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Press release from Business Wire

Rackspace Hosting Reports Second Quarter 2011 Results

<p> For the quarter ended June 30, 2011: </p> <ul> <li class='bwlistitemmargb'> Net revenue of $247.2 million grew 32% year-over-year and 7.5% from Q1 2011 </li> <li class='bwlistitemmargb'> Adjusted EBITDA <sup>(1)</sup> of $81.6 million grew 31% year-over-year and 7.5% from Q1 2011 </li> <li class='bwlistitemmargb'> Net income of $17.6 million grew 57% year-over-year and 27% from Q1 2011 </li> </ul>

Thursday, August 04, 2011

Rackspace Hosting Reports Second Quarter 2011 Results16:00 EDT Thursday, August 04, 2011 SAN ANTONIO (Business Wire) -- Rackspace® Hosting, Inc. (NYSE: RAX), the world's leading specialist in the hosting and cloud computing industry, announced financial results for the quarter ended June 30, 2011. Net revenue for the second quarter of 2011 was $247.2 million, up 7.5% from the previous quarter and 32.0% from the second quarter of 2010. Net revenue for the second quarter of 2011 was positively impacted by currency exchange rates when compared to the first quarter of 2011 by $1.1 million and the second quarter of 2010 by $5.1 million. Total server count increased to 74,028, up from 70,473 servers at the end of the previous quarter, and total customers increased to 152,578, up from 142,441 at the end of the previous quarter. “This past quarter we made good progress toward our goal of accelerating revenue growth while strengthening the business. While we still have lots to accomplish throughout the year, we remain on the right track to achieve our goals for 2011,” said Karl Pichler, chief financial officer. Adjusted EBITDA for the quarter was $81.6 million, a 7.5% increase compared to the first quarter of 2011 and a 31% increase compared to the second quarter of 2010. The adjusted EBITDA margin for the quarter was 33.0% compared to 33.0% for the previous quarter and 33.2% for the second quarter of 2010. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge of $2.8 million for the quarter relating to data center operating leases. Net income was $17.6 million for the quarter, up 27.1% from the previous quarter and 56.8% from the second quarter of 2010. Net income margin for the quarter was 7.1% compared to 6.0% for the previous quarter and 6.0% in the second quarter of 2010. Cash flow from operating activities was $79 million for the second quarter of 2011. Capital expenditures were $95 million, including $49 million for purchases of customer gear, $17 million for data center build outs, $14 million for office build outs and $15 million for capitalized software and other projects. Adjusted free cash flow (1) for the quarter was $(18) million. At the end of the second quarter of 2011, cash and cash equivalents were $132 million. Debt obligations totaled $139 million, consisting of $137 million related to capital leases and $2 million related to current and non-current debt. On a worldwide basis, Rackspace employed 3,712 Rackers as of June 30, 2011, up from 3,492 Rackers as of March 31, 2011 and 3,002 Rackers as of June 30, 2010. “During the second quarter we grew faster and generated higher returns, while investing to help us become bigger and more profitable in the future,” said Lanham Napier, president and chief executive officer. Rackspace Developments and Business Highlights Growing Momentum for OpenStack: With over 90 participating companies, the project continues to see major traction including its most recent code release, Cactus Code, accompanied by the Cactus Design Summit/OpenStack Conference in Santa Clara, CA, with over 500 attendees, 133 participating organizations and 217 