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Press release from Business Wire

Rackspace Hosting Reports Second Quarter 2012 Results

<p> For the quarter ended June 30, 2012: </p> <ul> <li class='bwlistitemmargb'> Net revenue of $319 million grew 29% year-over-year </li> <li class='bwlistitemmargb'> Adjusted EBITDA <sup>(1)</sup> of $112 million grew 37% year-over-year </li> <li class='bwlistitemmargb'> Achieved adjusted EBITDA margin of 35.1%, up from 33.0% year-over-year </li> <li class='bwlistitemmargb'> Net income of $25 million grew 43% year-over-year </li> </ul>

Tuesday, August 07, 2012

Rackspace Hosting Reports Second Quarter 2012 Results16:00 EDT Tuesday, August 07, 2012 SAN ANTONIO (Business Wire) -- Rackspace® Hosting, Inc. (NYSE: RAX), the open cloud company, announced financial results for the quarter ended June 30, 2012. Net revenue for the second quarter of 2012 was $319 million, up 5.9% from the previous quarter and 29% from the second quarter of 2011. Net revenue for the second quarter of 2012 was negatively impacted by currency exchange rates when compared to the second quarter of 2011 by $2.3 million and positively impacted compared to the previous quarter by $0.6 million. Total server count increased to 84,978 up from 82,438 servers at the end of the previous quarter, and total customers increased to 190,958, up from 180,866 at the end of the previous quarter. “At the halfway point in the year, we have made a lot of progress on our plans to broaden our product and services portfolio while simultaneously managing a rapidly growing business. Keep your eyes open for more product announcements in the coming weeks and we look forward to updating you on our progress in November,” said Karl Pichler, chief financial officer. Adjusted EBITDA for the quarter was $112 million, an 11.1% increase compared to the first quarter of 2012 and a 37% increase compared to the second quarter of 2011. The adjusted EBITDA margin for the quarter was 35.1% compared to 33.4% in the previous quarter and 33.0% for the second quarter of 2011. 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 second quarter of 2012, the non-cash data center lease charge was $2.1 million. Net income was $25 million for the quarter, up 8.4% from the previous quarter and up 43% from the second quarter of 2011. Net income margin for the quarter was 7.9% compared to 7.7% for the previous quarter and 7.1% in the second quarter of 2011. Cash flow from operating activities was $101 million for the second quarter of 2012. Capital expenditures were $82 million, including $54 million for purchases of customer gear, $3 million for data center build outs, $4 million for office build outs and $21 million for capitalized software and other projects. Adjusted free cash flow (1) for the quarter was $28.7 million. At the end of the second quarter of 2012, cash and cash equivalents were $215 million, and debt including capital lease obligations totaled $149 million. On a worldwide basis, Rackspace employed 4,528 Rackers as of June 30, 2012, up from 4,335 in the previous quarter. “Last week we achieved a significant milestone in our 2012 plan by launching Cloud Servers powered by OpenStack. This new offering embeds the latest version of the OpenStack software to combine the on-demand scalability of modern cloud infrastructure with the flexibility benefits of open source technology. This product launch represents the culmination of nearly two years of hard work by Rackers throughout the organization, and it will serve as the core of our new Open Cloud platform,” said Lanham Napier, chief executive officer. Rackspace Developments and Business Highlights Announced availability of production-ready open cloud powered by OpenStack®. The latest software release leverages power of community-driven development to extend on-demand compute, storage and networking capabilities; development process matures to help ensure platform quality and reliability. 