London data center. The process of replacing older, less
efficient gear continued in Q1 2016 and Q2 2016 as approximately 1,600
and 3,400 additional servers, respectively, were decommissioned.
(3) Reflects additional expense we would have expected to record if our
build-to-suit lease arrangements had been deemed operating leases
instead of finance lease obligations for build-to-suit leases.
Calculated as the excess of estimated straight-line rent expense over
actual depreciation expense for completed real estate projects under
build-to-suit lease arrangements.
(4) Includes the outstanding principal amount of debt and capital lease
obligations.
(5) Non-cash purchases of property and equipment primarily represents
changes in amounts accrued but not yet paid.
(6) Megawatts under contract at period end represents data center capacity
for which we have a contract enabling us to take control of the space.
(7) Megawatts available for customer use at period end represents data
center capacity that is built-out and is being used to provide service
to customers.
Consolidated Quarterly Statements of Income
(Unaudited)
Three Months Ended
-----------------------------------------------------
June September December March June
30, 30, 31, 31, 30,
(In millions) 2015 2015 2015 2016 2016
-------- ------------ ------------ --------- --------
Net revenue $489.4 $ 508.9 $ 522.8 $ 518.1 $523.6
Costs and expenses:
Cost of revenue 165.4 172.7 180.7 180.4 171.5
Research and
development 33.2 29.9 29.8 27.6 26.9
Sales and marketing 64.4 61.8 58.3 63.7 63.8
General and
administrative 86.5 88.2 90.1 85.7 92.5
Depreciation and
amortization 97.7 101.3 104.0 104.0 104.6
-------- ------------ ------------ --------- --------
Total costs and
expenses 447.2 453.9 462.9 461.4 459.3
-------- ------------ ------------ --------- --------
Gain on sale - - - 24.5 -
-------- ------------ ------------ --------- --------
Income from
operations 42.2 55.0 59.9 81.2 64.3
-------- ------------ ------------ --------- --------
Other income
(expense):
Interest expense (1.9) (2.8) (6.2) (10.5) (10.3)
Interest and other
income (expense) 1.4 (1.1) 0.5 1.1 0.4
-------- ------------ ------------ --------- --------
Total other income
(expense) (0.5) (3.9) (5.7) (9.4) (9.9)
-------- ------------ ------------ --------- --------
Income before
income taxes 41.7 51.1 54.2 71.8 54.4
Income taxes 13.4 15.6 23.1 23.0 18.6
-------- ------------ ------------ --------- --------
Net income $ 28.3 $ 35.5 $ 31.1 $ 48.8 $ 35.8
======== ============ ============ ========= ========
Three Months Ended
-----------------------------------------------------
June September December March June
(Percent of net 30, 30, 31, 31, 30,
revenue) 2015 2015 2015 2016 2016
-------- ------------ ------------ --------- --------
Net revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue 33.8% 34.0% 34.6% 34.8% 32.8%
Research and
development 6.8% 5.9% 5.7% 5.3% 5.1%
Sales and marketing 13.2% 12.1% 11.2% 12.3% 12.2%
General and
administrative 17.7% 17.3% 17.2% 16.6% 17.7%
Depreciation and
amortization 20.0% 19.9% 19.9% 20.1% 20.0%
-------- ------------ ------------ --------- --------
Total costs and
expenses 91.4% 89.2% 88.5% 89.1% 87.7%
-------- ------------ ------------ --------- --------
Gain on sale -% -% -% 4.7% -%
-------- ------------ ------------ --------- --------
Income from
operations 8.6% 10.8% 11.5% 15.7% 12.3%
-------- ------------ ------------ --------- --------
Other income
(expense):
Interest expense (0.4)% (0.5)% (1.2)% (2.0)% (2.0)%
Interest and other
income (expense) 0.3% (0.2)% 0.1% 0.2% 0.1%
-------- ------------ ------------ --------- --------
Total other income
(expense) (0.1)% (0.8)% (1.1)% (1.8)% (1.9)%
-------- ------------ ------------ --------- --------
Income before
income taxes 8.5% 10.0% 10.4% 13.9% 10.4%
Income taxes 2.7% 3.1% 4.4% 4.4% 3.5%
-------- ------------ ------------ --------- --------
Net income 5.8% 7.0% 6.0% 9.4% 6.8%
======== ============ ============ ========= ========
Due to rounding, totals may not equal the sum of the line items in the table
above.