developers. This event was followed by the announcement of Citrix's Project Olympus, a new cloud infrastructure product based on OpenStack, which is designed to allow enterprises to quickly build and deploy OpenStack based clouds. Last month, we also began to see major traction of OpenStack in Europe. We held an OpenStack Day in London — the first for our community in Europe and had over 350 people in attendance. Domino's Pizza Group chooses Rackspace: To help drive revenue and future growth, pizza delivery expert Domino's Pizza Group has selected Rackspace to provide them with RackConnect, an integrated cloud hosting and dedicated managed hosting service. The service will give Domino's a scalable and cost-effective platform that will support the execution of the company's ambitious growth strategy and meet the evolving demands of its online business. Domino's sought a hosting service that would meet the evolving demands of its online business, and allow its internal IT team to focus less on the maintenance of its online properties and business applications, and more on innovation. Launch of Hosted Virtual Desktop: In May, Rackspace announced the availability of Rackspace Hosted Virtual Desktop. The hosted virtual desktop platform utilizes Rackspace's comprehensive hosting services and may be paired with industry leading desktop virtualization solutions from Citrix and other joint channel partners. The offering enables customers to host their virtual desktops on their choice of dedicated and/or cloud solutions. Continued European Cloud Growth: Since its launch in January, Rackspace's UK cloud has been steadily growing and now has over 5,000 customers. To help meet this demand, the UK added new cloud services including Cloud Servers with managed service level and Cloud Load Balancers. The new UK offerings build upon Rackspace's existing portfolio and are already available in the US. 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 888-523-1227 from the United States or dial 719-325-2249 from abroad and reference pass code 4289158. 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 service leader in cloud computing, and a founder of OpenStack, an open source cloud platform. The San Antonio-based company provides Fanatical Support® to its customers, across a portfolio of IT services, including Managed Hosting and Cloud Computing. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company and was featured on Fortune's list of 100 Best Companies to Work For. The company was also positioned in the Leaders Quadrant by Gartner Inc. in the “2010 Magic Quadrant for Cloud Infrastructure as a Service and Web Hosting.” For more information, visit 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 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, 2010, filed with the SEC on February 22, 2011 and in Rackspace Hosting's Form 10-Q for the quarter ended June 30, 2011, expected to be filed later this month. 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 EndedSix Months Ended (In thousands, except per share data) June 30, 2010   March 31, 2011   June 30, 2011June 30, 2010   June 30, 2011 Net revenue $ 187,314 $ 230,002 $ 247,229 $ 366,119 $ 477,231 Costs and expenses: Cost of revenue 61,470 69,742 74,057 118,477 143,799 Sales and marketing 23,285 29,738 31,477 45,262 61,215 General and administrative 46,737 62,441 66,090 93,132 128,531 Depreciation and amortization   37,991     44,098     46,952     74,689     91,050   Total costs and expenses   169,483     206,019     218,576     331,560     424,595   Income from operations   17,831     23,983     28,653     34,559     52,636     Other income (expense): Interest expense (1,875 ) (1,491 ) (1,522 ) (4,019 ) (3,013 ) Interest and other income (expense)   814     (78 )   (614 )   999     (692 ) Total other income (expense)   (1,061 )   (1,569 )   (2,136 )   (3,020 )   (3,705 ) Income before income taxes 16,770 22,414 26,517 31,539 48,931 Income taxes   5,572     8,593     8,956     10,529     17,549   Net income $ 11,198   $ 13,821   $ 17,561   $ 21,010   $ 31,382     Net income per share Basic $ 0.09   $ 0.11   $ 0.14   $ 0.17   $ 0.24   Diluted $ 0.08   $ 0.10   $ 0.13   $ 0.16   $ 0.23     Weighted average number of shares outstanding Basic   124,592     127,845     129,706     124,288     128,780   Diluted   132,660     136,224     137,880     132,562     137,369       Consolidated Balance Sheets       (In thousands) December 31, 2010June 30, 2011(Unaudited)ASSETS Current assets: Cash and cash equivalents $ 104,941 $ 132,025 Accounts receivable, net of allowance for doubtfulaccounts and customer credits of $2,846 as ofDecember 31, 2010 and $3,832 as of June 30, 2011 47,734 63,039 Income taxes receivable 4,397 2,469 Deferred income taxes 6,416 6,043 Prepaid expenses and other current assets   21,957     19,716   Total current assets 185,445 223,292   Property and equipment, net 495,228 579,532 Goodwill 57,147 59,993 Intangible assets, net 9,675 10,669 Other non-current assets   14,082     14,090   Total assets $ 761,577   $ 887,576     LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 111,645 $ 145,609 Current portion of deferred revenue 15,822 15,317   Current portion of obligations under capital leases 59,763 64,147 Current portion of debt   1,912     1,750   Total current liabilities 189,142 226,823   Non-current deferred revenue 2,927 3,370 Non-current obligations under capital leases 69,173 72,944 Non-current debt 879 - Non-current deferred income taxes 35,238 41,730 Other non-current liabilities   25,355     30,866   Total liabilities 322,714 375,733   COMMITMENTS AND CONTINGENCIES   Stockholders' equity: Common stock 127 130 Additional paid-in capital 296,571 335,298 Accumulated other comprehensive loss (12,416 ) (9,547 ) Retained earnings   154,581     185,962   Total stockholders' equity   438,863     511,843   Total liabilities and stockholders' equity $ 761,577   $ 887,576       Consolidated Statements of Cash Flows           (Unaudited)   Three Months EndedSix Months Ended (in thousands) June 30, 2010March 31, 2011June 30, 2011June 30, 2010June 30, 2011Cash Flows From Operating Activities Net income $ 11,198 $ 13,821 $ 17,561 $ 21,010 $ 31,382 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 37,991 44,098 46,952 74,689 91,050 Loss on disposal of equipment, net 126 182 90 274 272 Provision for bad debts and customer credits 848 1,603 1,635 1,384 3,238 Deferred income taxes (4,911 ) 3,680 2,179 (6,632 ) 5,859 Deferred rent 1,316 3,031 2,783 3,120 5,814 Share-based compensation expense 6,376 7,810 5,983 12,354 13,793 Excess tax benefits from share-based compensation arrangements (8,438 ) (898 ) (692 ) (15,453 ) (1,590 ) Changes in certain assets and liabilities Accounts receivable (5,362 ) (5,716 ) (12,154 ) (6,728 ) (17,870 ) Income taxes receivable 8,215 - 1,928 11,985 1,928 Prepaid expenses and other current assets 111 1,210 1,268 (793 ) 2,478 Accounts payable and accrued expenses 6,559 16,690 14,048 10,070 30,738 Deferred revenue (1,351 ) 153 (476 ) (2,425 ) (323 ) All other operating activities   (716 )   2,589     (1,611 )   -     978   Net cash provided by operating activities 51,962 88,253 79,494 102,855 167,747   Cash Flows From Investing Activities Purchases of property and equipment, net (29,050 ) (57,651 ) (74,754 ) (68,672 ) (132,405 ) Acquisitions, net of cash acquired - (952 ) - - (952 ) Earn-out payments for