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| 8-K - RESULTS OF OPERATIONS AND FINANCIAL CONDITION - RACKSPACE HOSTING, INC. | rax8k_q22014.htm |
Rackspace Announces Record Growth in Second Quarter 2014
SAN ANTONIO - August 11, 2014 - Rackspace® Hosting, Inc. (NYSE: RAX), the #1 managed cloud company, announced financial results for the quarter ended June 30, 2014.
Net revenue for the second quarter of 2014 was $441 million, up 4.8 percent from the previous quarter and 17 percent from the second quarter of 2013. Net revenue for the second quarter of 2014 was positively impacted by currency exchange rates when compared to the previous quarter by $1.9 million and positively impacted when compared to the second quarter of 2013 by $9.9 million.
For the third quarter of 2014, the company is forecasting quarter-over-quarter sequential net revenue growth of 3 to 4.5 percent, resulting in net revenue in the range of $454 million to $461 million.
"This was a record quarter for Rackspace,” said Graham Weston, Chairman and CEO of Rackspace. “We added thousands of new customers, including one of our largest ever, and we saw solid growth from existing customers like Under Armour, SunPower and Alex and Ani. We generated a company record $20 million in incremental revenue in the quarter and revenue per server was an all time high. Total revenue grew 4.3 percent on a constant currency basis, which was the highest rate of growth that we’ve generated since the fourth quarter of 2012.”
Total server count in the second quarter of 2014 increased to 107,657, up from 106,229 servers at the end of the previous quarter.
Adjusted EBITDA(1) for the quarter was $142 million, a 1.5 percent increase compared to the first quarter of 2014. Adjusted EBITDA margin for the quarter was 32.1 percent compared to 33.2 percent in the previous quarter.
The company expects Adjusted EBITDA margin to be in the range of 31 to 33 percent in the third quarter of 2014.
Net income was $22 million for the quarter, down 11.8 percent from the previous quarter. Net income margin for the quarter was 5.1 percent compared to 6.0 percent for the previous quarter.
Cash flow from operating activities was $125 million for the second quarter of 2014. Capital expenditures were $112 million, including $65 million for purchases of customer gear, $14 million for data center build outs, $7 million for office build outs and $27 million for capitalized software and other projects.
Adjusted Free Cash Flow(1) for the quarter was $26 million. Return on Capital(1) was 10.0 percent in the second quarter, compared to 11.4 percent in the previous quarter. Average monthly revenue per server was $1,375, compared to $1,336 in the previous quarter.
At the end of the second quarter of 2014, cash and cash equivalents were $340 million, and interest-bearing debt including capital lease obligations totaled $42 million.
On a worldwide basis, Rackspace employed 5,798 Rackers as of June 30, 2014, up from 5,743 in the previous quarter.
- 1 -
Rackspace Business Highlights
• | Rackspace announced its managed cloud strategy for delivering public cloud services to market, including enhanced service levels and a more transparent service-based pricing model. Rackspace also created developer+™, a new program for developers that offers essential services needed to build scalable applications. This strategy focuses on Rackspace's historical strength working with businesses and developers who want a strong partner to help design, manage and scale their cloud operations. |
• | Gartner, Inc. placed Rackspace in the Leaders quadrant of the “Magic Quadrant for Cloud-Enabled Managed Hosting” in both North America and Europe. The Gartner assessment evaluates providers based on the completeness of their vision and their ability to execute. Rackspace was among the 17 providers assessed by Gartner, and one of only two in the Leaders quadrant in North America. In Europe, the firm analyzed 17 providers and Rackspace was one of seven in the Leaders quadrant. |
• | Rackspace launched OnMetal™ Cloud Servers to reduce cloud complexity and help cloud applications scale. These API-driven bare metal servers can be spun up as quickly as virtual machines. OnMetal Cloud Servers are designed for customers with rapidly growing infrastructure footprints who value the agility and elasticity of cloud along with the simplicity and cost-efficiency of colocation. |
• | ObjectRocket demonstrated Automated Online Compaction and its rapid-deployment API at MongoDB World and extended its free backup service to MongoDB databases hosted with any provider. ObjectRocket offers MongoDB users a one-click, automated compaction solution, effectively eliminating the need for what can be a difficult and time consuming manual database maintenance process. Automated Online Compaction allows MongoDB instances to be compacted online and in the background on the ObjectRocket platform. |
• | Rackspace was named the sixth “best place to work” in the U.K. in the large company category of the U.K.'s 2014 Great Place to Work Awards. This is the 10th consecutive year that Rackspace has been recognized by the Great Place to Work Awards. The awards seek to identify companies with highly committed individuals who help their organization achieve its business objectives and consistently go the extra mile. In addition, the award looks for companies whose leadership team ensures that each employee feels trusted and supported. The award's objective is to recognize a sense of camaraderie and a desire to work for growth, attributes that Rackspace openly demonstrates. |
Conference Call and Webcast
Rackspace's executive management will host a conference call to discuss the results for the second quarter of 2014 starting today at 4:30 p.m. ET.
