Osprey Flyer: Rackspace Reports Record Q3 Earnings! (Financial Charts) *Revenues, Net Income, EPS Up* RAX

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Rackspace Hosting (RAX) reported Q3 2011 financial results on November 7, 2011

*Charts and commentary have been updated for Rackspace Q3 2011 financial results*

Rackspace Reports Record Q3 Earnings!: Revenues, Net Income, EPS Up

Rackspace Summary Q3 2011 Total revenues, operating income, net income, and earnings per share all reached another record high. Financial performance continues outstanding. Cash flow per share from operations dropped, but is not an immediate concern. Overall financial position is good, but working capital is negative again, mostly due to leasing of data centers and servers. This is a liquidity issue not a profitability issue.

Rackspace Income Statement Q3 2011 Rackspace reported record total revenues of $264.57M, record net income of $12.71M, and record earnings per share of $0.14. From the prior quarter Q2 2011, total revenues were up +7.01%, net income up +13.79%, and earnings per share up +7.69%. From the prior year quarter Q3 2010, these were up +32.48%, up +69.21%, and up +55.56%, respectively. Gross margin dipped QoQ to 68.84%, operating margin was a multi-year high of 11.74%, and net margin was a multi-year high of 7.55%. Cash flow from operations dipped to $0.51 per share mostly due to a large increase in prepaid expenses and other current assets. The Operating Expense Ratio (operating expenses divided by total revenues) of 57.09% is a 4-quarter low.

Rackspace Balance Sheet Q3 2011 Rackspace's total assets increased +9.36% QoQ to a record $970.68M from the prior quarter of $887.58M. The capital to assets ratio (total stockholders' equity divided by total assets) is a respectable 56.77% and about the same for the past 3 quarters. The current ratio (current assets divided by total assets) is an illiquid 23.41% and lack of working capital has been a problem for Rackspace 3 of the past 4 quarters. Current working capital (current assets less current liabilities) is a negative -$2.73 and was negative in the prior quarter Q2 2011 (-$3.53M). Rackspace continues with low working capital, due to ongoing leasing of data centers and servers plus an increase in prepaid expenses and other current assets. This is a liquidity issue, not a profitability issue. The return on assets is low for a technology company, but has consistently grown to the current peak of +7.71%.

Rackspace Outlook Q4 2011 Rackspace did not provide quarterly guidance, but will provide annual guidance in February 2012.

Rackspace Financial Performance by the Quarters (Charts)

Rackspace Earnings Per Share Below is a chart of quarterly earnings per share. Current Earnings per Share of $0.14 is a very strong +7.69% QoQ and +55.56% YoY. EPS has been flat 2 times, but never decreased, since Q3 2009 on the chart below. The EPS chart average is $0.09.

Rackspace Cash Flow per Share Below is a chart of cash flow from operations per share. Current Cash Flow per Share of $0.51 is a 4-quarter low. CFS dropped -$0.09 and -15.25% QoQ, and was up +$0.01 YoY. The largest contributors to this drop were an increase in Prepaid Expenses and Other Current Assets plus Excess Tax Benefits from Share-Based Compensation Arrangements. The CFS chart average is $0.49.

Rackspace Total Revenues, Operating Income, and Net Income Below is a chart of quarterly total revenues, operating income, and net income. Current Total Revenues of $264.57M are a new all-time high, up +7.01% QoQ and +32.48% YoY, and have consistently grown. This is the 4th consecutive quarter above $200M. Current Operating Income of $31.07M are a new all-time high, up +8.44% QoQ. Current Net Income of $19.98M is also an all-time high, up +13.79% QoQ and +69.21% YoY. The TR, OI, and NI chart averages are $206.03M, $21.35M, and $12.71M, respectively.

Rackspace Gross Margin, Operating Margin, and Net Margin Below is a chart of quarterly gross margin, operating margin, and net margin. Current Gross Margin of 68.84% is a 4-quarter low and just above the historical average. Current Operating Margin of 11.74% is historically very strong and is a multi-year, if not all-time, high. This is the 5th consecutive quarter above 10%. Current Net Margin of 7.55% is historically very strong and is a multi-year, if not all-time, high. The GM, OM, and NM chart averages are 68.47%, 10.19%, and 6.04%, respectively.

Rackspace Return on Assets Below is a chart of annual return on average assets per quarter. The total net income for the most recent 4 quarters is divided into average assets for the most recent 4 quarters to obtain a rolling annualized ROA, an annualized return on average assets for the 12 months (4 quarters) ended. Rackspace has a historically low ROA for a technology company, but the ROA is consistently increasing QoQ. Current Return on Assets of +7.71% continues the uptrend QoQ and is a multi-year, if not all-time high. This indicates assets are being more effectively deployed. The ROA chart average is 6.60%.

