Rackspace Hosting Reports Third Quarter 2009 Results

http://www.businesswire.com/news/home/20091109006521/en

For the Quarter Ended September 30, 2009:

* Net Revenue of $162.4 Million Grew 17.4% Year-over-Year and 6.8% from Q2 2009
* Adjusted EBITDA(1) of $51.4 Million Grew 39.1% Year-over-Year and 6.9% from Q2
2009
* Achieved Adjusted EBITDA Margin of 31.7%, up from 26.7% in Q3 2008
* Net Income of $7.6 Million Grew 45.3% Year-over-Year and 8.8% from Q2 2009

SAN ANTONIO--(Business Wire)--
Rackspace Hosting, Inc. (NYSE: RAX), the world`s leader in hosting and cloud
computing, today announced financial results for the quarter ended September 30,
2009.

Net revenue for the third quarter ended September 30, 2009 was $162.4 million,
up 6.8% from the previous quarter and up 17.4% from the third quarter ended
September 30, 2008. Net revenue for the third quarter was favorably impacted by
currency exchange rates when compared to the second quarter of 2009 and
negatively impacted when compared to the third quarter of 2008.

Favorable changes in currency exchange rates quarter-over-quarter had a positive
impact on net revenue by $2.4 million. Unfavorable changes in currency exchange
rates year-over-year had a negative impact on net revenue by $6.5 million.

Managed hosting revenue for the quarter increased to $147.1 million, up from
$138.9 million in the second quarter of 2009. Cloud revenue increased to $15.3
million in the quarter, up from $13.1 million in the second quarter of 2009.
Rackspace`s cloud business now represents approximately 10% of its total net
revenues, up from only 5% in the same quarter of 2008.

Total server count increased to 54,655, up from 52,269 servers in the second
quarter of 2009, and total customers increased to 80,944, up from 70,803 in the
second quarter of 2009.

"Our portfolio approach of finding the right fit for our customers and our
dedication to delivering a world class customer outcome is a very real
competitive advantage and it has shown through in our results so far this year.
Today, Rackspace is the world leader in hosting and cloud computing thanks to
our unique culture of customer service. We believe this advantage is the reason
we`ve been able to grow, increase profits and take market share from the
competition during 2009. As we gain more traction on moving up market to serve
the enterprise and compete hard to win in the rapidly expanding cloud market,
our commitment to customer service and innovation should help us win our
disproportionate share," said Lanham Napier, president and chief executive
officer. "Rackers have built a culture of customer service and innovation and
they understand that being a part of this huge revolution that will change the
way the world consumes computing is a very special opportunity."

Adjusted EBITDA for the third quarter of 2009 was $51.4 million, a 6.9% increase
compared to the second quarter of 2009 and a 39.1% increase compared to the
third quarter of last year. The adjusted EBITDA margin for the third quarter of
2009 was 31.7%.

Adjusted EBITDA and adjusted EBITDA margin for the quarter were negatively
impacted by a non-cash charge of $1.9 million relating to operating leases for
the data centers in Northern Virginia and Chicago. Operations began in Northern
Virginia in the second quarter of this year and Rackspace is now in the fourth
of ten phases, while operations are expected to begin in Chicago in the first
quarter of 2010.

"In early February, we shared our 2009 operational roadmap with the market. We
stated that we would continue to grow our managed hosting business and that we
would grow our cloud business rapidly in 2009. We committed to improving our
margins and profitability through focused scaling efforts, and said that any
cash burn in 2009 would be minimal. Given the strong results of third quarter,
we can safely say that we`ve delivered on our operational roadmap for this
year," said Bruce Knooihuizen, chief financial officer. "We showed that we`ve
been able to differentiate during challenging times. Looking ahead, we`re
steadfast in our commitment to becoming an even stronger competitor as we work
to improve our operational discipline through the end of this year and into
2010."