To access the conference call from the United States and Canada, please dial 800-786-0540, from the United Kingdom, please dial 0800-496-0445, and from Hong Kong, please dial 800-900-872.
A live webcast and a replay of the conference call will be available on Rackspace's website, located at ir.rackspace.com.
About Rackspace Hosting
Rackspace (NYSE: RAX) is the #1 managed cloud company. Its technical expertise and Fanatical Support® allow companies to tap the power of the cloud without the pain of hiring experts in dozens of complex technologies. Rackspace is also the leader in hybrid cloud, giving each customer the best fit for its unique needs -- whether on single- or multi-tenant servers, or a combination of those platforms. Rackspace is the founder of OpenStack®, the open-source operating system for the cloud. Headquartered in San Antonio, Rackspace serves more than 200,000 business customers from data centers on four continents. It ranks 29th on Fortune's list of 100 Best Companies to Work For. For more information, visit www.rackspace.com.
- 2 -
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, 2013, filed with the SEC on March 3, 2014, and in Rackspace Hosting’s Form 10-Q for the quarter ended June 30, 2014. 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: | Media Relations: |
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 | Six Months Ended | |||||||||||||||||||
(In thousands, except per share data) | June 30, 2013 | March 31, 2014 | June 30, 2014 | June 30, 2013 | June 30, 2014 | |||||||||||||||
Net revenue | $ | 375,847 | $ | 421,047 | $ | 441,112 | $ | 738,047 | $ | 862,159 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of revenue | 117,658 | 140,417 | 145,051 | 231,268 | 285,468 | |||||||||||||||
Research and development (1) | 23,216 | 25,192 | 29,711 | 41,591 | 54,903 | |||||||||||||||
Sales and marketing | 52,269 | 57,359 | 60,480 | 102,083 | 117,839 | |||||||||||||||
General and administrative (1) | 72,840 | 71,150 | 81,424 | 140,317 | 152,574 | |||||||||||||||
Depreciation and amortization | 74,460 | 87,805 | 90,559 | 144,571 | 178,364 | |||||||||||||||
Total costs and expenses | 340,443 | 381,923 | 407,225 | 659,830 | 789,148 | |||||||||||||||
Income from operations | 35,404 | 39,124 | 33,887 | 78,217 | 73,011 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (833 | ) | (495 | ) | (529 | ) | (1,773 | ) | (1,024 | ) | ||||||||||
Interest and other income (expense) | (303 | ) | 265 | 171 | (104 | ) | 436 | |||||||||||||
Total other income (expense) | (1,136 | ) | (230 | ) | (358 | ) | (1,877 | ) | (588 | ) | ||||||||||
Income before income taxes | 34,268 | 38,894 | 33,529 | 76,340 | 72,423 | |||||||||||||||
Income taxes | 11,901 | 13,448 | 11,078 | 26,712 | 24,526 | |||||||||||||||
Net income | $ | 22,367 | $ | 25,446 | $ | 22,451 | $ | 49,628 | $ | 47,897 | ||||||||||
Net income per share | ||||||||||||||||||||
Basic | $ | 0.16 | $ | 0.18 | $ | 0.16 | $ | 0.36 | $ | 0.34 | ||||||||||
Diluted | $ | 0.16 | $ | 0.18 | $ | 0.16 | $ | 0.34 | $ | 0.33 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||
Basic | 138,011 | 141,048 | 142,079 | 139,463 | 141,558 | |||||||||||||||
Diluted | 142,178 | 143,815 | 144,093 | 144,180 | 143,910 | |||||||||||||||
(1) | Certain reclassifications have been made to amounts previously reported for the three and six months ended June 30, 2013 in order to conform to the current period's presentation. For more information, refer to our Form 10-Q for the quarter ended June 30, 2014. |