2012 Microsoft Hosting Partner of the Year. Rackspace was chosen from more than 3,000 global Microsoft partners recognized in the managed, cloud and hybrid hosting industry. This marks the fourth time Rackspace has captured this honor. 2012 Computerworld 100 Best Places to Work in IT. The criteria was based on salaries, turnover, training and development, recognizing and rewarding outstanding performances, benefits, and the cost of pursuing technology certifications. Computerworld actually surveyed IT employees currently employed at the 100 organizations that made the list to get an accurate survey result. Business Insider and Glassdoor.com collaborate to name Rackspace one of The 25 Best Tech Companies To Work For In 2012. All the reviews and ratings were taken within the last year to be as up to date as possible. Just a few of the principles they accounted for were culture, lifestyle and what you can learn while working at these companies. 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 888-504-7960 from the United States and Canada or dial 719-785-1766 from abroad and reference pass code 3500741. 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 (NYSE: RAX) is the open cloud company, delivering open technologies and powering more than 180,000 customers worldwide. Rackspace provides its renowned Fanatical Support® to customers across a broad portfolio of IT products, including Public and Private Cloud and Hybrid and Dedicated Hosting. The company offers customers choice and flexibility, and helps them avoid vendor lock-in. Rackspace has been recognized by Bloomberg BusinessWeek as a Top 100 Performing Technology Company and is featured on Fortune's list of 100 Best Companies to Work For. Rackspace was positioned in the Leaders Quadrant by Gartner Inc. in the “2011 Magic Quadrant for Managed Hosting.” Rackspace is headquartered in San Antonio with offices around the world. The company website can be found at 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, and 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, 2011, filed with the SEC on February 17, 2012 and in Rackspace Hosting's Form 10-Q for the quarter ended June 30, 2012, 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.       Consolidated Statements of Income(Unaudited)   Three Months EndedSix Months Ended (In thousands, except per share data) June 30,2011   March 31,2012   June 30,2012June 30,2011   June 30,2012 Net revenue $ 247,229 $ 301,355 $ 318,990 $ 477,231 $ 620,345 Costs and expenses: Cost of revenue 74,057 87,240 90,052 143,799 177,292 Sales and marketing 31,477 38,502 39,613 61,215 78,115 General and administrative 66,090 83,378 86,813 128,531 170,191 Depreciation and amortization   46,952     55,151     61,808     91,050     116,959   Total costs and expenses   218,576     264,271     278,286     424,595     542,557   Income from operations   28,653     37,084     40,704     52,636     77,788   Other income (expense): Interest expense (1,522 ) (1,272 ) (1,233 ) (3,013 ) (2,505 ) Interest and other income (expense)   (614 )   137     (405 )   (692 )   (268 ) Total other income (expense)   (2,136 )   (1,135 )   (1,638 )   (3,705 )   (2,773 ) Income before income taxes 26,517 35,949 39,066 48,931 75,015 Income taxes   8,956     12,769     13,932     17,549     26,701   Net income $ 17,561   $ 23,180   $ 25,134   $ 31,382   $ 48,314     Net income per share Basic $ 0.14   $ 0.17   $ 0.19   $ 0.24   $ 0.36   Diluted $ 0.13   $ 0.17   $ 0.18   $ 0.23   $ 0.34     Weighted average number of shares outstanding Basic   129,706     133,062     135,033     