Rackspace Hosting, Inc (RAX)

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Rackspace Hosting, Inc. (RAX)

Q4 2012 Earnings Conference Call

February 12, 2013, 16:30 PM ET

Executives

Lanham Napier - CEO

Karl Pichler - SVP, CFO and Treasurer

Jason Luce - VP of Finance

Analysts

James Breen - William Blair & Company L.L.C.

Jonathan Schildkraut - Evercore Partners Inc.

Simon Flannery - Morgan Stanley

Gray Powell - Wells Fargo Securities, LLC

Christopher Larsen - Piper Jaffray Companies

Scott Goldman – Goldman Sachs

Sterling Auty - JPMorgan

Thomas Seitz - Jefferies & Company, Inc.

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to Rackspace Hosting's Q4 Earnings Release 2012 Call. As a reminder, this call is being recorded. At this time, all lines are in a listen-only mode to prevent background noise. After the prepared remarks, there will be a question-and-answer session. (Operator Instructions).

It is now my pleasure to introduce Jason Luce, Vice President of Finance for Rackspace. Mr. Luce, you may begin.

Jason Luce

Hello, everyone. Welcome to Rackspace's fourth quarter and fiscal year 2012 earnings conference call. We hope that you have had a chance to read our press release, which we issued earlier today. If you don't have a copy of the press release, please visit our Investor Relations page of our website at ir.rackspace.com. This call is also being webcast online and can be accessed through our Investor Relations site.

For Rackspace on the call today will be Lanham Napier, Chief Executive Officer; and Karl Pichler, Chief Financial Officer.

I need to remind you that some of the comments we will make today are forward-looking statements, including statements regarding expected operations and business results; our growth plans; the impact of new platforms, products or services; and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially.

These risks and uncertainties include things like one, market acceptance of our public cloud platform and products; two, the continued adoption of OpenStack as the open-source cloud computing platform standard; three, increasing competition in our industry; four, unfavorable economic conditions; and, five, other risks that are described in our SEC filings.

Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

Please also note that certain financial measures we will use during this call, such as adjusted EBITDA, are expressed on a non-GAAP basis. And our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings release for 2012, which is currently posted on the Investors page of our website. After our prepared remarks this afternoon, we will be happy to take your questions.

I will now turn the call over to Lanham. Lanham?

Lanham Napier

Good afternoon, everyone. Thank you for joining us today. 2013 will be transformation for Rackspace, a year when we will step up and lead the open cloud movement while laying the foundation for massive growth ahead.

As we think about 2013, there are four main themes. Number one, cloud's technology paradigm shift that is happening now and this shift is an incredible opportunity for our company. Number two, businesses of all sizes are demanding open cloud technologies in the new cloud world. Number three, OpenStack is the open cloud standard. Number four, as the co-founder of OpenStack, Rackspace is well positioned to lead the open cloud movement.

Before we dig into the four themes for 2013, let's briefly review some of the operational and financial highlights from 2012. First, our revenue grew 28% to just over 1.3 billion in the year. And we are on pace to generate 2 billion of revenue in a fraction of the time it took us to achieve our first 1 billion.

Adjusted EBITDA margins came to 35.5% for the year. This compares to 33.9% in 2011 and 33.6% in 2010. Net income margins improved to 8.1% for the year, up from 7.5% in 2011 and 5.9% in 2010.

Third, adjusted free cash flow came in at a company record 119 million compared to negative 8 million in 2011 and 34 million in 2010. And fourth, return on capital grew to 15.9% for the full year, up from 14.7% in 2011 and 11.6% in 2010. Q4 return on capital equaled 16.9%.

Looking back, 2012 was a year of execution and rebuilding, a year spent in the lab. During 2012, we made significant investments across the business to bolster our systems, products and service delivery capabilities.

From a financial standpoint, a year ago we shared our operational plan and we said that if we executed successfully in 2012, we would expect a revenue growth and margin profile that is similar to our performance in 2011. We are very happy to report we accomplished these financial goals.

One of the most important projects we completed in 2012 was the launch of our public open cloud as products and services leveraged the features and scalability advantages of the OpenStack software platform.

Our new open cloud platform was released at the end of October and consisted of seven new products including Cloud Servers, Cloud Database, Cloud Block Storage, Cloud Networks, Cloud Monitoring, Cloud Backup and a new control panel for managing the elements of the open cloud platform.

This project was one of the most difficult, exciting and strategic challenges that our company has very pursued. It was the largest product investment the company's ever made and we believe it has tremendously improved the technical capabilities of our offering.

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