- 4 -
Consolidated Balance Sheets
(In thousands) | December 31, 2013 | June 30, 2014 | |||||
(Unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 259,733 | $ | 340,344 | |||
Accounts receivable, net of allowance for doubtful accounts and customer credits of $3,891 as of December 31, 2013 and $4,672 as of June 30, 2014 | 123,898 | 130,911 | |||||
Deferred income taxes | 12,637 | 11,769 | |||||
Prepaid expenses | 30,782 | 27,239 | |||||
Other current assets | 11,918 | 7,470 | |||||
Total current assets | 438,968 | 517,733 | |||||
Property and equipment, net | 890,776 | 972,830 | |||||
Goodwill | 81,084 | 81,084 | |||||
Intangible assets, net | 23,880 | 20,043 | |||||
Other non-current assets | 57,089 | 56,285 | |||||
Total assets | $ | 1,491,797 | $ | 1,647,975 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 122,047 | $ | 147,285 | |||
Accrued compensation and benefits | 62,459 | 65,700 | |||||
Income and other taxes payable | 11,388 | 18,578 | |||||
Current portion of deferred revenue | 22,868 | 20,742 | |||||
Current portion of capital lease obligations | 37,885 | 25,639 | |||||
Current portion of debt | 1,861 | 1,108 | |||||
Total current liabilities | 258,508 | 279,052 | |||||
Non-current liabilities: | |||||||
Deferred revenue | 3,662 | 2,506 | |||||
Capital lease obligations | 25,048 | 14,982 | |||||
Finance lease obligations for assets under construction | — | 36,262 | |||||
Debt | 124 | 18 | |||||
Deferred income taxes | 69,729 | 54,645 | |||||
Deferred rent | 43,046 | 47,693 | |||||
Other liabilities | 36,268 | 41,620 | |||||
Total liabilities | 436,385 | 476,778 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
Stockholders' equity: | |||||||
Common stock | 141 | 143 | |||||
Additional paid-in capital | 636,660 | 696,109 | |||||
Accumulated other comprehensive income (loss) | (4,536 | ) | 3,901 | ||||
Retained earnings | 423,147 | 471,044 | |||||
Total stockholders’ equity | 1,055,412 | 1,171,197 | |||||
Total liabilities and stockholders’ equity | $ | 1,491,797 | $ | 1,647,975 | |||
- 5 -
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||||||
(in thousands) | June 30, 2013 | March 31, 2014 | June 30, 2014 | June 30, 2013 | June 30, 2014 | ||||||||||||||
Cash Flows From Operating Activities | |||||||||||||||||||
Net income | $ | 22,367 | $ | 25,446 | $ | 22,451 | $ | 49,628 | $ | 47,897 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||
Depreciation and amortization | 74,460 | 87,805 | 90,559 | 144,571 | 178,364 | ||||||||||||||
Loss (gain) on disposal of equipment, net | (15 | ) | 228 | (69 | ) | 225 | 159 | ||||||||||||
Provision for bad debts and customer credits | 1,301 | 1,813 | 1,454 | 2,361 | 3,267 | ||||||||||||||
Deferred income taxes | (8,444 | ) | (10,119 | ) | (8,975 | ) | (1,891 | ) | (19,094 | ) | |||||||||
Deferred rent | 1,519 | 2,256 | 2,113 | 5,484 | 4,369 | ||||||||||||||
Share-based compensation expense | 13,315 | 12,732 | 17,265 | 25,498 | 29,997 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | (11,898 | ) | (15,100 | ) | (13,221 | ) | (16,197 | ) | (28,321 | ) | |||||||||
Changes in certain assets and liabilities: | |||||||||||||||||||
Accounts receivable | (7,220 | ) | 3,870 | (12,990 | ) | (13,488 | ) | (9,120 | ) | ||||||||||
Prepaid expenses and other current assets | 5,081 | 3,337 | 3,918 | (556 | ) | 7,255 | |||||||||||||
Accounts payable and accrued expenses | 12,473 | 30,251 | 21,745 | 15,535 | 51,996 | ||||||||||||||
