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| 8-K - RESULTS OF OPERATIONS AND FINANCIAL CONDITION - RACKSPACE HOSTING, INC. | rax8k_q32013.htm |
Rackspace Hosting Reports Third Quarter 2013 Results
SAN ANTONIO - November 11, 2013 - Rackspace® Hosting, Inc. (NYSE: RAX), the open cloud company, announced financial results for the quarter ended September 30, 2013.
Net revenue for the third quarter of 2013 was $389 million, up 3.4% from the previous quarter and 16% from the third quarter of 2012. Net revenue for the third quarter of 2013 was positively impacted by currency exchange rates when compared to the previous quarter by $0.9 million and negatively impacted when compared to the third quarter of 2012 by $1.8 million.
Total server count increased to 101,967, up from 98,884 servers at the end of the previous quarter.
Adjusted EBITDA(1) for the quarter was $125 million, a 1.9% increase compared to the second quarter of 2013 and a 3% increase compared to the third quarter of 2012. The Adjusted EBITDA margin for the quarter was 32.3% compared to 32.8% in the previous quarter and 36.2% in the third 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 third quarter of 2013, the non-cash data center lease charge was $3.8 million, compared to $1.5 million in the previous quarter and $2.3 million in the third quarter of 2012.
Net income was $16 million for the quarter, down 27.1% from the previous quarter and 40% from the third quarter of 2012. Net income margin for the quarter was 4.2% compared to 6.0% for the previous quarter and 8.1% in the third quarter of 2012.
Cash flow from operating activities was $115 million for the third quarter of 2013. Capital expenditures were $118 million, including $74 million for purchases of customer gear, $12 million for data center build outs, $7 million for office build outs and $25 million for capitalized software and other projects.
Adjusted Free Cash Flow(1) for the quarter was $8 million. Return on Capital(1) was 8.0% in the third quarter, compared to 11.9% in the prior quarter and 16.0% in the third quarter of 2012. Average monthly revenue per server was $1,290, compared to $1,298 in the prior quarter and $1,287 in the third quarter of 2012.
At the end of the third quarter of 2013, cash and cash equivalents were $270 million, and debt including capital lease obligations totaled $73 million.
On a worldwide basis, Rackspace employed 5,450 Rackers as of September 30, 2013, up from 5,272 in the previous quarter.
- 1 -
Rackspace Developments and Business Highlights
• | Rackspace Launches Performance Cloud Servers - The Performance Cloud Servers deliver up to 132X higher disk IO performance than our current standard. These new servers provide greater speed, throughput and reliability that are designed to deliver enhanced levels of application performance. This public cloud offering creates a powerful hosting platform for a variety of workloads, ranging from basic web hosting to large scale NoSQL data stores like MongoDB and Cassandra. Rackspace customers will receive increased efficiency and performance for their applications and, ultimately, greater revenue for their businesses. The Performance Cloud Servers maximize the performance customers get at any price level. This allows Rackspace to offer the new servers for as little as two-thirds of the price of comparatively sized Standard Cloud Servers. |
• | Rackspace Elects Ossa Fisher to the Board of Directors - Fisher is currently serving as senior vice president for strategy and analytics at global dating leader, Match.com, where she has built a reputation for wide-ranging industry insight, marketing analytics, and product development. |
• | Rackspace Launches Comprehensive Big Data Solution and Managed Support for Apache™ Hadoop® - As part of Rackspace Data Services, a collection of SQL and NoSQL data offerings available as a service, Rackspace announced the availability of the Hortonworks Data Platform powered by Apache Hadoop in both the managed hosting environment and the Rackspace public cloud. In addition, Rackspace is offering managed services around the Big Data solution to ease the operational burden for customers. |
• | Rackspace Launches Hong Kong’s First Hybrid Cloud Powered by OpenStack® - The new public cloud joins Rackspace’s existing portfolio of private cloud and dedicated solutions to complete the Open Cloud Company’s Hybrid Cloud offering to businesses throughout the Asia-Pacific region. The Rackspace hybrid cloud provides a massive opportunity, as demand for cloud services continues to increase rapidly throughout the Asia-Pacific region. |
• | Openstack Announces Latest Version - Havana, the latest version of Openstack, was released on October 17th. Havana had over 900 individual contributors and almost 400 new features added to the platform. The total lines of code increased to 1.72 million with 145 organizations contributing to the Havana release. |
• | Rackspace Extends On-Premise VMware® Environments with New Dedicated VMware vCenter™ Server Offering - Rackspace announced a new offering for its Managed Virtualization service, Dedicated VMware vCenter Server, that will provide managed support for single-tenant VMware vCenter Servers. With Dedicated VMware vCenter Server, enterprise customers can migrate existing VMware workloads out of their on-premise data center into a Rackspace data center, while leveraging existing tools to maintain the control and agility they require. The new service helps accelerate customers’ journey to hybrid cloud computing, leveraging the reliability of Rackspace, all backed by Fanatical Support®. |
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 888-401-4685 from the United States and Canada or dial 719-457-2639 from abroad and reference pass code 8355636. A live webcast and a replay of the conference call will be available on Rackspace's website, located at http://ir.rackspace.com.
