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Rackspace Reports Second Quarter Results

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® (RAX), the #1 managed cloud company, today announced financial results for the quarter that ended June 30, 2016.

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 (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  
(In millions, except per share data)   June 30,
 2015
    March 31,
 2016
    June 30,
 2016
    June 30,
 2015
    June 30,
 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,
2015
    June 30,
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  
(In millions)   June 30,
 2015
    March 31,
 2016
    June 30,
 2016
    June 30,
 2015
    June 30,
 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 average monthly revenue per server)   June 30,
 2015
    September 30,
 2015
    December 31,
 2015
    March 31,
 2016
    June 30,
 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    ...