Deferred revenue | 823 | (2,110 | ) | (1,411 | ) | 2,065 | (3,521 | ) | |||||||||||
All other operating activities | 2,437 | 1,250 | 1,698 | 6,757 | 2,948 | ||||||||||||||
Net cash provided by operating activities | 106,199 | 141,659 | 124,537 | 219,992 | 266,196 | ||||||||||||||
Cash Flows From Investing Activities | |||||||||||||||||||
Purchases of property and equipment | (119,836 | ) | (84,953 | ) | (114,044 | ) | (225,377 | ) | (198,997 | ) | |||||||||
Acquisitions, net of cash acquired | — | — | — | (6,203 | ) | — | |||||||||||||
All other investing activities | (380 | ) | 455 | 1,173 | (372 | ) | 1,628 | ||||||||||||
Net cash used in investing activities | (120,216 | ) | (84,498 | ) | (112,871 | ) | (231,952 | ) | (197,369 | ) | |||||||||
Cash Flows From Financing Activities | |||||||||||||||||||
Principal payments of capital leases | (16,612 | ) | (12,586 | ) | (10,959 | ) | (35,550 | ) | (23,545 | ) | |||||||||
Principal payments of notes payable | (846 | ) | (52 | ) | (847 | ) | (897 | ) | (899 | ) | |||||||||
Payments for deferred acquisition obligations | (59 | ) | (57 | ) | (56 | ) | (1,238 | ) | (113 | ) | |||||||||
Receipt of Texas Enterprise Fund grant | — | 5,500 | — | — | 5,500 | ||||||||||||||
Common shares withheld for employee withholding taxes | — | (13,620 | ) | — | — | (13,620 | ) | ||||||||||||
Proceeds from employee stock plans | 4,686 | 2,122 | 12,631 | 6,400 | 14,753 | ||||||||||||||
Excess tax benefits from share-based compensation arrangements | 11,898 | 15,100 | 13,221 | 16,197 | 28,321 | ||||||||||||||
Net cash provided by (used in) financing activities | (933 | ) | (3,593 | ) | 13,990 | (15,088 | ) | 10,397 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | (625 | ) | 534 | 853 | (1,961 | ) | 1,387 | ||||||||||||
Increase (decrease) in cash and cash equivalents | (15,575 | ) | 54,102 | 26,509 | (29,009 | ) | 80,611 | ||||||||||||
Cash and cash equivalents, beginning of period | 278,627 | 259,733 | 313,835 | 292,061 | 259,733 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 263,052 | $ | 313,835 | $ | 340,344 | $ | 263,052 | $ | 340,344 | |||||||||
Supplemental Cash Flow Information: | |||||||||||||||||||
Non-cash purchases of property and equipment (1) | $ | (13,311 | ) | $ | 15,741 | $ | (1,651 | ) | $ | 6,547 | $ | 14,090 | |||||||
(1) | Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements. |
- 6 -
Key Metrics - Quarter to Date
(Unaudited)
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except average monthly revenue per server) | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | ||||||||||||||
Growth | |||||||||||||||||||
Dedicated cloud, net revenue | $ | 276,845 | $ | 280,215 | $ | 291,265 | $ | 299,689 | $ | 310,647 | |||||||||
Public cloud, net revenue | $ | 99,002 | $ | 108,421 | $ | 116,838 | $ | 121,358 | $ | 130,465 | |||||||||
Net revenue | $ | 375,847 | $ | 388,636 | $ | 408,103 | $ | 421,047 | $ | 441,112 | |||||||||
Revenue growth (year over year) | 17.8 | % | 15.7 | % | 15.6 | % | 16.2 | % | 17.4 | % | |||||||||
Net upgrades (monthly average) | 1.5 | % | 1.5 | % | 1.1 | % | 0.9 | % | 1.5 | % | |||||||||
Churn (monthly average) | -0.8 | % | -0.8 | % | -0.7 | % | -0.6 | % | -0.7 | % | |||||||||
Growth in installed base (monthly average) (2) | 0.7 | % | 0.7 | % | 0.4 | % | 0.3 | % | 0.8 | % | |||||||||
Number of employees (Rackers) at period end | 5,272 | 5,450 | 5,651 | 5,743 | 5,798 | ||||||||||||||