- 2 -
About Rackspace Hosting
Rackspace Hosting (NYSE: RAX) is the open cloud company, delivering open technologies and powering more than 200,000 customers worldwide. Rackspace provides its renowned Fanatical Support® across a portfolio of IT products, including Public Cloud, Private Cloud, Hybrid Hosting and Dedicated Hosting. The company offers choice, flexibility and freedom from vendor lock-in. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company, is featured on Fortune's list of 100 Best Companies to Work For and is included on the Dow Jones Sustainability Index. Rackspace was positioned in the Leaders quadrant by Gartner Inc. in the 2013 "Magic Quadrant for Managed Hosting in North America” and "Magic Quadrant for European Managed Hosting." Rackspace is headquartered in San Antonio with offices and data centers around the world. For more information, visit 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 Hosting 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, 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 Hosting's Form 10-K for the year ended December 31, 2012, filed with the SEC on March 1, 2013, and in Rackspace Hosting’s Form 10-Q for the quarter ended September 30, 2013, expected to be filed later this week. 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 | Nine Months Ended | |||||||||||||||||||
(In thousands, except per share data) | September 30, 2012 | June 30, 2013 | September 30, 2013 | September 30, 2012 | September 30, 2013 | |||||||||||||||
Net revenue | $ | 335,985 | $ | 375,847 | $ | 388,636 | $ | 956,330 | $ | 1,126,683 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of revenue (1) | 107,348 | 117,658 | 127,404 | 310,001 | 358,672 | |||||||||||||||
Research and development (1) | 15,563 | 23,216 | 23,773 | 39,794 | 65,364 | |||||||||||||||
Sales and marketing (1) | 41,109 | 52,269 | 50,869 | 122,705 | 152,952 | |||||||||||||||
General and administrative (1) | 62,663 | 72,840 | 78,075 | 179,781 | 218,392 | |||||||||||||||
Depreciation and amortization | 63,972 | 74,460 | 80,753 | 180,931 | 225,324 | |||||||||||||||
Total costs and expenses | 290,655 | 340,443 | 360,874 | 833,212 | 1,020,704 | |||||||||||||||
Income from operations | 45,330 | 35,404 | 27,762 | 123,118 | 105,979 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (1,253 | ) | (833 | ) | (689 | ) | (3,758 | ) | (2,462 | ) | ||||||||||
Interest and other income (expense) | 38 | (303 | ) | 440 | (230 | ) | 336 | |||||||||||||
Total other income (expense) | (1,215 | ) | (1,136 | ) | (249 | ) | (3,988 | ) | (2,126 | ) | ||||||||||
Income before income taxes | 44,115 | 34,268 | 27,513 | 119,130 | 103,853 | |||||||||||||||
Income taxes | 16,918 | 11,901 | 11,202 | 43,619 | 37,914 | |||||||||||||||
Net income | $ | 27,197 | $ | 22,367 | $ | 16,311 | $ | 75,511 | $ | 65,939 | ||||||||||
Net income per share | ||||||||||||||||||||
Basic | $ | 0.20 | $ | 0.16 | $ | 0.12 | $ | 0.56 | $ | 0.48 | ||||||||||
Diluted | $ | 0.19 | $ | 0.16 | $ | 0.11 | $ | 0.54 | $ | 0.46 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||
Basic | 135,946 | 138,011 | 138,714 | 134,683 | 138,140 | |||||||||||||||
Diluted | 141,474 | 142,178 | 143,543 | 140,794 | 142,699 | |||||||||||||||
(1) | As previously reported in the 10-Q filings for the three months ended March 31, 2013 and June 30, 2013, certain reclassifications have been made to prior period amounts in order to conform to the current period's presentation. For more information, refer to our Form 10-Q for the quarter ended September 30, 2013. |