Net income was $7.6 million for the third quarter of 2009, an 8.8% increase
compared to the second quarter of 2009 and a 45.3% increase compared to the
third quarter of last year. Net income margin for the third quarter of 2009 was
4.7% compared to 4.6% for the second quarter of 2009, and 3.8% for the third
quarter of 2008.

Cash flow from operating activities was $42.4 million for the third quarter of
2009. Capital expenditures were $46.7 million, including $28.7 million for
purchases of customer gear, $4.0 million for data center build outs, $5.4
million for office build outs, and $8.5 million for capitalized software and
other expenditures.

For the full year of 2009, the company expects to have total capital
expenditures of approximately $185 million, including $110 million for customer
gear, $35 million for data centers, $15 million for office space, and $25
million for capitalized software and other.

Adjusted free cash flow for the quarter was $10.4 million, which included an
income tax refund of $7.5 million related to the 2008 tax period.

At the end of the third quarter, cash and cash equivalents were $103.0 million.
Included in that amount are investments in money market funds in the amount of
$60.7 million. Debt obligations totaled $168.0 million consisting of $109.5
million related to capital leases and $58.5 million related to current and
non-current debt. $50.0 million of the current and non-current debt is related
to borrowings on the company`s line of credit. The company has an additional
$194.3 million available for future borrowings on the company`s line of credit.

On a worldwide basis, Rackspace employed 2,730 Rackers as of September 30, 2009,
up from 2,648 Rackers as of June 30, 2009 and 2,536 Rackers as of September 30,
2008.

Rackspace Cloud Highlights and Other Developments

* Top Talent Flocks to The Rackspace Cloud: In October 2009, Rackspace announced
six key hires to The Rackspace Cloud. The new Rackers bring significant product
development experience from Microsoft, Yahoo, and Canonical where they held
leadership roles in high growth phases in their companies, driving the
development of Microsoft Exchange, Yahoo! Media, and the fastest growing Linux
operating system, Ubuntu.
* Launch of NoMoreServers.com: In October 2009, Rackspace announced the launch
of NoMoreServers.com, a site dedicated to the emergence of
Computing-as-a-Service models to power corporate computing.
* Launch of Cloud Tools, Ecosystem Portal: In August 2009, further illustrating
Rackspace`s commitment to the development on an Open Cloud, the company
announced the launch of Cloud Tools, an online service for sharing tools,
applications and services built by the company`s strategic partners and
independent developers for The Rackspace Cloud.
* Rackspace Adds Cloud-Based Email Archiving: In August 2009, Rackspace
announced the launch of Rackspace Archiving, a solution that enables hosted
email customers to automatically keep a long-term backup of incoming and
outgoing email for its almost 1.5 million users.

Conference Call and Webcast

Management will host a conference call to discuss its third quarter 2009
financial results today at 4:30 p.m. EST. To access the conference call, please
dial 888-298-3451 from the United States or dial 719-325-2352 from abroad and
reference pass code 9231467. 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 Hosting is the world`s leader in hosting and cloud computing and is
ranked #43 on FORTUNE Magazine`s 100 Best Companies to work for in the United
States. The company provides its customers with Fanatical Support in delivering
its portfolio of hosted IT services, including Managed Hosting, Cloud Computing
and Email and Apps. 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, 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 continuation or further
deterioration of the current difficult economic conditions or further
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-Q for the quarter ended June 30, 2009, filed with the SEC on August 13,
2009 and in Rackspace Hosting`s Form 10-Q for the quarter ended September 30,
2009 that will 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.