Number of servers deployed at period end | 98,884 | 101,967 | 103,886 | 106,229 | 107,657 | ||||||||||||||
Average monthly revenue per server | $ | 1,298 | $ | 1,290 | $ | 1,322 | $ | 1,336 | $ | 1,375 | |||||||||
Profitability | |||||||||||||||||||
Income from operations | $ | 35,404 | $ | 27,762 | $ | 27,157 | $ | 39,124 | $ | 33,887 | |||||||||
Depreciation and amortization | $ | 74,460 | $ | 80,753 | $ | 87,683 | $ | 87,805 | $ | 90,559 | |||||||||
Share-based compensation expense | |||||||||||||||||||
Cost of revenue | $ | 2,735 | $ | 3,453 | $ | 3,877 | $ | 3,791 | $ | 4,127 | |||||||||
Research and development | $ | 1,813 | $ | 2,306 | $ | 2,521 | $ | 2,780 | $ | 3,293 | |||||||||
Sales and marketing | $ | 1,744 | $ | 2,149 | $ | 1,766 | $ | 2,091 | $ | 2,062 | |||||||||
General and administrative | $ | 7,023 | $ | 9,051 | $ | 9,024 | $ | 4,070 | $ | 7,783 | |||||||||
Total share-based compensation expense | $ | 13,315 | $ | 16,959 | $ | 17,188 | $ | 12,732 | $ | 17,265 | |||||||||
Adjusted EBITDA (1) | $ | 123,179 | $ | 125,474 | $ | 132,028 | $ | 139,661 | $ | 141,711 | |||||||||
Adjusted EBITDA margin | 32.8 | % | 32.3 | % | 32.4 | % | 33.2 | % | 32.1 | % | |||||||||
Operating income margin | 9.4 | % | 7.1 | % | 6.7 | % | 9.3 | % | 7.7 | % | |||||||||
Income from operations | $ | 35,404 | $ | 27,762 | $ | 27,157 | $ | 39,124 | $ | 33,887 | |||||||||
Effective tax rate | 34.7 | % | 40.7 | % | 22.7 | % | 34.6 | % | 33.0 | % | |||||||||
Net operating profit after tax (NOPAT) (1) | $ | 23,119 | $ | 16,463 | $ | 20,992 | $ | 25,587 | $ | 22,704 | |||||||||
NOPAT margin | 6.2 | % | 4.2 | % | 5.1 | % | 6.1 | % | 5.1 | % | |||||||||
Capital efficiency and returns | |||||||||||||||||||
Interest bearing debt | $ | 88,434 | $ | 72,579 | $ | 64,918 | $ | 53,326 | $ | 41,747 | |||||||||
Stockholders' equity | $ | 933,897 | $ | 988,708 | $ | 1,055,412 | $ | 1,100,012 | $ | 1,171,197 | |||||||||
Less: Excess cash | $ | (217,950 | ) | $ | (223,359 | ) | $ | (210,761 | ) | $ | (263,309 | ) | $ | (287,411 | ) | ||||
Capital base | $ | 804,381 | $ | 837,928 | $ | 909,569 | $ | 890,029 | $ | 925,533 | |||||||||
Average capital base | $ | 777,030 | $ | 821,155 | $ | 873,749 | $ | 899,799 | $ | 907,781 | |||||||||
Capital turnover (annualized) | 1.93 | 1.89 | 1.87 | 1.87 | 1.94 | ||||||||||||||
Return on capital (annualized) (1) | 11.9 | % | 8.0 | % | 9.6 | % | 11.4 | % | 10.0 | % | |||||||||
- 7 -
Three Months Ended | |||||||||||||||||||
(Dollar amounts in thousands, except average monthly revenue per server) | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | ||||||||||||||
Capital expenditures | |||||||||||||||||||
Cash purchases of property and equipment | $ | 119,836 | $ | 100,496 | $ | 126,723 | $ | 84,953 | $ | 114,044 | |||||||||
Non-cash purchases of property and equipment (3) | $ | (13,311 | ) | $ | 17,062 | $ | (4,116 | ) | $ | 15,741 | $ | (1,651 | ) | ||||||
Total capital expenditures | $ | 106,525 | $ | 117,558 | $ | 122,607 | $ | 100,694 | $ | 112,393 | |||||||||
Customer gear | $ | 73,022 | $ | 73,784 | $ | 65,291 | $ | 60,688 | $ | 64,767 | |||||||||
Data center build outs | $ | 10,085 | $ | 12,441 | $ | 22,524 | $ | 10,963 | $ | 13,767 | |||||||||
Office build outs | $ | 1,683 | $ | 6,700 | $ | 14,860 | $ | 9,212 | $ | 6,857 | |||||||||
Capitalized software and other projects | $ | 21,735 | $ | 24,633 | $ | 19,932 | $ | 19,831 | $ | 27,002 | |||||||||
Total capital expenditures | $ | 106,525 | $ | 117,558 | $ | 122,607 | $ | 100,694 | $ | 112,393 | |||||||||