- 4 -
Consolidated Balance Sheets
(In thousands) | December 31, 2012 | September 30, 2013 | |||||
(Unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 292,061 | $ | 269,995 | |||
Accounts receivable, net of allowance for doubtful accounts and customer credits of $4,236 as of December 31, 2012 and $4,350 as of September 30, 2013 | 92,834 | 113,543 | |||||
Deferred income taxes | 10,320 | 10,280 | |||||
Prepaid expenses | 25,195 | 39,654 | |||||
Other current assets | 4,835 | 9,191 | |||||
Total current assets | 425,245 | 442,663 | |||||
Property and equipment, net | 724,985 | 850,905 | |||||
Goodwill | 68,742 | 76,831 | |||||
Intangible assets, net | 23,802 | 25,328 | |||||
Other non-current assets | 52,777 | 56,042 | |||||
Total assets | $ | 1,295,551 | $ | 1,451,769 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 105,174 | $ | 130,390 | |||
Accrued compensation and benefits | 48,404 | 67,754 | |||||
Income and other taxes payable | 21,550 | 15,124 | |||||
Current portion of deferred revenue | 17,265 | 17,839 | |||||
Current portion of obligations under capital leases | 61,302 | 44,375 | |||||
Current portion of debt | 1,744 | 1,835 | |||||
Total current liabilities | 255,439 | 277,317 | |||||
Non-current liabilities: | |||||||
Deferred revenue | 3,695 | 4,372 | |||||
Obligations under capital leases | 60,335 | 26,192 | |||||
Debt | 1,991 | 177 | |||||
Deferred income taxes | 71,081 | 79,654 | |||||
Deferred rent | 32,293 | 40,593 | |||||
Other liabilities | 27,070 | 34,756 | |||||
Total liabilities | 451,904 | 463,061 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
Stockholders' equity: | |||||||
Common stock | 138 | 140 | |||||
Additional paid-in capital | 515,188 | 594,344 | |||||
Accumulated other comprehensive loss | (8,089 | ) | (8,125 | ) | |||
Retained earnings | 336,410 | 402,349 | |||||
Total stockholders’ equity | 843,647 | 988,708 | |||||
Total liabilities and stockholders’ equity | $ | 1,295,551 | $ | 1,451,769 | |||
- 5 -
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||
(in thousands) | September 30, 2012 | June 30, 2013 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||||
Cash Flows From Operating Activities | |||||||||||||||||||
Net income | $ | 27,197 | $ | 22,367 | $ | 16,311 | $ | 75,511 | $ | 65,939 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||||||||||
Depreciation and amortization | 63,972 | 74,460 | 80,753 | 180,931 | 225,324 | ||||||||||||||
Loss (gain) on disposal of equipment, net | 597 | (15 | ) | 667 | 962 | 892 | |||||||||||||
Provision for bad debts and customer credits | 1,426 | 1,301 | 1,482 | 4,559 | 3,843 | ||||||||||||||
Deferred income taxes | 1,120 | (8,444 | ) | 12,196 | 3,793 | 10,305 | |||||||||||||
Deferred rent | 2,279 | 1,519 | 3,801 | 6,329 | 9,285 | ||||||||||||||
Share-based compensation expense | 12,418 | 13,315 | 16,959 | 30,302 | 42,457 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | (5,145 | ) | (11,898 | ) | (1,186 | ) | (34,981 | ) | (17,383 | ) | |||||||||
Changes in certain assets and liabilities: | |||||||||||||||||||
Accounts receivable | (9,789 | ) | (7,220 | ) | (10,641 | ) | (29,103 | ) | (24,129 | ) | |||||||||
Prepaid expenses and other current assets | (18,910 | ) | 5,081 | (18,004 | ) | (11,030 | ) | (18,560 | ) | ||||||||||
Accounts payable and accrued expenses | 25,027 | 12,473 | 11,413 | 51,206 | 26,948 | ||||||||||||||