Consolidated Statements of Income
(Unaudited)

Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(In thousands, except per share data) 2008 2009 2009 2008 2009

Net revenue $ 138,354 $ 151,995 $ 162,399 $ 388,796 $ 459,471
Costs and expenses:
Cost of revenue 45,499 48,235 53,093 127,564 147,538
Sales and marketing 21,462 19,080 19,860 58,876 59,442
General and administrative 38,729 41,566 43,622 110,470 122,728
Depreciation and amortization 23,174 29,711 32,696 63,862 90,211
Total costs and expenses 128,864 138,592 149,271 360,772 419,919
Income from operations 9,490 13,403 13,128 28,024 39,552
Other income (expense):
Interest expense (1,912 ) (2,172 ) (2,147 ) (5,076 ) (6,854 )
Interest and other income (expense) (144 ) (267 ) 523 276 165
Total other income (expense) (2,056 ) (2,439 ) (1,624 ) (4,800 ) (6,689 )
Income before income taxes 7,434 10,964 11,504 23,224 32,863
Income taxes 2,199 3,973 3,900 8,365 11,680
Net income $ 5,235 $ 6,991 $ 7,604 $ 14,859 $ 21,183

Net income per share
Basic $ 0.05 $ 0.06 $ 0.06 $ 0.14 $ 0.18
Diluted $ 0.04 $ 0.06 $ 0.06 $ 0.13 $ 0.17

Weighted average number of shares outstanding
Basic 111,231 120,214 121,501 105,698 119,788
Diluted 118,724 126,442 129,160 112,796 125,849

Consolidated Balance Sheets

(In thousands) December 31, September 30,
2008 2009
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 238,407 $ 102,950
Accounts receivable, net of allowance for doubtful accounts and
customer credits of $3,295 as of December 31, 2008
and $5,184 as of September 30, 2009 30,932 39,902
Income taxes receivable 12,318 4,072
Prepaid expenses and other current assets 10,838 14,056
Total current assets 292,495 160,980

Property and equipment, net 362,042 419,454
Goodwill 6,942 22,329
Intangible assets, net 15,101 12,344
Other non-current assets 8,681 10,223
Total assets $ 685,261 $ 625,330

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 71,387 $ 77,108
Current portion of deferred revenue 16,284 15,338
Current portion of obligations under capital leases 38,909 46,408
Current portion of debt 5,944 4,850
Total current liabilities 132,524 143,704

Non-current deferred revenue 3,883 2,884
Non-current obligations under capital leases 50,781 63,063
Non-current debt 204,779 53,655
Non-current deferred income taxes 13,398 19,665
Other non-current liabilities 10,212 11,967
Total liabilities 415,577 294,938

COMMITMENTS AND CONTINGENCIES

Stockholders' equity:
Common stock 117 122
Additional paid-in capital 207,589 241,355
Accumulated other comprehensive income (loss) (16,027 ) (10,273 )
Retained earnings 78,005 99,188
Total stockholders` equity 269,684 330,392
Total liabilities and stockholders` equity $ 685,261 $ 625,330

Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2008 2009 2009 2008 2009

Cash Flows From Operating Activities
Net income $ 5,235 $ 6,991 $ 7,604 $ 14,859 $ 21,183
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 23,174 29,711 32,696 63,862 90,211
Loss on disposal of equipment, net 300 311 489 2,277 976
Provision for bad debts and customer credits 1,130 4,073 2,466 2,340 8,848
Deferred income taxes 7,962 2,810 (214 ) 10,486 5,103
Share-based compensation expense 4,317 5,017 5,612 10,873 14,866
Deferred rent 22 231 1,925 419 2,049
Other non-cash compensation expense 72 324 190 212 599
Excess tax benefits from share-based
compensation arrangements (591 ) - - (3,212 ) -
Changes in certain assets and liabilities
Accounts receivables (3,806 ) (6,522 ) (4,133 ) (5,446 ) (16,991 )
Income taxes receivable (10,837 ) (778 ) 9,281 (10,837 ) 8,246
Accounts payable and accrued expenses 6,767 18,605 (9,434 ) 17,665 2,620
Deferred revenues (43 ) (1,096 ) (1,602 ) 2,114 (2,394 )
All other operating activities (493 ) (1,628 ) (2,524 ) (3,399 ) (4,112 )
Net cash provided by operating activities 33,209 58,049 42,356 102,213 131,204