128,780     134,045   Diluted   137,880     139,964     140,786     137,369     140,396           Consolidated Balance Sheets   (In thousands) December 31, 2011June 30, 2012(Unaudited)ASSETS Current assets: Cash and cash equivalents $ 159,856 $ 215,448 Accounts receivable, net of allowance for doubtful accounts and customer credits of$3,420 as of December 31, 2011 and $3,725 as of June 30, 2012 68,709 85,161 Deferred income taxes 9,841 9,774 Prepaid expenses 22,006 13,120 Other current assets   2,953     3,996   Total current assets 263,365 327,499   Property and equipment, net 627,490 677,960 Goodwill 59,993 62,177 Intangible assets, net 26,034 23,760 Other non-current assets   49,600     47,332   Total assets $ 1,026,482   $ 1,138,728     LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 156,004 $ 148,091 Current portion of deferred revenue 14,835 16,065 Current portion of obligations under capital leases 66,031 69,210 Current portion of debt   879     650   Total current liabilities 237,749 234,016   Non-current deferred revenue 3,446 3,162 Non-current obligations under capital leases 72,216 77,939 Non-current debt — 1,427 Non-current deferred income taxes 68,781 55,164 Non-current deferred rent 23,343 27,754 Other non-current liabilities   21,524     24,447   Total liabilities 427,059 423,909   COMMITMENTS AND CONTINGENCIES   Stockholders' equity: Common stock 132 135 Additional paid-in capital 383,031 449,133 Accumulated other comprehensive loss (14,732 ) (13,755 ) Retained earnings   230,992     279,306   Total stockholders' equity   599,423     714,819   Total liabilities and stockholders' equity $ 1,026,482   $ 1,138,728           Consolidated Statements of Cash Flows(Unaudited)     Three Months EndedSix Months Ended (in thousands) June 30,2011   March 31,2012   June 30,2012June 30,2011   June 30,2012Cash Flows From Operating Activities Net income $ 17,561 $ 23,180 $ 25,134 $ 31,382 $ 48,314 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 46,952 55,151 61,808 91,050 116,959 Loss on disposal of equipment, net 90 279 86 272 365 Provision for bad debts and customer credits 1,635 1,455 1,678 3,238 3,133 Deferred income taxes 2,179 4,275 (1,602 ) 5,859 2,673 Deferred rent 2,783 1,930 2,120 5,814 4,050 Share-based compensation expense 5,983 8,509 9,375 13,793 17,884 Excess tax benefits from share-based compensation arrangements (692 ) (20,235 ) (9,601 ) (1,590 ) (29,836 ) Changes in certain assets and liabilities Accounts receivable (12,154 ) (9,008 ) (10,306 ) (17,870 ) (19,314 ) Income taxes receivable 1,928 — — 1,928 — Prepaid expenses and other current assets 1,268 1,708 6,172 2,478 7,880 Accounts payable and accrued expenses (1) 12,589 9,841 15,722 20,315 25,563 Deferred revenue (476 ) 1,496 (791 ) (323 ) 705 All other operating activities   (1,611 )   (820 )   1,534     978     714   Net cash provided by operating activities 78,035 77,761 101,329 157,324 179,090   Cash Flows From Investing Activities Purchases of property and equipment (1) (73,295 ) (67,604 ) (65,786 ) (121,982 ) (133,390 ) Acquisitions, net of cash acquired — (712 ) — (952 ) (712 ) All other investing activities   —     7     32     —     39   Net cash used in investing activities (73,295 ) (68,309 ) (65,754 ) (122,934 ) (134,063 )   Cash Flows From Financing Activities Principal payments of capital leases (16,198 ) (17,273 ) (17,769 ) (31,420 ) (35,042 ) Principal payments of notes payable (433 ) (439 ) (440 ) (1,041 ) (879 ) Payments for deferred acquisition obligations — (1,826 ) (2,900 ) — (4,726 ) Receipt of Texas Enterprise Fund Grant — 3,500 — — 3,500 Proceeds from employee stock plans 9,216 12,381 5,462 22,967 17,843 Excess tax benefits from share-based compensation arrangements   692     20,235     9,601     1,590     29,836   Net