Deferred revenue | (997 | ) | 823 | (874 | ) | (292 | ) | 1,191 | |||||||||||
All other operating activities | (190 | ) | 2,437 | 1,673 | 524 | 8,430 | |||||||||||||
Net cash provided by operating activities | 99,005 | 106,199 | 114,550 | 278,711 | 334,542 | ||||||||||||||
Cash Flows From Investing Activities | |||||||||||||||||||
Purchases of property and equipment | (53,449 | ) | (119,836 | ) | (100,496 | ) | (187,455 | ) | (325,873 | ) | |||||||||
Acquisitions, net of cash acquired | (5,233 | ) | — | — | (5,945 | ) | (6,203 | ) | |||||||||||
All other investing activities | 3 | (380 | ) | (1,436 | ) | 42 | (1,808 | ) | |||||||||||
Net cash used in investing activities | (58,679 | ) | (120,216 | ) | (101,932 | ) | (193,358 | ) | (333,884 | ) | |||||||||
Cash Flows From Financing Activities | |||||||||||||||||||
Principal payments of capital leases | (17,928 | ) | (16,612 | ) | (15,658 | ) | (52,970 | ) | (51,208 | ) | |||||||||
Principal payments of notes payable | (1,032 | ) | (846 | ) | (966 | ) | (1,911 | ) | (1,863 | ) | |||||||||
Payments for deferred acquisition obligations | — | (59 | ) | (58 | ) | (4,726 | ) | (1,296 | ) | ||||||||||
Proceeds from notes payable | 691 | — | — | 691 | — | ||||||||||||||
Receipt of Texas Enterprise Fund Grant | — | — | — | 3,500 | — | ||||||||||||||
Proceeds from employee stock plans | 13,671 | 4,686 | 8,446 | 31,514 | 14,846 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | 5,145 | 11,898 | 1,186 | 34,981 | 17,383 | ||||||||||||||
Net cash provided by (used in) financing activities | 547 | (933 | ) | (7,050 | ) | 11,079 | (22,138 | ) | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | 1,330 | (625 | ) | 1,375 | 1,363 | (586 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents | 42,203 | (15,575 | ) | 6,943 | 97,795 | (22,066 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 215,448 | 278,627 | 263,052 | 159,856 | 292,061 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 257,651 | $ | 263,052 | $ | 269,995 | $ | 257,651 | $ | 269,995 | |||||||||
Supplemental cash flow information: | |||||||||||||||||||
Non-cash purchases of property and equipment | $ | 31,934 | $ | (13,311 | ) | $ | 17,062 | $ | 62,212 | $ | 23,609 | ||||||||
- 6 -
Key Metrics - Quarter to Date
(Unaudited)
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except average monthly revenue per server) | September 30, 2012 | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | ||||||||||||||
Growth | |||||||||||||||||||
Dedicated cloud, net revenue | $ | 256,559 | $ | 265,585 | $ | 271,311 | $ | 276,845 | $ | 280,215 | |||||||||
Public cloud, net revenue | $ | 79,426 | $ | 87,324 | $ | 90,889 | $ | 99,002 | $ | 108,421 | |||||||||
Net revenue | $ | 335,985 | $ | 352,909 | $ | 362,200 | $ | 375,847 | $ | 388,636 | |||||||||
Revenue growth (year over year) | 27.0 | % | 24.6 | % | 20.2 | % | 17.8 | % | 15.7 | % | |||||||||
Net upgrades (monthly average) | 1.6 | % | 1.2 | % | 0.9 | % | 1.5 | % | 1.5 | % | |||||||||
Churn (monthly average) | -0.8 | % | -0.7 | % | -0.8 | % | -0.8 | % | -0.8 | % | |||||||||
Growth in installed base (monthly average) (2) | 0.8 | % | 0.5 | % | 0.1 | % | 0.7 | % | 0.7 | % | |||||||||
Number of employees (Rackers) at period end | 4,596 | 4,852 | 5,043 | 5,272 | 5,450 | ||||||||||||||
Number of servers deployed at period end | 89,051 | 90,524 | 94,122 | 98,884 | 101,967 | ||||||||||||||
Average monthly revenue per server | $ | 1,287 | $ | 1,310 | $ | 1,308 | $ | 1,298 | $ | 1,290 | |||||||||