Cash Flows From Investing Activities
Purchases of property and equipment, net (45,328 ) (31,027 ) (26,024 ) (132,849 ) (82,640 )
Earnout payments for acquisitions - (5,622 ) (1,200 ) - (6,822 )
Net cash used in investing activities (45,328 ) (36,649 ) (27,224 ) (132,849 ) (89,462 )

Cash Flows From Financing Activities
Principal payments of capital leases (8,737 ) (11,084 ) (11,591 ) (22,881 ) (32,513 )
Principal payments of notes payable (2,592 ) (3,776 ) (1,381 ) (5,521 ) (5,908 )
Borrowings on line of credit 160,000 - - 200,000 -
Payments on line of credit (57,301 ) - (50,000 ) (57,301 ) (150,000 )
Payments for debt issuance costs - (328 ) (39 ) (158 ) (367 )
Proceeds from sale leaseback transactions - - - 1,543 -
Proceeds from issuance of common stock at IPO net of offering expenses 145,195 - - 145,195 -
Proceeds from issuance of common stock, net - - - 548 -
Proceeds from exercise of warrants 278 - - 278 -
Proceeds from exercise of stock options 759 3,995 3,513 1,964 9,743
Excess tax benefits from share-based compensation arrangements 591 - - 3,212 -
Net cash provided by (used in) financing activities 238,193 (11,193 ) (59,498 ) 266,879 (179,045 )

Effect of exchange rate changes on cash (850 ) 2,650 (561 ) (862 ) 1,846

Increase (decrease) in cash and cash equivalents 225,224 12,857 (44,927 ) 235,381 (135,457 )

Cash and cash equivalents, beginning of period 35,094 135,020 147,877 24,937 238,407

Cash and cash equivalents, end of period $ 260,318 $ 147,877 $ 102,950 $ 260,318 $ 102,950

Supplemental cash flow information:
Acquisition of property and equipment by capital leases $ 21,005 $ 23,637 $ 16,974 $ 58,708 $ 52,294
Acquisition of property and equipment by notes payable 2,004 - 3,690 11,934 3,690
Vendor financed equipment purchases $ 23,009 $ 23,637 $ 20,664 $ 70,642 $ 55,984

Shares issued in business combinations $ - $ 1,115 $ 6,800 $ - $ 8,680
Cash payments for interest, net of amount capitalized $ 2,400 $ 2,116 $ 1,908 $ 5,676 $ 6,266
Cash payments for income taxes $ 2,535 $ 2,179 $ 2,362 $ 6,075 $ 5,300

Key Metrics - Quarter to Date
(Unaudited)
Three Months Ended
(Dollar amounts in thousands, except annualized net revenue per average technical square foot) September 30, December 31, March 31, June 30, September 30,
2008 2008 2009 2009 2009
Growth
Managed hosting customers at period end 18,012 18,480 19,048 19,363 19,328
Cloud customers at period end* 18,173 34,820 43,030 51,440 61,616
Number of customers at period end 36,185 53,300 62,078 70,803 80,944

Managed hosting, net revenue $ 131,908 $ 134,275 $ 134,204 $ 138,943 $ 147,065
Cloud, net revenue $ 6,446 $ 8,862 $ 10,873 $ 13,052 $ 15,334
Net revenue $ 138,354 $ 143,137 $ 145,077 $ 151,995 $ 162,399
Revenue growth (year over year) 44.0 % 34.2 % 21.3 % 16.2 % 17.4 %
Net upgrades (monthly average) 1.8 % 1.4 % 0.9 % 1.2 % 1.2 %
Churn (monthly average) -1.2 % -1.3 % -1.1 % -1.0 % -1.1 %
Growth in installed base (monthly average) 0.6 % 0.1 % -0.2 % 0.2 % 0.1 %

Number of employees (Rackers) at period end 2,536 2,611 2,661 2,648 2,730
Number of servers deployed at period end 45,231 47,518 50,038 52,269 54,655

