Rackspace Hosting, Inc (RAX)

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Rackspace Hosting, Inc. (RAX)

Q4 2011 Earnings Call

February 13, 2012 04:30 pm ET


Lanham Napier – Chief Executive Officer

Karl Pichler – Senior Vice President, Chief Financial Officer & Treasurer

Jason Luce – Vice President of Finance


Chris Larson – Piper Jaffray

James Breen – William Blair

Jonathan Schildkraut – Evercore Partners

Greg Powell – Wells Fargo

Scott Goldman – Goldman Sachs

Simon Flannery – Morgan Stanley

Frank Louthan – Raymond James

Pat Walravens – JMP Securities

Cody Synesael – Cowen and Company



Good afternoon, ladies and gentlemen, and welcome to Rackspace’s Q4 2011 Earnings Conference Call. As a reminder, today’s conference is being recorded. (Operator instructions.)

And now it is my pleasure to turn the conference over to Mr. Jason Luce, Vice President of Finance for Rackspace. Please go ahead, sir.

Jason Luce

Thanks, Kelsey. Good afternoon. Thank you for joining Rackspace’s Q4 2011 earnings call. I’m here today with Lanham Napier, our CEO, and Karl Pricher, our CFO. We issued a press release after the close of the market today with our unaudited financial results for Q4 2011. If you do not have a copy please visit the investors section of our website at Rackspace.com where this call is also being webcast.

The primary purpose of today’s call is to discuss Q4 results, however, some of our comments today are forward-looking statements that involve risks, uncertainties, and assumptions. If the risks or uncertainties materialize, or assumptions prove incorrect, our assumptions could differ materially from those expressed or implied by the forward-looking statements and assumptions. All statements other than historical facts are statements that could be deemed forward-looking statements. These risks, uncertainties and assumptions are described in Rackspace Hosting’s Form 10(k) for the year ended December 31st, 2010, filed with the SEC on February 22, 2011; and in Rackspace Hosting’s Form 10(k) for the year ended December 31st, 2011, expected to be filed shortly.

These forward-looking statements speak as of today. Except as required by law, we assume no obligation to update these forward-looking statements publicly even if new information becomes available in the future. During today’s discussion we will be using GAAP as well as non-GAAP financial measures such as adjusted EBITDA. Our GAAP results and GAAP to non-GAAP reconciliations can be found in the earnings release we issued earlier today which is posted on our website as mentioned previously.

Following our prepared remarks today we’ll open the call for your questions. Okay, let’s get started, Lanham.

Lanham Napier

Good afternoon, everyone, and thank you for joining us today. 2011 was an absolute breakout year for Rackspace that was accentuated by the strongest quarter prior to the recession hitting in mid-2008. During the year we accelerated our revenue growth for the second year in a row and crossed $1 billion in annual revenue while simultaneously improving margins and returns. In short, we made tremendous progress toward our long-term goal of becoming the service leader in Cloud computing.

Before we dive in, we need to thank our army of Rackers that is now 4000 strong, and the 175,000 customers that have trusted Rackspace to run the mission critical applications that drive their business. At the beginning of last year we shared our plans for 2011 to further increase our service level capability and enhance our product portfolio. The goal of these investments was to help seize the massive market opportunity ahead of us by becoming more competitive and improving the capital efficiency of our business model. If we were able to achieve these goals we say we will grow revenue faster than in 2010, maintain our margin profile, and generate cash flow or minimize cash burn.

So let’s get started reviewing our performance in 2011 and then outline our plan for 2012. Number one: revenue growth for the year accelerated to 31%, up from 24% in 2010 and 18% in 2009. The primary drivers for the increased growth trajectory are owed to continued growth in our Public Cloud offering. Our Public Cloud business grew 88% in 2011 and now represents more than 20% of our total revenue. Our monthly installed base growth improved to 1.2% in Q4, up from the monthly average of 0.5% in 2010 and the highest level since 2007. This metric is the primary proof point that Fanatical Support continues to differentiate our offer in the marketplace, further traction growing our enterprise business and customers continuing to leverage our enhanced portfolio of products and services.

Number two: adjusted EBITDA margins came to 33.9% for the year, up from 33.6% in 2010, and net income margins improved to 7.5% for the year, up from 5.9% in 2010. Number three: return on capital grew to 14.7% for the full year, up from 11.6% in 2010. Q4 return on capital grew to 17.2%. And number four: adjusted free cash flow was negative $7.4 million for the full year but turned positive in Q4 when we generated $19 million of adjusted free cash flow.

We executed well against the goals we shared with you for 2011, particularly in the areas of product development as well as many critical behind the scenes activities that are crucial to supporting and building business. Some of the new products include Cloud load balancers and the Managed Cloud service, which has been very successful. After one year of availability the Managed Cloud product has almost 3000 customers, and the average monthly revenue for those customers has almost doubled. In addition to the new product introductions we launched our Managed Cloud and Critical Site services in the UK and improved our hybrid hosting capability by releasing Version 2 of our RackConnect products.

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