Infrastructure capacity and utilization | |||||||||||||||||||
Megawatts under contract at period end | 59.6 | 60.0 | 60.0 | 58.1 | 58.1 | ||||||||||||||
Megawatts available for use at period end | 44.4 | 46.9 | 46.9 | 45.3 | 45.4 | ||||||||||||||
Megawatts utilized at period end | 26.0 | 27.0 | 27.4 | 28.1 | 29.0 | ||||||||||||||
Annualized net revenue per average Megawatt of power utilized | $ | 59,305 | $ | 58,662 | $ | 60,015 | $ | 60,691 | $ | 61,802 | |||||||||
(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) | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | ||||||||||||||
Net revenue | $ | 375,847 | $ | 388,636 | $ | 408,103 | $ | 421,047 | $ | 441,112 | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 117,658 | 127,404 | 133,821 | 140,417 | 145,051 | ||||||||||||||
Research and development | 23,216 | 23,773 | 24,849 | 25,192 | 29,711 | ||||||||||||||
Sales and marketing | 52,269 | 50,869 | 55,465 | 57,359 | 60,480 | ||||||||||||||
General and administrative | 72,840 | 78,075 | 79,128 | 71,150 | 81,424 | ||||||||||||||
Depreciation and amortization | 74,460 | 80,753 | 87,683 | 87,805 | 90,559 | ||||||||||||||
Total costs and expenses | 340,443 | 360,874 | 380,946 | 381,923 | 407,225 | ||||||||||||||
Income from operations | 35,404 | 27,762 | 27,157 | 39,124 | 33,887 | ||||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (833 | ) | (689 | ) | (656 | ) | (495 | ) | (529 | ) | |||||||||
Interest and other income (expense) | (303 | ) | 440 | 405 | 265 | 171 | |||||||||||||
Total other income (expense) | (1,136 | ) | (249 | ) | (251 | ) | (230 | ) | (358 | ) | |||||||||
Income before income taxes | 34,268 | 27,513 | 26,906 | 38,894 | 33,529 | ||||||||||||||
Income taxes | 11,901 | 11,202 | 6,108 | 13,448 | 11,078 | ||||||||||||||
Net income | $ | 22,367 | $ | 16,311 | $ | 20,798 | $ | 25,446 | $ | 22,451 | |||||||||
Three Months Ended | |||||||||||||||||||
(Percent of net revenue) | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | ||||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenue | 31.3 | % | 32.8 | % | 32.8 | % | 33.3 | % | 32.9 | % | |||||||||
Research and development | 6.2 | % | 6.1 | % | 6.1 | % | 6.0 | % | 6.7 | % | |||||||||
Sales and marketing | 13.9 | % | 13.1 | % | 13.6 | % | 13.6 | % | 13.7 | % | |||||||||
General and administrative | 19.4 | % | 20.1 | % | 19.4 | % | 16.9 | % | 18.5 | % | |||||||||
Depreciation and amortization | 19.8 | % | 20.8 | % | 21.5 | % | 20.9 | % | 20.5 | % | |||||||||
Total costs and expenses | 90.6 | % | 92.9 | % | 93.3 | % | 90.7 | % | 92.3 | % | |||||||||
Income from operations | 9.4 | % | 7.1 | % | 6.7 | % | 9.3 | % | 7.7 | % | |||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (0.2 | )% | (0.2 | )% | (0.2 | )% | (0.1 | )% | (0.1 | )% | |||||||||
Interest and other income (expense) | (0.1 | )% | 0.1 | % | 0.1 | % | 0.1 | % | 0.0 | % | |||||||||
Total other income (expense) | (0.3 | )% | (0.1 | )% | (0.1 | )% | (0.1 | )% | (0.1 | )% | |||||||||
Income before income taxes | 9.1 | % | 7.1 | % | 6.6 | % | 9.2 | % | 7.6 | % | |||||||||
Income taxes | 3.2 | % | 2.9 | % | 1.5 | % | 3.2 | % | 2.5 | % | |||||||||
Net income | 6.0 | % | 4.2 | % | 5.1 | % | 6.0 | % | 5.1 | % | |||||||||
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) | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | ||||||||||||||
Net revenue | $ | 375,847 | $ | 388,636 | $ | 408,103 | $ | 421,047 | $ | 441,112 | |||||||||
Income from operations | $ | 35,404 | $ | 27,762 | $ | 27,157 | $ | 39,124 | $ | 33,887 | |||||||||