Profitability
Income from operations $ 9,490 $ 12,125 $ 13,021 $ 13,403 $ 13,128
Depreciation and amortization $ 23,174 $ 26,310 $ 27,804 $ 29,711 $ 32,696
Share-based compensation expense
Cost of revenue $ 819 $ 678 $ 629 $ 675 $ 778
Sales and marketing $ 612 $ 595 $ 698 $ 721 $ 826
General and administrative $ 2,886 $ 2,871 $ 2,910 $ 3,621 $ 4,008
Total share-based compensation expense $ 4,317 $ 4,144 $ 4,237 $ 5,017 $ 5,612
Adjusted EBITDA (1) $ 36,981 $ 42,579 $ 45,062 $ 48,131 $ 51,436

Adjusted EBITDA margin (1) 26.7 % 29.7 % 31.1 % 31.7 % 31.7 %

Operating income margin 6.9 % 8.5 % 9.0 % 8.8 % 8.1 %

Income from operations $ 9,490 $ 12,125 $ 13,021 $ 13,403 $ 13,128
Effective tax rate 29.6 % 27.7 % 36.6 % 36.2 % 33.9 %
Net operating profit after tax (NOPAT) (1) $ 6,681 $ 8,766 $ 8,255 $ 8,551 $ 8,678
NOPAT margin 4.8 % 6.1 % 5.7 % 5.6 % 5.3 %

Capital efficiency and returns
Interest bearing debt $ 297,933 $ 300,413 $ 201,507 $ 210,284 $ 167,976
Stockholders' equity $ 269,008 $ 269,684 $ 282,880 $ 308,823 $ 330,392
Less: Excess cash $ (235,421 ) $ (200,620 ) $ (117,611 ) $ (129,638 ) $ (83,462 )
Capital base $ 331,520 $ 369,477 $ 366,776 $ 389,469 $ 414,906
Average capital base $ 316,245 $ 350,499 $ 368,127 $ 378,123 $ 402,188
Capital turnover (annualized) 1.75 1.63 1.58 1.61 1.62

Return on capital (annualized) (1) 8.5 % 10.0 % 9.0 % 9.0 % 8.6 %

Capital expenditures
Purchases of property and equipment, net $ 45,328 $ 32,547 $ 25,589 $ 31,027 $ 26,024
Vendor financed equipment purchases $ 23,009 $ 14,848 $ 11,683 $ 23,637 $ 20,664
Total capital expenditures $ 68,337 $ 47,395 $ 37,272 $ 54,664 $ 46,688

Customer gear $ 27,627 $ 23,073 $ 19,255 $ 32,448 $ 28,705
Data center build outs $ 21,679 $ 14,240 $ 11,386 $ 13,914 $ 4,028
Office build outs $ 11,227 $ 8,340 $ 2,239 $ 1,651 $ 5,432
Capitalized software and other projects $ 7,804 $ 1,742 $ 4,392 $ 6,651 $ 8,523
Total capital expenditures $ 68,337 $ 47,395 $ 37,272 $ 54,664 $ 46,688

Infrastructure capacity and utilization
Technical square feet of data center space 136,962 134,923 157,523 177,371 167,821
at period end **
Annualized net revenue per average $ 4,093 $ 4,212 $ 3,969 $ 3,631 $ 3,764
technical square foot **
Utilization rate at period end 63.4 % 70.4 % 64.6 % 59.8 % 62.3 %

* Beginning December 31, 2008 amounts include customers resulting from the Slicehost acquisition, and beginning March 31, 2009 amounts include SaaS customers for Jungle Disk.
** The technical square feet as of September 30, 2009 includes an additional 2,200 square feet for the Virginia data center less 11,750 square feet for operations at a U.K. data center that was decommissioned and migrated to the Slough data center during the third quarter 2009.
(1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.