cash provided by (used in) financing activities (6,723 ) 16,578 (6,046 ) (7,904 ) 10,532   Effect of exchange rate changes on cash and cash equivalents 140 645 (612 ) 598 33           Increase (decrease) in cash and cash equivalents (1,843 ) 26,675 28,917 27,084 55,592   Cash and cash equivalents, beginning of period 133,868 159,856 186,531 104,941 159,856           Cash and cash equivalents, end of period $ 132,025   $ 186,531   $ 215,448   $ 132,025   $ 215,448     Supplemental cash flow information: Acquisition of property and equipment by vendor financed capital leases $ 20,567 $ 22,564 $ 21,380 $ 39,576 $ 43,944 Acquisition of property and equipment by vendor financed notes payable — — 2,045 — 2,045 Increase (decrease) in property and equipment in accounts payable and accrued expenses   1,459     (7,852 )   (7,243 )   10,423     (15,095 ) Non-cash purchases of property and equipment $ 22,026   $ 14,712   $ 16,182   $ 49,999   $ 30,894     Cash payments for interest, net of amount capitalized $ 1,313 $ 1,258 $ 1,208 $ 2,776 $ 2,466 Cash payments for income taxes $ 7,065 $ 1,955 $ 2,117 $ 11,635 $ 4,072 (1)   The amounts for the three and six months ended June 30, 2011 and the three months ended March 31, 2012 were corrected for immaterial errors.  The change was a reclassification between purchases of property and equipment in investing activities and the change in accounts payable and accrued expenses in operating activities.  The impact of the change is reflected in the supplemental line "Increase (decrease) in property and equipment in accounts payable and accrued expenses." There were no changes to the other financial statements.       Key Metrics - Quarter to Date(Unaudited)   Three Months Ended (Dollar amounts in thousands, except average monthly revenue per server) June 30,2011   September 30,2011   December 31,2011   March 31,2012   June 30,2012Growth Dedicated Cloud, net revenue $ 204,275 $ 213,899 $ 224,808 $ 236,604 $ 246,417 Public Cloud, net revenue $ 42,954   $ 50,673   $ 58,453   $ 64,751   $ 72,573   Net revenue $ 247,229 $ 264,572 $ 283,261 $ 301,355 $ 318,990 Revenue growth (year over year) 32.0 % 32.5 % 31.9 % 31.0 % 29.0 %   Net upgrades (monthly average) 1.8 % 1.8 % 2.0 % 1.5 % 1.7 % Churn (monthly average)   -0.9 %   -0.9 %   -0.8 %   -0.8 %   -0.8 % Growth in installed base (monthly average) (2) 0.9 % 0.9 % 1.2 % 0.7 % 1.0 %   Number of customers at period end (3) 152,578 161,422 172,510 180,866 190,958 Number of employees (Rackers) at period end 3,712 3,799 4,040 4,335 4,528   Number of servers deployed at period end 74,028 78,717 79,805 82,438 84,978 Average monthly revenue per server $ 1,141 $ 1,155 $ 1,191 $ 1,238 $ 1,270   Profitability Income from operations $ 28,653 $ 31,070 $ 39,765 $ 37,084 $ 40,704 Depreciation and amortization $ 46,952 $ 49,518 $ 54,844 $ 55,151 $ 61,808 Share-based compensation expense Cost of revenue $ 756 $ 1,005 $ 1,047 $ 1,236 $ 1,113 Sales and marketing $ 609 $ 864 $ 839 $ 1,114 $ 1,393 General and administrative $ 4,618   $ 5,526   $ 5,699   $ 6,159   $ 6,869   Total share-based compensation expense $ 5,983   $ 7,395   $ 7,585   $ 8,509   $ 9,375   Adjusted EBITDA (1) $ 81,588 $ 87,983 $ 102,194 $ 100,744 $ 111,887   Adjusted EBITDA margin 33.0 % 33.3 % 36.1 % 33.4 % 35.1 %   Operating income margin 11.6 % 11.7 % 14.0 % 12.3 % 12.8 %   Income from operations $ 28,653 $ 31,070 $ 39,765 $ 37,084 $ 40,704 Effective tax rate   33.8 %   31.7 %   34.5 %   35.5 %   35.7 % Net operating profit after tax (NOPAT) (1) $ 18,968 $ 21,221 $ 26,046 $ 23,919 $ 26,173 NOPAT margin 7.7 % 8.0 % 9.2 % 7.9 % 8.2 %   Capital efficiency and returns Interest bearing debt $ 138,841 $ 144,152 $ 139,126 $ 143,978 $ 149,226 Stockholders' equity $ 511,843 $ 551,049 $ 599,423 $ 668,436 $ 714,819 