Rackspace Growth Rates Below is a chart of the annual (YoY, Y/Y, annual change) growth rates for total revenues and earnings per share. Total Revenues Growth YoY of +32.48% continues the high rate of increase. Current Earnings per Share Growth YoY of +55.56% also continues a strong growth rate. The TRG and EPSG chart averages are a very strong +28.55% and incredible +50.75%, respectively.

Rackspace Revenue Sources Below is a chart of revenue sources as a percentage of total revenues. The trend is a decrease in Managed Hosting (now 80.85%) offset by an increase in Cloud (now 19.15%). The Managed Hosting and Cloud chart averages are 86.29% and 13.71%, respectively.

Rackspace Working Capital Below is a chart of working capital (current assets less current liabilities). Current Negative Working Capital of -$2.73 million is the 2nd consecutive quarter and the 3rd quarter in the past 4 quarters such a condition has existed. This appears to be mostly the result of 1) an increase in accounts payable and other accrued expenses and 2) the ongoing leasing of data centers and servers (see next chart below). The leasing of data centers and servers, that is the current portion (due within 1 year) of obligations under capital leases, has created a large, ongoing current liability (now $65.78M). This is a liquidity issue not a profitability issue. The Current Assets, Current Liabilities, and Working Capital chart averages are $207.71M, $185.20M, and $22.51M, respectively.

Rackspace Customers, Servers, Employees Below is a chart of customers, servers, and employees by quarter. Current Customers of 161,422 have been steadily increasing and current Servers of 78,717 have also, but at a slower rate. Current Employees of 3.799 have increased at an even slower rate, which has consistently increased the Customers to Employees Ratio. This indicates increased efficiency. The chart averages are Customers (120,534), Servers (65,145), and Employees (3,201).

Rackspace Hosting Reports Third Quarter 2011 Results

SAN ANTONIO, November 7, 2011 (BUSINESS WIRE) - Rackspace(R) Hosting, Inc. (NYSE: RAX), the world's leading specialist in the hosting and cloud computing industry, announced financial results for the quarter ended September 30, 2011.

Net revenue for the third quarter of 2011 was $265 million, up 7.0% from the previous quarter and 32.5% from the third quarter of 2010. Net revenue for the third quarter of 2011 was negatively impacted by currency exchange rates when compared to the second quarter of 2011 by $0.8 million and favorably impacted by currency exchange rates when compared to the third quarter of 2010 by $2.4 million.

Total server count increased to 78,717, up from 74,028 servers at the end of the previous quarter, and total customers increased to 161,422, up from 152,578 at the end of the previous quarter.

"In summary, we are very pleased with this quarter's results. We are focused on finishing the year on a strong note and will give you a more in depth look into our 2012 plans when we report our full year results in February," said Karl Pichler, chief financial officer.

Adjusted EBITDA for the quarter was $88 million, a 7.8% increase compared to the second quarter of 2011 and a 28.5% increase compared to the third quarter of 2010. The adjusted EBITDA margin for the quarter was 33.3% compared to 33.0% for the previous quarter and 34.3% for the third quarter of 2010. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge of $2.5 million for the quarter relating to non-cash rent for data center operating leases.

Net income was $20 million for the quarter, up 13.8% from the previous quarter and 69.2% from the third quarter of 2010. Net income margin for the quarter was 7.6% compared to 7.1% for the previous quarter and 5.9% in the third quarter of 2010.

Cash flow from operating activities was $70 million for the third quarter of 2011. Capital expenditures were $94 million, including $54 million for purchases of customer gear, $17 million for data center build outs, $9 million for office build outs and $14 million for capitalized software and other projects. Adjusted free cash flow (1) for the quarter was $(5) million. At the end of the third quarter of 2011, cash and cash equivalents were $125 million. Debt obligations totaled $144 million, consisting of $143 million related to capital leases and $1 million related to current debt.

On a worldwide basis, Rackspace employed 3,799 Rackers as of September 30, 2011, up from 3,712 Rackers as of June 30, 2011 and 3,130 Rackers as of September 30, 2010.

"In the third quarter we improved upon the solid results that we delivered in the first and second quarters by continuing our strong pace of revenue growth while boosting margins and returns," said Lanham Napier, president and chief executive officer.

About Rackspace Hosting
Rackspace Hosting is the service leader in cloud computing, and a founder of OpenStack, an open source cloud platform. The San Antonio-based company provides Fanatical Support to its customers, across a portfolio of IT services, including Managed Hosting and Cloud Computing. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company and was featured on Fortune's list of 100 Best Companies to Work For. The company was also positioned in the Leaders Quadrant by Gartner Inc. in the "2010 Magic Quadrant for Cloud Infrastructure as a Service and Web Hosting." For more information, visit http://www.rackspace.com/.

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