Consolidated Quarterly Statements of Income
(Unaudited)

(In thousands) September 30, December 31, March 31, June 30, September 30,
2008 2008 2009 2009 2009

Net revenue $ 138,354 $ 143,137 $ 145,077 $ 151,995 $ 162,399
Costs and expenses:
Cost of revenue 45,499 45,019 46,210 48,235 53,093
Sales and marketing 21,462 21,447 20,502 19,080 19,860
General and administrative 38,729 38,236 37,540 41,566 43,622
Depreciation and amortization 23,174 26,310 27,804 29,711 32,696
Total costs and expenses 128,864 131,012 132,056 138,592 149,271
Income from operations 9,490 12,125 13,021 13,403 13,128
Other income (expense):
Interest expense (1,912 ) (3,153 ) (2,535 ) (2,172 ) (2,147 )
Interest and other income (expense) (144 ) 492 (91 ) (267 ) 523
Total other income (expense) (2,056 ) (2,661 ) (2,626 ) (2,439 ) (1,624 )
Income before income taxes 7,434 9,464 10,395 10,964 11,504
Income taxes 2,199 2,620 3,807 3,973 3,900
Net income $ 5,235 $ 6,844 $ 6,588 $ 6,991 $ 7,604

(Percent of net revenue) September 30, December 31, March 31, June 30, September 30,
2008 2008 2009 2009 2009

Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses
Cost of revenue 32.9 % 31.5 % 31.9 % 31.7 % 32.7 %
Sales and marketing 15.5 % 15.0 % 14.1 % 12.6 % 12.2 %
General and administrative 28.0 % 26.7 % 25.9 % 27.3 % 26.9 %
Depreciation and amortization 16.7 % 18.4 % 19.2 % 19.5 % 20.1 %
Total costs and expenses 93.1 % 91.5 % 91.0 % 91.2 % 91.9 %
Income from operations 6.9 % 8.5 % 9.0 % 8.8 % 8.1 %
Other income (expense):
Interest expense -1.4 % -2.2 % -1.7 % -1.4 % -1.3 %
Interest and other income (expense) -0.1 % 0.3 % -0.1 % -0.2 % 0.3 %
Total other income (expense) -1.5 % -1.9 % -1.8 % -1.6 % -1.0 %
Income before income taxes 5.4 % 6.6 % 7.2 % 7.2 % 7.1 %
Income taxes 1.6 % 1.8 % 2.6 % 2.6 % 2.4 %
Net income 3.8 % 4.8 % 4.5 % 4.6 % 4.7 %

Due to rounding, totals may not equal the sum of the line items in the table above.

(1) Non-GAAP Financial Measures

Adjusted EBITDA (Non-GAAP financial measure)

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 income from operations, 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 Adjusted EBITDA reconciliation in
our key metrics table below.

(Dollars in thousands) September 30, December 31, March 31, June 30, September 30,
2008 2008 2009 2009 2009
(Unaudited)
Net revenue $ 138,354 $ 143,137 $ 145,077 $ 151,995 $ 162,399

Income from operations $ 9,490 $ 12,125 $ 13,021 $ 13,403 $ 13,128

Net income $ 5,235 $ 6,844 $ 6,588 $ 6,991 $ 7,604
Plus: Income taxes 2,199 2,620 3,807 3,973 3,900
Plus: Total other (income) expense 2,056 2,661 2,626 2,439 1,624
Plus: Depreciation and amortization 23,174 26,310 27,804 29,711 32,696
Plus: Share-based compensation expense 4,317 4,144 4,237 5,017 5,612
Adjusted EBITDA $ 36,981 $ 42,579 $ 45,062 $ 48,131 $ 51,436

Operating income margin 6.9 % 8.5 % 9.0 % 8.8 % 8.1 %

Adjusted EBITDA margin 26.7 % 29.7 % 31.1 % 31.7 % 31.7 %

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 payables and
accrued expenses - deferred revenues - other non-current liabilities and
deferred income taxes); calculated on a quarterly basis.