acquisitions (490 ) - - (490 ) - Other investing activities   (75 )   -     -     (75 )   -   Net cash used in investing activities (29,615 ) (58,603 ) (74,754 ) (69,237 ) (133,357 )   Cash Flows From Financing Activities Principal payments of capital leases (12,957 ) (15,222 ) (16,198 ) (25,753 ) (31,420 ) Principal payments of notes payable (2,505 ) (608 ) (433 ) (3,345 ) (1,041 ) Proceeds from employee stock plans 2,788 13,751 9,216 5,050 22,967 Excess tax benefits from share-based compensation arrangements   8,438     898     692     15,453     1,590   Net cash used in financing activities (4,236 ) (1,181 ) (6,723 ) (8,595 ) (7,904 )   Effect of exchange rate changes on cash and cash equivalents (912 ) 458 140 (1,952 ) 598           Increase (decrease) in cash and cash equivalents 17,199 28,927 (1,843 ) 23,071 27,084   Cash and cash equivalents, beginning of period 131,297 104,941 133,868 125,425 104,941           Cash and cash equivalents, end of period $ 148,496   $ 133,868   $ 132,025   $ 148,496   $ 132,025     Supplemental cash flow information: Acquisition of property and equipment by capital leases $ 15,793 $ 19,009 $ 20,567 $ 31,559 $ 39,576 Shares issued in business combinations $ 510 $ - $ - $ 510 $ - Cash payments for interest, net of amount capitalized $ 1,861 $ 1,463 $ 1,313 $ 4,005 $ 2,776 Cash payments for income taxes $ 8,525 $ 4,570 $ 7,065 $ 11,939 $ 11,635     Key Metrics – Quarter to Date           (Unaudited)   Three Months Ended (Dollar amounts in thousands, except annualized net revenue per average technical square foot) June 30, 2010September 30, 2010December 31, 2010March 31, 2011June 30, 2011Growth Managed hosting, net revenue $ 164,094 $ 172,947 $ 183,311 $ 192,895 $ 204,275 Cloud, net revenue $ 23,220     $ 26,763     $ 31,415     $ 37,107     $ 42,954   Net revenue $ 187,314 $ 199,710 $ 214,726 $ 230,002 $ 247,229 Revenue growth (year over year) 23.2 % 23.0 % 26.7 % 28.6 % 32.0 %   Net upgrades (monthly average) 1.6 % 1.6 % 1.6 % 1.8 % 1.8 % Churn (monthly average)   (1.0 )%     (1.1 )%     (1.0 )%     (0.9 )%     (0.9 )% Growth in installed base (monthly average) (2) 0.6 % 0.5 % 0.6 % 0.9 % 0.9 %   Number of customers at period end (3) 108,023 118,732 130,291 142,441 152,578   Number of employees (Rackers) at period end 3,002 3,130 3,262 3,492 3,712 Number of servers deployed at period end 61,874 63,996 66,015 70,473 74,028   Profitability Income from operations $ 17,831 $ 21,635 $ 23,408 $ 23,983 $ 28,653 Depreciation and amortization $ 37,991 $ 39,677 $ 41,529 $ 44,098 $ 46,952 Share-based compensation expense Cost of revenue $ 1,163 $ 1,305 $ 1,223 $ 1,412 $ 756 Sales and marketing (4) $ 1,100 $ 1,209 $ 1,052 $ 1 $ 609 General and administrative $ 4,113     $ 4,669     $ 4,812     $ 6,397     $ 4,618   Total share-based compensation expense $ 6,376     $ 7,183     $ 7,087     $ 7,810     $ 5,983   Adjusted EBITDA (1) $ 62,198 $ 68,495 $ 72,024 $ 75,891 $ 81,588   Adjusted EBITDA margin 33.2 % 34.3 % 33.5 % 33.0 % 33.0 %   Operating income margin 9.5 % 10.8 % 10.9 % 10.4 % 11.6 %   Income from operations $ 17,831 $ 21,635 $ 23,408 $ 23,983 $ 28,653 Effective tax rate 33.2 % 35.5 % 37.2 % 38.3 % 33.8 % Net operating profit after tax (NOPAT) (1) $ 11,911 $ 13,955 $ 14,700 $ 14,798 $ 18,968 NOPAT margin 6.4 % 7.0 % 6.8 % 6.4 % 7.7 %   Capital efficiency and returns Interest bearing debt $ 169,847 $ 180,177 $ 131,727 $ 134,905 $ 138,841 Stockholders' equity $ 397,994 $ 413,237 $ 438,863 $ 478,307 $ 511,843 Less: Excess cash $ (126,018 )   $ (142,592 )   $ (79,174 )   $ (106,268 )   $ (102,358 ) Capital base $ 441,823 $ 450,822 $ 491,416 $ 506,944 $ 548,326 Average capital base $ 435,963 $ 446,323 $ 471,119 $ 499,180 $ 