Profitability | |||||||||||||||||||
Income from operations | $ | 45,330 | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | |||||||||
Depreciation and amortization | $ | 63,972 | $ | 68,914 | $ | 70,111 | $ | 74,460 | $ | 80,753 | |||||||||
Share-based compensation expense | |||||||||||||||||||
Cost of revenue | $ | 2,499 | $ | 2,759 | $ | 2,519 | $ | 2,735 | $ | 3,453 | |||||||||
Research and development | $ | 1,379 | $ | 1,237 | $ | 1,528 | $ | 1,813 | $ | 2,306 | |||||||||
Sales and marketing | $ | 2,021 | $ | 1,764 | $ | 1,658 | $ | 1,744 | $ | 2,149 | |||||||||
General and administrative | $ | 6,519 | $ | 5,484 | $ | 6,478 | $ | 7,023 | $ | 9,051 | |||||||||
Total share-based compensation expense | $ | 12,418 | $ | 11,244 | $ | 12,183 | $ | 13,315 | $ | 16,959 | |||||||||
Adjusted EBITDA (1) | $ | 121,720 | $ | 129,781 | $ | 125,107 | $ | 123,179 | $ | 125,474 | |||||||||
Adjusted EBITDA margin | 36.2 | % | 36.8 | % | 34.5 | % | 32.8 | % | 32.3 | % | |||||||||
Operating income margin | 13.5 | % | 14.1 | % | 11.8 | % | 9.4 | % | 7.1 | % | |||||||||
Income from operations | $ | 45,330 | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | |||||||||
Effective tax rate | 38.3 | % | 38.8 | % | 35.2 | % | 34.7 | % | 40.7 | % | |||||||||
Net operating profit after tax (NOPAT) (1) | $ | 27,969 | $ | 30,369 | $ | 27,743 | $ | 23,119 | $ | 16,463 | |||||||||
NOPAT margin | 8.3 | % | 8.6 | % | 7.7 | % | 6.2 | % | 4.2 | % | |||||||||
Capital efficiency and returns | |||||||||||||||||||
Interest bearing debt | $ | 150,112 | $ | 125,372 | $ | 105,807 | $ | 88,434 | $ | 72,579 | |||||||||
Stockholders' equity | $ | 781,934 | $ | 843,647 | $ | 879,035 | $ | 933,897 | $ | 988,708 | |||||||||
Less: Excess cash | $ | (217,333 | ) | $ | (249,712 | ) | $ | (235,163 | ) | $ | (217,950 | ) | $ | (223,359 | ) | ||||
Capital base | $ | 714,713 | $ | 719,307 | $ | 749,679 | $ | 804,381 | $ | 837,928 | |||||||||
Average capital base | $ | 700,795 | $ | 717,010 | $ | 734,493 | $ | 777,030 | $ | 821,155 | |||||||||
Capital turnover (annualized) | 1.92 | 1.97 | 1.97 | 1.93 | 1.89 | ||||||||||||||
Return on capital (annualized) (1) | 16.0 | % | 16.9 | % | 15.1 | % | 11.9 | % | 8.0 | % | |||||||||
- 7 -
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except average monthly revenue per server) | September 30, 2012 | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | ||||||||||||||
Capital expenditures | |||||||||||||||||||
Cash purchases of property and equipment | $ | 53,449 | $ | 82,919 | $ | 105,541 | $ | 119,836 | $ | 100,496 | |||||||||
Non-cash purchases of property and equipment (3) | $ | 31,934 | $ | 5,096 | $ | 19,858 | $ | (13,311 | ) | $ | 17,062 | ||||||||
Total capital expenditures | $ | 85,383 | $ | 88,015 | $ | 125,399 | $ | 106,525 | $ | 117,558 | |||||||||
Customer gear | $ | 51,026 | $ | 60,099 | $ | 85,690 | $ | 73,022 | $ | 73,784 | |||||||||
Data center build outs | $ | 5,767 | $ | 7,768 | $ | 13,228 | $ | 10,085 | $ | 12,441 | |||||||||
Office build outs | $ | 3,413 | $ | 2,288 | $ | 7,860 | $ | 1,683 | $ | 6,700 | |||||||||
Capitalized software and other projects | $ | 25,177 | $ | 17,860 | $ | 18,621 | $ | 21,735 | $ | 24,633 | |||||||||
Total capital expenditures | $ | 85,383 | $ | 88,015 | $ | 125,399 | $ | 106,525 | $ | 117,558 | |||||||||
Infrastructure capacity and utilization | |||||||||||||||||||
Megawatts under contract at period end | 58.0 | 61.1 | 59.4 | 59.6 | 60.0 | ||||||||||||||