For the periods ending March 31, 2009 through September 30, 2009, we define
excess cash as the amount of cash and cash equivalents that exceeds our
operating cash requirements, which for these periods are calculated as three
percent of our annualized net revenue for the three months prior to period end.
For prior periods, we defined excess cash as our investments in money market
funds. As a result of a decrease in capital requirements due to the completion
of the last phase of our DFW data center and phase 2 of our Slough, U.K. data
center, as well as the signing of leases to occupy data centers that have
minimal data center build out costs, our operating cash requirements have
declined. 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 a
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 consider to be the
most directly comparable GAAP measure, and may not be comparable to similarly
titled measures reported by other companies. See our ROC reconciliation to
return on assets below.

(Dollars in thousands) September 30, December 31, March 31, June 30, September 30,
2008 2008 2009 2009 2009
(Unaudited)
Income from operations $ 9,490 $ 12,125 $ 13,021 $ 13,403 $ 13,128
Effective tax rate 29.6 % 27.7 % 36.6 % 36.2 % 33.9 %
Net operating profit after tax (NOPAT) $ 6,681 $ 8,766 $ 8,255 $ 8,551 $ 8,678

Net income $ 5,235 $ 6,844 $ 6,588 $ 6,991 $ 7,604

Total assets at period end $ 685,211 $ 685,261 $ 601,434 $ 656,793 $ 625,330
Less: Excess cash (235,421 ) (200,620 ) (117,611 ) (129,638 ) (83,462 )
Less: Accounts payable and accrued expenses (81,740 ) (71,387 ) (71,211 ) (87,316 ) (77,108 )
Less: Deferred revenue (current and non-current) (20,055 ) (20,167 ) (20,374 ) (20,011 ) (18,222 )
Less: Other non-current liabilities and deferred income taxes (16,475 ) (23,610 ) (25,462 ) (30,359 ) (31,632 )
Capital base $ 331,520 $ 369,477 $ 366,776 $ 389,469 $ 414,906

Average total assets $ 546,761 $ 685,236 $ 643,348 $ 629,114 $ 641,062
Average capital base $ 316,245 $ 350,499 $ 368,127 $ 378,123 $ 402,188
Return on assets (annualized) 3.8 % 4.0 % 4.1 % 4.4 % 4.7 %
Return on capital (annualized) 8.5 % 10.0 % 9.0 % 9.0 % 8.6 %

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 vendor financed equipment
purchases), cash payments for interest, net, and cash payments for income taxes,
net.

We believe that Adjusted Free Cash Flow is an important metric for investors in
evaluating how a company is currently using cash generated, and may indicate its
ability to generate cash that can potentially be used by the business for
capital investments, acquisitions, reduction of debt, payment of dividends, etc.
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 Adjusted Free Cash Flow reconciliation to Adjusted
EBITDA below, as well as our reconciliation of Net income to Adjusted EBITDA
provided above.

Three Months
Ended
(In thousands) September 30,
2009
(Unaudited)
Adjusted EBITDA $ 51,436
Non-cash deferred rent 1,925
Total capital expenditures (46,688 )
Cash payments for interest, net (1,872 )
Cash refunds (payments) for income taxes, net 5,563
Adjusted free cash flow $ 10,364

Net Leverage (Non-GAAP financial measure)

We define Net Leverage as Net Debt divided by Adjusted EBITDA (trailing twelve
months).

We believe that Net Leverage is an important metric for investors in evaluating
a company`s liquidity. Note that Net Leverage is not a measure of financial
performance under GAAP and may not be comparable to similarly titled measures
reported by other companies. See our Net Leverage calculation below.

(Dollars in thousands) As of September 30,
2009
(Unaudited)
Obligations under capital leases $ 109,471
Debt 58,505
Total debt $ 167,976
Less: Cash and cash equivalents (102,950 )
Net debt $ 65,026
Adjusted EBITDA (trailing twelve months) $ 187,208

Net leverage 0.35

Rackspace Hosting, Inc.
Investor Relations
Jason Luce, 210-312-7291
ir@rackspace.com
or
Media Relations
Rachel Ferry, 210-312-3732
rachel.ferry@rackspace.com

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