Non-GAAP Financial Measures
Adjusted EBITDA
We use Adjusted EBITDA as a supplemental measure to review and assess our performance. Adjusted EBITDA is a metric that is used by analysts and investors for comparative and valuation purposes. We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.
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, less gain on sale. The following table presents a reconciliation of Adjusted EBITDA to net income.
Three Months Ended
-----------------------------------------------
June September December March June
30, 30, 31, 31, 30,
(In millions) 2015 2015 2015 2016 2016
------- ----------- ----------- ------- -------
Net revenue $489.4 $ 508.9 $ 522.8 $518.1 $523.6
Net income $ 28.3 $ 35.5 $ 31.1 $ 48.8 $ 35.8
Plus: Income taxes 13.4 15.6 23.1 23.0 18.6
Plus: Total other (income)
expense 0.5 3.9 5.7 9.4 9.9
Plus: Depreciation and
amortization 97.7 101.3 104.0 104.0 104.6
Plus: Share-based
compensation expense 20.4 19.6 18.1 17.8 18.4
Less: Gain on sale - - - (24.5) -
------- ----------- ----------- ------- -------
Adjusted EBITDA $160.3 $ 175.9 $ 182.0 $178.5 $187.3
Net income margin 5.8% 7.0% 6.0% 9.4% 6.8%
Adjusted EBITDA margin 32.8% 34.6% 34.8% 34.5% 35.8%
Revenue Growth Adjusted for Foreign Currency and Asset Divestiture
We use revenue growth adjusted for foreign currency and asset divestiture as an additional metric for understanding and assessing our growth excluding the effect of foreign currency rate fluctuations on our international business operations and the impact of the sale of certain assets of a non-strategic product line. We also believe this is an important metric to help investors evaluate our performance in comparison to prior periods. The effect of foreign currency is calculated by translating current period results using the average exchange rate from the comparative period rather than the actual exchange rates in effect during the respective period. The effect of the asset divestiture is derived by reducing our net revenue by the amount of net revenue contributed by this product line in the periods being compared. The following table presents a reconciliation of revenue growth adjusted for foreign currency and asset divestiture.
Three Months Ended
------------------------------------------------------------
Revenue
Growth
Net Adjusted
Revenue for Foreign
Foreign in Asset Currency
Net Currency Constant Divestiture and Asset
(In millions) Revenue Translation Currency Adjustment Divestiture
---------- ------------ ---------- ------------ ------------
June 30, 2016 $ 523.6 $ 6.1 $ 529.7 $ - $ 529.7
June 30, 2015 489.4 - 489.4 (3.0) 486.4
---------- ---------- ------------
Dollar change $ 34.2 $ 40.3 $ 43.3
Percent change 7.0% 8.2% 8.9%
March 31, 2016 $ 518.1 $ 6.4 $ 524.5 $ (0.2) $ 524.3
March 31, 2015 480.2 - 480.2 (3.0) 477.2
---------- ---------- ------------
Dollar change $ 37.9 $ 44.3 $ 47.1
Percent change 7.9% 9.2% 9.9%
December 31,
2015 $ 522.8 $ 6.3 $ 529.1
December 31,
2014 472.5 - 472.5
---------- ----------
Dollar change $ 50.3 $ 56.6
Percent change 10.7% 12.0%
September 30,
2015 $ 508.9 $ 10.2 $ 519.1
September 30,
2014 459.7 - 459.7
---------- ----------
Dollar change $ 49.2 $ 59.4
Percent change 10.7% 12.9%
June 30, 2015 $ 489.4 $ 12.1 $ 501.5
June 30, 2014 441.2 - 441.2
---------- ----------
Dollar change $ 48.2 $ 60.3
Percent change 11.0% 13.7%
Return on Capital ("ROC")
We believe that ROC is an important metric for investors in evaluating our company's performance. ROC measures how effectively a company generates profits from the capital that is deployed. We calculate ROC by dividing net operating profit after tax by our average capital base. The following table presents a reconciliation of ROC to Return on Assets, which we calculate directly from amounts on the Consolidated Statements of Income and the Consolidated Balance Sheets.