527,635 Capital turnover (annualized) 1.72 1.79 1.82 1.84 1.87   Return on capital (annualized) (1) 10.9 % 12.5 % 12.5 % 11.9 % 14.4 %   Capital expenditures Purchases of property and equipment, net $ 29,050 $ 29,222 $ 46,884 $ 57,651 $ 74,754 Vendor financed equipment purchases $ 15,793     $ 23,208     $ 16,596     $ 19,009     $ 20,567   Total capital expenditures $ 44,843 $ 52,430 $ 63,480 $ 76,660 $ 95,321   Customer gear $ 29,589 $ 36,219 $ 38,052 $ 46,300 $ 48,777 Data center build outs $ 5,955 $ 6,162 $ 9,754 $ 9,173 $ 17,491 Office build outs $ 1,306 $ 1,271 $ 5,145 $ 2,957 $ 14,074 Capitalized software and other projects $ 7,993     $ 8,778     $ 10,529     $ 18,230     $ 14,979   Total capital expenditures $ 44,843 $ 52,430 $ 63,480 $ 76,660 $ 95,321   Infrastructure capacity and utilization Technical square feet of data center space at period end (5) 169,998 177,148 180,173 181,848 198,868 Annualized net revenue per average technical square foot $ 4,407 $ 4,602 $ 4,807 $ 5,083 $ 5,195 Utilization rate at period end 69.1 % 68.9 % 72.0 % 76.7 % 72.9 %   (1) See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures. (2) Due to rounding, totals may not equal the sum of the line items in the table above. (3) Customers continue to be counted on an account basis and therefore a customer with more than one account with us would be included as more than one customer. Furthermore, amounts include SaaS customers for Jungle Disk using a Rackspace storage solution. Jungle Disk customers using a third-party storage solution are excluded. (4) During the three months ended March 31, 2011, share-based compensation expense within Sales and Marketing was positively impacted by the reversal of previously recorded expense related to terminated employees. (5) Technical square footage as of June 30, 2011 excludes 48,380 square feet for unused portions of our data center facilities.     Consolidated Quarterly Statements of Income(Unaudited)           Three Months Ended (In thousands) June 30, 2010September 30, 2010December 31, 2010March 31, 2011June 30, 2011   Net revenue $ 187,314 $ 199,710 $ 214,726 $ 230,002 $ 247,229 Costs and expenses: Cost of revenue 61,470 64,616 66,747 69,742 74,057 Sales and marketing 23,285 24,651 26,294 29,738 31,477 General and administrative 46,737 49,131 56,748 62,441 66,090 Depreciation and amortization   37,991     39,677     41,529     44,098     46,952   Total costs and expenses   169,483     178,075     191,318     206,019     218,576   Income from operations   17,831     21,635     23,408     23,983     28,653   Other income (expense): Interest expense (1,875 ) (2,068 ) (1,897 ) (1,491 ) (1,522 ) Interest and other income (expense)   814     (1,263 )   57     (78 )   (614 ) Total other income (expense)   (1,061 )   (3,331 )   (1,840 )   (1,569 )   (2,136 ) Income before income taxes 16,770 18,304 21,568 22,414 26,517 Income taxes   5,572     6,495     8,029     8,593     8,956   Net income $ 11,198   $ 11,809   $ 13,539   $ 13,821   $ 17,561     Three Months Ended (Percent of net revenue) June 30, 2010September 30, 2010December 31, 2010March 31, 2011June 30, 2011   Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Cost of revenue 32.8 % 32.4 % 31.1 % 30.3 % 30.0 % Sales and marketing 12.4 % 12.3 % 12.2 % 12.9 % 12.7 % General and administrative 25.0 % 24.6 % 26.4 % 27.1 % 26.7 % Depreciation and amortization   20.3 %   19.9 %   19.3 %   19.2 %   19.0 % Total costs and expenses   90.5 %   89.2 %   89.1 %   89.6 %   88.4 % Income from operations   9.5 %   10.8 %   10.9 %   10.4 %   11.6 % Other income (expense): Interest expense -1.0 % -1.0 % -0.9 % -0.6 % -0.6 % Interest and other income (expense)   0.4 %   -0.6 %   0.0 %   -0.0 %   -0.2 % Total other income (expense)   -0.6 %   -1.7 %   -0.9 %   -0.7 %   -0.9 % Income before income taxes 9.0 % 9.2 % 10.0 % 9.7 % 10.7 % Income taxes   3.0 %   3.3 %   3.7 %   3.7 %   3.6 % Net income   6.0 %   5.9 %   6.3 %   6.0 %   7.1 %   Due to rounding, totals may not equal the sum of the line items in the table above.     (1) Non-GAAP Financial MeasuresAdjusted 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 net 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 Adjusted EBITDA to net income reconciliations in the table below.   Three Months Ended (Dollars in thousands) June 30, 2010   September 30, 2010   December 31, 2010   March 31, 2011   June 30, 2011 Net revenue $ 187,314 $ 199,710 $ 214,726 $ 230,002 $ 247,229   Income from operations $ 17,831 $ 21,635 $ 23,408 $ 23,983 $ 28,653   Net income $ 11,198 $ 11,809 $ 13,539 $ 13,821 $ 17,561 Plus: Income taxes 5,572 6,495 8,029 8,593 8,956 Plus: Total other (income) expense 1,061 3,331 1,840 1,569 2,136 Plus: Depreciation and amortization 37,991 39,677 41,529 44,098 46,952 Plus: Share-based compensation expense   6,376     7,183     7,087     7,810     5,983   Adjusted EBITDA $ 62,198 $ 68,495 $ 72,024 $ 75,891 $ 81,588   Operating income margin 9.5 % 10.8 % 10.9 % 10.4 % 11.6 %   Adjusted EBITDA margin 33.2 % 34.3 % 33.5 % 33.0 % 33.0 %     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. 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 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 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.   Three Months Ended (Dollars in thousands) June 30, 2010   September 30, 2010   December 31, 2010   March 31, 2011   June 30, 2011 Income from operations $ 17,831 $ 21,635 $ 23,408 $ 23,983 $ 28,653 Effective tax rate   33.2 %   35.5 %   37.2 %   38.3 %   33.8 % Net operating profit after tax (NOPAT) $ 11,911 $ 13,955 $ 14,700 $ 14,798 $ 18,968   Net income $ 11,198 $ 11,809 $ 13,539 $ 13,821 $ 17,561   Total assets at period end $ 720,457 $ 760,198 $ 761,577 $ 831,414 $ 887,576 Less: Excess cash (126,018 ) (142,592 ) (79,174 ) (106,268 ) (102,358 ) Less: Accounts payable and accrued expenses (97,711 ) (101,427 ) (111,645 ) (132,308 ) (145,609 ) Less: Deferred revenue (current and non-current) (16,640 ) (16,685 ) (18,749 ) (19,149 ) (18,687 )   Less: Other non-current liabilities and deferred income taxes   (38,265 )   (48,672 )   (60,593 )   (66,745 )   (72,596 ) Capital base $ 441,823 $ 450,822 $ 491,416 $ 506,944 $ 548,326   Average total assets $ 706,093 $ 740,328 $ 760,888 $ 796,496 $ 859,495 Average capital base $ 435,963 $ 446,323 $ 471,119 $ 499,180 $ 527,635   Return on assets (annualized) 6.3 % 6.4 % 7.1 % 6.9 % 8.2 % Return on capital (annualized) 10.9 % 12.5 % 12.5 % 11.9 % 14.4 %     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 refunds (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   Six Months Ended (In thousands) June 30, 2011June 30, 2011 Adjusted EBITDA $ 81,588 $ 157,479 Non-cash deferred rent 2,783 5,814 Total capital expenditures (95,321 ) (171,981 ) Cash payments for interest, net (1,270 ) (2,696 ) Cash payments for income taxes, net   (5,506 )   (9,744 ) Adjusted free cash flow $ (17,726 ) $ (21,128 )     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.   As of   (Dollars in thousands) June 30, 2011 Obligations under capital leases $ 137,091 Debt   1,750   Total debt $ 138,841 Less: Cash and cash equivalents   (132,025 ) Net debt $ 6,816   Adjusted EBITDA (trailing twelve months) $ 297,998   Net leverage 0.02 x Rackspace Hosting, Inc.Investor RelationsBryan McGrath, 210-312-5230ir@rackspace.comorCorporate CommunicationsRachel Ferry, 210-312-3732rachel.ferry@rackspace.com