Less: Excess cash $ (102,358 ) $ (92,931 ) $ (125,865 ) $ (150,368 ) $ (177,169 ) Capital base $ 548,326 $ 602,270 $ 612,684 $ 662,046 $ 686,876 Average capital base $ 527,635 $ 575,298 $ 607,477 $ 637,365 $ 674,461 Capital turnover (annualized) 1.87 1.84 1.87 1.89 1.89   Return on capital (annualized) (1) 14.4 % 14.8 % 17.2 % 15.0 % 15.5 %   Capital expenditures Purchases of property and equipment(4) $ 73,295 $ 67,916 $ 56,629 $ 67,604 $ 65,786 Non-cash purchases of property and equipment(4) $ 22,026   $ 25,642   $ 22,726   $ 14,712   $ 16,182   Total capital expenditures $ 95,321 $ 93,558 $ 79,355 $ 82,316 $ 81,968   Customer gear $ 48,777 $ 53,643 $ 47,376 $ 52,999 $ 53,746 Data center build outs $ 17,491 $ 16,715 $ 6,568 $ 9,473 $ 3,285 Office build outs $ 14,074 $ 8,806 $ 9,915 $ 4,666 $ 4,015 Capitalized software and other projects $ 14,979   $ 14,394   $ 15,496   $ 15,178   $ 20,922   Total capital expenditures $ 95,321 $ 93,558 $ 79,355 $ 82,316 $ 81,968   Infrastructure capacity and utilization Megawatts under contract at period end 38.0 41.9 48.1 47.8 58.0 Megawatts available for use at period end 27.0 29.7 30.7 32.2 32.7 Megawatts utilized at period end 19.0 20.2 20.9 21.4 22.7 Annualized net revenue per average Megawatt of power utilized $ 53,455 $ 53,994 $ 55,136 $ 56,994 $ 57,867 (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 are 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) Purchases of property and equipment in prior periods were corrected for immaterial errors.  The change was a reclassification between purchases of property and equipment and non-cash purchases of property and equipment.  There was no impact on total capital expenditures.       Consolidated Quarterly Statements of Income(Unaudited)   Three Months Ended (In thousands) June 30,2011   September 30,2011   December 31,2011   March 31,2012   June 30,2012   Net revenue $ 247,229 $ 264,572 $ 283,261 $ 301,355 $ 318,990 Costs and expenses: Cost of revenue 74,057 82,445 82,851 87,240 90,052 Sales and marketing 31,477 31,838 33,452 38,502 39,613 General and administrative 66,090 69,701 72,349 83,378 86,813 Depreciation and amortization   46,952     49,518     54,844     55,151     61,808   Total costs and expenses   218,576     233,502     243,496     264,271     278,286   Income from operations   28,653     31,070     39,765     37,084     40,704   Other income (expense): Interest expense (1,522 ) (1,531 ) (1,304 ) (1,272 ) (1,233 ) Interest and other income (expense)   (614 )   (276 )   (226 )   137     (405 ) Total other income (expense)   (2,136 )   (1,807 )   (1,530 )   (1,135 )   (1,638 ) Income before income taxes 26,517 29,263 38,235 35,949 39,066 Income taxes   8,956     9,281     13,188     12,769     13,932   Net income $ 17,561   $ 19,982   $ 25,047   $ 23,180   $ 25,134     Three Months Ended (Percent of net revenue) June 30,2011September 30,2011December 31,2011March 31,2012June 30,2012   Net revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Cost of revenue 30.0 % 31.2 % 29.2 % 28.9 % 28.2 % Sales and marketing 12.7 % 12.0 % 11.8 % 12.8 % 12.4 % General and administrative 26.7 % 26.3 % 25.5 % 27.7 % 27.2 % Depreciation and amortization   19.0 %   18.7 %   19.4 %   18.3 %   19.4 % Total costs and expenses   88.4 %   88.3 %   86.0 %   87.7 %   87.2 % Income from operations   11.6 %   11.7 %   14.0 %   12.3 %   12.8 % Other income (expense): Interest expense (0.6 )% (0.6 )% (0.5 )% (0.4 )% (0.4 )% Interest and other income (expense)   (0.2 )%   (0.1 )%   (0.1 )%   0.0 %   (0.1 )% Total other income (expense)   (0.9 )%   (0.7 )%   (0.5 )%   (0.4 )%   (0.5 )% Income before income taxes 10.7 % 11.1 % 13.5 % 11.9 % 12.2 % Income taxes   3.6 %   3.5 %   4.7 %   4.2 %   4.4 % Net income   7.1 %   7.6 %   8.8 %   7.7 %   7.9 %   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 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 Adjusted EBITDA to net income reconciliations in the table below.     