Three Months Ended
-----------------------------------------------------
September December March
June 30, 30, 31, 31, June 30,
(In millions) 2015 2015 2015 2016 2016
--------- ----------- ----------- --------- ---------
Net income $ 28.3 $ 35.5 $ 31.1 $ 48.8 $ 35.8
Income from operations $ 42.2 $ 55.0 $ 59.9 $ 81.2 $ 64.3
Adjustment for gain on
sale - - - (24.5) -
Adjustment for build-
to-suit lease impact
(1) (0.4) (1.1) (2.3) (2.2) (2.6)
--------- ----------- ----------- --------- ---------
Income from
operations,
adjusted $ 41.8 $ 53.9 $ 57.6 $ 54.5 $ 61.7
Effective tax rate 32.2% 30.4% 42.6% 32.1% 34.0%
--------- ----------- ----------- --------- ---------
Net operating
profit after tax
(NOPAT) $ 28.4 $ 37.5 $ 33.1 $ 37.0 $ 40.7
Total assets at period
end $1,826.6 $ 1,749.2 $ 2,014.2 $2,025.4 $1,996.8
Add: Unamortized
debt issuance costs
(2) - - 7.6 7.4 7.2
Less: Excess cash
(3) (258.4) (128.0) (422.0) (472.0) (481.5)
Less: Accounts
payable and accrued
expenses, accrued
compensation and
benefits, and
income and other
taxes payable (256.4) (236.9) (205.6) (213.0) (219.1)
Less: Deferred
revenue (current
and non-current) (29.7) (31.8) (31.2) (29.0) (30.2)
Less: Other non-
current
liabilities,
deferred income
taxes, deferred
rent, and finance
lease obligations
for build-to-suit
leases (299.7) (294.9) (315.0) (313.6) (296.4)
--------- ----------- ----------- --------- ---------
Capital base $ 982.4 $ 1,057.6 $ 1,048.0 $1,005.2 $ 976.8
Average total
assets $1,756.0 $ 1,787.9 $ 1,881.7 $2,019.8 $2,011.1
Average capital
base $ 961.2 $ 1,020.0 $ 1,052.8 $1,026.6 $ 991.0
Return on assets
(annualized) 6.4% 8.0% 6.6% 9.7% 7.1%
Return on capital
(annualized) 11.8% 14.7% 12.6% 14.4% 16.4%
(1) Reflects additional expense we would have expected to record if our
build-to-suit lease arrangements had been deemed operating leases
instead of finance lease obligations for build-to-suit leases.
Calculated as the excess of estimated straight-line rent expense over
actual depreciation expense for completed real estate projects under
build-to-suit lease arrangements.
(2) Amount recorded as a direct deduction from the carrying value of the
long-term debt liability in the consolidated balance sheets
(3) Defined 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.
Free Cash Flow
We use Free Cash Flow as a supplemental measure to analyze cash flows generated from our operations because we believe it is useful to investors in evaluating our ability to fund capital expenditures, which continue to be a significant investment required by our business.
We define Free Cash Flow as net cash provided by operating activities less cash purchases of property and equipment, plus excess tax benefits from share-based compensation arrangements. Excess tax benefits represent tax deductions for share-based compensation expense in excess of book compensation expense and reduce our income taxes payable. We have included the impact of excess tax benefits in Free Cash Flow to be consistent with the treatment of other tax benefits.
Free Cash Flow has limitations, including the fact that it does not represent the residual cash flow exclusively available for discretionary expenditures because we are obligated to make payments for debt service and other contractual obligations which have not been deducted from this measure. Therefore, Free Cash Flow should be evaluated in addition to, and not as a substitute for, other financial measures prepared in accordance with GAAP. The following table presents a reconciliation of Free Cash Flow to the most directly comparable GAAP financial measure, net cash provided by operating activities.