Megawatts available for use at period end | 33.7 | 36.9 | 38.8 | 44.4 | 46.9 | ||||||||||||||
Megawatts utilized at period end | 23.5 | 24.0 | 24.7 | 26.0 | 27.0 | ||||||||||||||
Annualized net revenue per average Megawatt of power utilized | $ | 58,179 | $ | 59,437 | $ | 59,499 | $ | 59,305 | $ | 58,662 | |||||||||
(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 -
Consolidated Quarterly Statements of Income
(Unaudited)
Three Months Ended | |||||||||||||||||||
(In thousands) | September 30, 2012 | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | ||||||||||||||
Net revenue | $ | 335,985 | $ | 352,909 | $ | 362,200 | $ | 375,847 | $ | 388,636 | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 107,348 | 109,012 | 113,610 | 117,658 | 127,404 | ||||||||||||||
Research and development | 15,563 | 16,942 | 18,375 | 23,216 | 23,773 | ||||||||||||||
Sales and marketing | 41,109 | 43,467 | 49,814 | 52,269 | 50,869 | ||||||||||||||
General and administrative | 62,663 | 64,951 | 67,477 | 72,840 | 78,075 | ||||||||||||||
Depreciation and amortization | 63,972 | 68,914 | 70,111 | 74,460 | 80,753 | ||||||||||||||
Total costs and expenses | 290,655 | 303,286 | 319,387 | 340,443 | 360,874 | ||||||||||||||
Income from operations | 45,330 | 49,623 | 42,813 | 35,404 | 27,762 | ||||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (1,253 | ) | (991 | ) | (940 | ) | (833 | ) | (689 | ) | |||||||||
Interest and other income (expense) | 38 | 245 | 199 | (303 | ) | 440 | |||||||||||||
Total other income (expense) | (1,215 | ) | (746 | ) | (741 | ) | (1,136 | ) | (249 | ) | |||||||||
Income before income taxes | 44,115 | 48,877 | 42,072 | 34,268 | 27,513 | ||||||||||||||
Income taxes | 16,918 | 18,970 | 14,811 | 11,901 | 11,202 | ||||||||||||||
Net income | $ | 27,197 | $ | 29,907 | $ | 27,261 | $ | 22,367 | $ | 16,311 | |||||||||
Three Months Ended | |||||||||||||||||||
(Percent of net revenue) | September 30, 2012 | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | ||||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 32.0 | % | 30.9 | % | 31.4 | % | 31.3 | % | 32.8 | % | |||||||||
Research and development | 4.6 | % | 4.8 | % | 5.1 | % | 6.2 | % | 6.1 | % | |||||||||
Sales and marketing | 12.2 | % | 12.3 | % | 13.8 | % | 13.9 | % | 13.1 | % | |||||||||
General and administrative | 18.7 | % | 18.4 | % | 18.6 | % | 19.4 | % | 20.1 | % | |||||||||
Depreciation and amortization | 19.0 | % | 19.5 | % | 19.4 | % | 19.8 | % | 20.8 | % | |||||||||
Total costs and expenses | 86.5 | % | 85.9 | % | 88.2 | % | 90.6 | % | 92.9 | % | |||||||||
Income from operations | 13.5 | % | 14.1 | % | 11.8 | % | 9.4 | % | 7.1 | % | |||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (0.4 | )% | (0.3 | )% | (0.3 | )% | (0.2 | )% | (0.2 | )% | |||||||||
Interest and other income (expense) | 0.0 | % | 0.1 | % | 0.1 | % | (0.1 | )% | 0.1 | % | |||||||||
Total other income (expense) | (0.4 | )% | (0.2 | )% | (0.2 | )% | (0.3 | )% | (0.1 | )% | |||||||||
Income before income taxes | 13.1 | % | 13.8 | % | 11.6 | % | 9.1 | % | 7.1 | % | |||||||||
Income taxes | 5.0 | % | 5.4 | % | 4.1 | % | 3.2 | % | 2.9 | % | |||||||||
Net income | 8.1 | % | 8.5 | % | 7.5 | % | 6.0 | % | 4.2 | % | |||||||||
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 table below:
Three Months Ended | |||||||||||||||||||
(Dollars in thousands) | September 30, 2012 | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | ||||||||||||||