Net income | $ | 22,367 | $ | 16,311 | $ | 20,798 | $ | 25,446 | $ | 22,451 | |||||||||
Plus: Income taxes | 11,901 | 11,202 | 6,108 | 13,448 | 11,078 | ||||||||||||||
Plus: Total other (income) expense | 1,136 | 249 | 251 | 230 | 358 | ||||||||||||||
Plus: Depreciation and amortization | 74,460 | 80,753 | 87,683 | 87,805 | 90,559 | ||||||||||||||
Plus: Share-based compensation expense | 13,315 | 16,959 | 17,188 | 12,732 | 17,265 | ||||||||||||||
Adjusted EBITDA | $ | 123,179 | $ | 125,474 | $ | 132,028 | $ | 139,661 | $ | 141,711 | |||||||||
Operating income margin | 9.4 | % | 7.1 | % | 6.7 | % | 9.3 | % | 7.7 | % | |||||||||
Adjusted EBITDA margin | 32.8 | % | 32.3 | % | 32.4 | % | 33.2 | % | 32.1 | % | |||||||||
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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, deferred rent and finance lease obligations for assets under construction); 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 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 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) | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | ||||||||||||||
Income from operations | $ | 35,404 | $ | 27,762 | $ | 27,157 | $ | 39,124 | $ | 33,887 | |||||||||
Effective tax rate | 34.7 | % | 40.7 | % | 22.7 | % | 34.6 | % | 33.0 | % | |||||||||
Net operating profit after tax (NOPAT) | $ | 23,119 | $ | 16,463 | $ | 20,992 | $ | 25,587 | $ | 22,704 | |||||||||
Net income | $ | 22,367 | $ | 16,311 | $ | 20,798 | $ | 25,446 | $ | 22,451 | |||||||||
Total assets at period end | $ | 1,377,928 | $ | 1,451,769 | $ | 1,491,797 | $ | 1,566,949 | $ | 1,647,975 | |||||||||
Less: Excess cash | (217,950 | ) | (223,359 | ) | (210,761 | ) | (263,309 | ) | (287,411 | ) | |||||||||
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable | (178,552 | ) | (213,268 | ) | (195,894 | ) | (224,423 | ) | (231,563 | ) | |||||||||
Less: Deferred revenue (current and non-current) | (22,636 | ) | (22,211 | ) | (26,530 | ) | (24,485 | ) | (23,248 | ) | |||||||||
Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction | (154,409 | ) | (155,003 | ) | (149,043 | ) | (164,703 | ) | (180,220 | ) | |||||||||
Capital base | $ | 804,381 | $ | 837,928 | $ | 909,569 | $ | 890,029 | $ | 925,533 | |||||||||
Average total assets | $ | 1,363,139 | $ | 1,414,849 | $ | 1,471,783 | $ | 1,529,373 | $ | 1,607,462 | |||||||||
Average capital base | $ | 777,030 | $ | 821,155 | $ | 873,749 | $ | 899,799 | $ | 907,781 | |||||||||
Return on assets (annualized) | 6.6 | % | 4.6 | % | 5.7 | % | 6.7 | % | 5.6 | % | |||||||||
Return on capital (annualized) | 11.9 | % | 8.0 | % | 9.6 | % | 11.4 | % | 10.0 | % | |||||||||
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 | Six Months Ended | ||||||||||||||
(In thousands) | June 30, 2013 | June 30, 2014 | June 30, 2013 | June 30, 2014 | |||||||||||
Adjusted EBITDA | $ | 123,179 | $ | 141,711 | $ | 248,286 | $ | 281,372 | |||||||
Non-cash deferred rent | 1,519 | 2,113 | 5,484 | 4,369 | |||||||||||
Total capital expenditures | (106,525 | ) | (112,393 | ) | (231,924 | ) | (213,087 | ) | |||||||
Cash payments for interest, net | (775 | ) | (520 | ) | (1,826 | ) | (952 | ) | |||||||
Cash payments for income taxes, net | (5,911 | ) | (4,576 | ) | (9,750 | ) | (5,462 | ) | |||||||
Adjusted free cash flow | $ | 11,487 | $ | 26,335 | $ | 10,270 | $ | 66,240 | |||||||
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