Three Months
Ended Six Months Ended
----------------- -----------------
June June June June
30, 30, 30, 30,
(In millions) 2015 2016 2015 2016
-------- -------- -------- --------
Net cash provided by operating
activities $ 122.9 $ 164.9 $ 268.2 $ 321.1
Less: Cash purchases of property and
equipment (104.7) (76.7) (197.2) (159.6)
Plus: Excess tax benefits from share-
based compensation arrangements 18.6 10.2 38.8 26.0
-------- -------- -------- --------
Free cash flow $ 36.8 $ 98.4 $ 109.8 $ 187.5
======== ======== ======== ========
Non-GAAP EPS
Non-GAAP Net Income and Non-GAAP EPS are used as supplemental measures to facilitate comparisons to peer companies. Non-GAAP Net Income is defined as net income excluding non-cash charges for share-based compensation and other items that may arise from time to time, net of the related tax benefits. Non-GAAP EPS is calculated using Non-GAAP Net Income divided by the weighted-average number of shares on both an unadjusted basis and as adjusted to give effect to dilutive securities. The following table presents a reconciliation of these non-GAAP financial measures.
Three Months Ended
------------------------------------------------
June September December March June
(In millions, except per 30, 30, 31, 31, 30,
share data) 2015 2015 2015 2016 2016
------- ----------- ----------- -------- -------
Net income $ 28.3 $ 35.5 $ 31.1 $ 48.8 $ 35.8
Adjustments:
Share-based compensation
expense 20.4 19.6 18.1 17.8 18.4
Gain on sale - - - (24.5) -
------- ----------- ----------- -------- -------
Total adjustments 20.4 19.6 18.1 (6.7) 18.4
Income tax expense
(benefit) (1) (6.6) (5.9) (8.2) 2.1 (6.3)
------- ----------- ----------- -------- -------
Total adjustments,
net of tax 13.8 13.7 9.9 (4.6) 12.1
------- ----------- ----------- -------- -------
Non-GAAP net income $ 42.1 $ 49.2 $ 41.0 $ 44.2 $ 47.9
======= =========== =========== ======== =======
Net income per share ("GAAP
EPS")
Basic $ 0.20 $ 0.26 $ 0.23 $ 0.37 $ 0.28
======= =========== =========== ======== =======
Diluted $ 0.20 $ 0.25 $ 0.23 $ 0.37 $ 0.28
======= =========== =========== ======== =======
Non-GAAP net income per
share ("Non-GAAP EPS")
Basic $ 0.30 $ 0.35 $ 0.31 $ 0.34 $ 0.38
======= =========== =========== ======== =======
Diluted $ 0.29 $ 0.35 $ 0.31 $ 0.34 $ 0.38
======= =========== =========== ======== =======
Weighted average number of
shares outstanding
Basic 142.4 139.0 133.3 130.3 126.1
======= =========== =========== ======== =======
Diluted 144.5 140.6 134.2 131.0 127.0
======= =========== =========== ======== =======
(1) Based on the GAAP effective tax rate for the period.
Expected Revenue Growth Adjusted for Foreign Currency and Asset Divestitures
As previously stated, we use revenue growth adjusted for foreign currency and asset divestitures as an additional metric for understanding and assessing our growth excluding the effect of foreign currency rate fluctuations on our international business operations and the impact of certain asset divestitures. We also provide investors with expected revenue growth adjusted for foreign currency and asset divestitures for future periods. The following tables present reconciliations of expected revenue growth adjusted for foreign currency and asset divestitures for these future periods.
Three Months Ended
-------------------------------
Revenue growth
Dollars (year over
(in millions) year)
--------------- ---------------
Q3 2015 Actual:
Net revenue $509
Q3 2016 Guidance:
Net revenue $510 - $515 0.2% - 1.2%
Plus: Negative impact of currency
movements ~$19 ~3.7%
Plus: Negative impact of asset
divestitures ~$5 ~1.0%
--------------- ---------------
Revenue adjusted for foreign currency and
asset divestitures $534 - $539 4.9% - 5.9%
================ ===============
-------------------------------
Year Ended
-------------------------------
Revenue growth
Dollars (year over
(in millions) year)
--------------- ---------------
2015 Actual:
Net revenue $2,001
2016 Guidance:
Net revenue $2,060 - $2,080 3% - 4%
Plus: Negative impact of currency
movements ~$50 ~2.5%
Plus: Negative impact of asset
divestitures ~$20 ~1.0%
--------------- ---------------
Revenue adjusted for foreign currency and
asset divestitures $2,130 - $2,150 6.5% - 7.5%
=============== ===============
Contacts:
Investor Relations:
Jessica Drought
210-312-4191
jessica.drought@rackspace.com
Media Relations:
Brandon Brunson
210-312-1357
brandon.brunson@rackspace.com
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