Net revenue | $ | 335,985 | $ | 352,909 | $ | 362,200 | $ | 375,847 | $ | 388,636 | |||||||||
Income from operations | $ | 45,330 | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | |||||||||
Net income | $ | 27,197 | $ | 29,907 | $ | 27,261 | $ | 22,367 | $ | 16,311 | |||||||||
Plus: Income taxes | 16,918 | 18,970 | 14,811 | 11,901 | 11,202 | ||||||||||||||
Plus: Total other (income) expense | 1,215 | 746 | 741 | 1,136 | 249 | ||||||||||||||
Plus: Depreciation and amortization | 63,972 | 68,914 | 70,111 | 74,460 | 80,753 | ||||||||||||||
Plus: Share-based compensation expense | 12,418 | 11,244 | 12,183 | 13,315 | 16,959 | ||||||||||||||
Adjusted EBITDA | $ | 121,720 | $ | 129,781 | $ | 125,107 | $ | 123,179 | $ | 125,474 | |||||||||
Operating income margin | 13.5 | % | 14.1 | % | 11.8 | % | 9.4 | % | 7.1 | % | |||||||||
Adjusted EBITDA margin | 36.2 | % | 36.8 | % | 34.5 | % | 32.8 | % | 32.3 | % | |||||||||
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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 payable 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); calculated on a quarterly basis.
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 table below:
Three Months Ended | |||||||||||||||||||
(Dollars in thousands) | September 30, 2012 | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | ||||||||||||||
Income from operations | $ | 45,330 | $ | 49,623 | $ | 42,813 | $ | 35,404 | $ | 27,762 | |||||||||
Effective tax rate | 38.3 | % | 38.8 | % | 35.2 | % | 34.7 | % | 40.7 | % | |||||||||
Net operating profit after tax (NOPAT) | $ | 27,969 | $ | 30,369 | $ | 27,743 | $ | 23,119 | $ | 16,463 | |||||||||
Net income | $ | 27,197 | $ | 29,907 | $ | 27,261 | $ | 22,367 | $ | 16,311 | |||||||||
Total assets at period end | $ | 1,241,765 | $ | 1,295,551 | $ | 1,348,350 | $ | 1,377,928 | $ | 1,451,769 | |||||||||
Less: Excess cash | (217,333 | ) | (249,712 | ) | (235,163 | ) | (217,950 | ) | (223,359 | ) | |||||||||
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable | (177,328 | ) | (175,128 | ) | (197,686 | ) | (178,552 | ) | (213,268 | ) | |||||||||
Less: Deferred revenue (current and non-current) | (18,483 | ) | (20,960 | ) | (21,811 | ) | (22,636 | ) | (22,211 | ) | |||||||||
Less: Other non-current liabilities, deferred income taxes, and deferred rent | (113,908 | ) | (130,444 | ) | (144,011 | ) | (154,409 | ) | (155,003 | ) | |||||||||
Capital base | $ | 714,713 | $ | 719,307 | $ | 749,679 | $ | 804,381 | $ | 837,928 | |||||||||
Average total assets | $ | 1,190,247 | $ | 1,268,658 | $ | 1,321,951 | $ | 1,363,139 | $ | 1,414,849 | |||||||||
Average capital base | $ | 700,795 | $ | 717,010 | $ | 734,493 | $ | 777,030 | $ | 821,155 | |||||||||
Return on assets (annualized) | 9.1 | % | 9.4 | % | 8.2 | % | 6.6 | % | 4.6 | % | |||||||||
Return on capital (annualized) | 16.0 | % | 16.9 | % | 15.1 | % | 11.9 | % | 8.0 | % | |||||||||
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 | Nine Months Ended | ||||||
(In thousands) | September 30, 2013 | September 30, 2013 | |||||
Adjusted EBITDA | $ | 125,474 | $ | 373,760 | |||
Non-cash deferred rent | 3,801 | 9,285 | |||||
Total capital expenditures | (117,558 | ) | (349,482 | ) | |||
Cash payments for interest, net | (661 | ) | (2,487 | ) | |||
Cash payments for income taxes, net | (2,605 | ) | (12,355 | ) | |||
Adjusted free cash flow | $ | 8,451 | $ | 18,721 | |||
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