Three Months Ended (Dollars in thousands) June 30,2011   September 30,2011   December 31,2011   March 31,2012   June 30,2012 Net revenue $ 247,229 $ 264,572 $ 283,261 $ 301,355 $ 318,990   Income from operations $ 28,653 $ 31,070 $ 39,765 $ 37,084 $ 40,704   Net income $ 17,561 $ 19,982 $ 25,047 $ 23,180 $ 25,134 Plus: Income taxes 8,956 9,281 13,188 12,769 13,932 Plus: Total other (income) expense 2,136 1,807 1,530 1,135 1,638 Plus: Depreciation and amortization 46,952 49,518 54,844 55,151 61,808 Plus: Share-based compensation expense   5,983     7,395     7,585     8,509     9,375   Adjusted EBITDA $ 81,588 $ 87,983 $ 102,194 $ 100,744 $ 111,887   Operating income margin 11.6 % 11.7 % 14.0 % 12.3 % 12.8 %   Adjusted EBITDA margin 33.0 % 33.3 % 36.1 % 33.4 % 35.1 %   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 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 to 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 consider to be the most directly comparable GAAP measure. 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. See our ROC reconciliation to return on assets below.     Three Months Ended (Dollars in thousands) June 30,2011   September 30,2011   December 31,2011   March 31,2012   June 30,2012 Income from operations $ 28,653 $ 31,070 $ 39,765 $ 37,084 $ 40,704 Effective tax rate   33.8 %   31.7 %   34.5 %   35.5 %   35.7 % Net operating profit after tax (NOPAT) $ 18,968 $ 21,221 $ 26,046 $ 23,919 $ 26,173   Net income $ 17,561 $ 19,982 $ 25,047 $ 23,180 $ 25,134   Total assets at period end $ 887,576 $ 970,677 $ 1,026,482 $ 1,089,393 $ 1,138,728 Less: Excess cash (102,358 ) (92,931 ) (125,865 ) (150,368 ) (177,169 ) Less: Accounts payable and accrued expenses (145,609 ) (148,464 ) (156,004 ) (153,668 ) (148,091 ) Less: Deferred revenue (current and non-current) (18,687 ) (17,772 ) (18,281 ) (20,195 ) (19,227 ) Less: Other non-current liabilities, deferred income taxes, and deferred rent   (72,596 )   (109,240 )   (113,648 )   (103,116 )   (107,365 ) Capital base $ 548,326 $ 602,270 $ 612,684 $ 662,046 $ 686,876   Average total assets $ 859,495 $ 929,127 $ 998,580 $ 1,057,938 $ 1,114,061 Average capital base $ 527,635 $ 575,298 $ 607,477 $ 637,365 $ 674,461   Return on assets (annualized) 8.2 % 8.6 % 10.0 % 8.8 % 9.0 % Return on capital (annualized) 14.4 % 14.8 % 17.2 % 15.0 % 15.5 %   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 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, 2012   June 30, 2012 Adjusted EBITDA $ 111,887 $ 212,631 Non-cash deferred rent 2,120 4,050 Total capital expenditures (81,968 ) (164,284 ) Cash payments for interest, net (1,209 ) (2,435 ) Cash payments for income taxes, net   (2,100 )     (3,775 ) Adjusted free cash flow $ 28,730 $ 46,187   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. We believe that Net Leverage provides an additional indicator when assessing our liquidity, capital structure and leverage and provides insight into a company's ability to assume more debt if and when required. A negative Net Leverage indicates that our cash and cash equivalents is greater than our total debt as of the balance sheet date. See our Net Leverage calculation below.   As of (Dollars in thousands) June 30, 2012 Obligations under capital leases $ 147,149 Debt   2,077   Total debt $ 149,226 Less: Cash and cash equivalents   (215,448 ) Net debt $ (66,222 ) Adjusted EBITDA (trailing twelve months) $ 402,808   Net leverage (0.16 ) x Rackspace HostingInvestor RelationsBryan McGrath, 210-312-5230ir@rackspace.comorCorporate CommunicationsRachel Ferry, 210-312-3732rachel.ferry@rackspace.com