Rackspace Hosting, Inc (RAX)

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Rackspace Hosting, Inc. (RAX)

Q2 2008 Earnings Call

September 10, 2008 4.30 pm ET


Karl Pichler - Vice President of Finance

Lanham Napier - President, Chief Executive Officer

Bruce Knooihuizen - Senior Vice President, Chief Financial Officer


Jason Armstrong - Goldman Sachs

Chris Larsen - Credit Suisse

Thomas Watts - Cowen & Company

Jonathan Schildkraut - Jefferies

Kash Rangan - Merrill Lynch

Devang Kothari - JMP Securities

Erik Suppiger - Signal Hill

Matt Kather - WR Hambrecht

Matt Therian - Renaissance Capital



Welcome to the Rackspace’s second quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce Karl Pichler, Vice President of Finance for Rackspace.

Karl Pichler

Welcome to Rackspace’s first ever quarterly conference call as a public company. Today we will cover Rackspace’s second quarter ending June 30, 2008. My name is Karl Pichler and I’m Vice President of Finance. We hope that you have all had the chance to read our press release which we issued earlier today. If you do not have a copy please visit the Investor Relations page of our website at ir.rackspace.com.

This call is also being broadcast online and can be accessed through the Investor Relations page on Rackspace’s website. From Rackspace on the call today will be Lanham Napier, President and Chief Executive Officer and Bruce Knooihuizen, Senior Vice President and Chief Financial Officer.

I need to remind you that some of the comments we’ll make today are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 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 including international expansion plans to performance or market share relating to products and services, any statements of expectation or belief and any statements of assumptions underlying any of the foregoing.

These risks, uncertainties and assumptions include the effectiveness of managing company growth, infrastructure failures, changes in the economy, technological and competitive factors, regulatory factors and other risks that are described in Rackspace’s amended registration statement on Form S-1 filed with the SEC on August 5, 2008. Additional information will also be set forth in Rackspace’s report on Form 10-Q for the quarter ended June 30, 2008, which will be filed with the SEC in September of 2008.

These forward-looking statements speak as of today. Except as required by law Rackspace assumes no obligation to update these forward-looking statements publicly or to update the reasons and actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. After our prepared remarks this afternoon, we’ll be happy to take your questions.

I will now turn the call over Lanham.

Lanham Napier

Welcome to Rackspace’s first ever quarterly conference call to discuss our second quarter 2008 results. This is an exciting time at Rackspace and because this is our first quarterly conference call, I’m going to spend some additional time providing insight into our business and some characteristics we believe sets apart in the industry.

Just a little over a month ago, we successfully completed our initial public offering and listed on the New York Stock Exchange. Listing on the Exchange has strengthened our position and provided us with the capital to invest in the long-term growth of our business.

I’m going to focus on four things upfront and then provide some additional color and detail on our performance before handing it over to Bruce. First, our outline and incredible growth opportunity in Hosting, why Rackspace has been able to grow more than 50% each year for the past five years and why Rackspace is best positioned to capitalize on this opportunity in the future.

Second, I will discuss our disciplined approach to capital allocation and velocity of managing for the long-term. Third, I will talk about Fanatical Support and why we believe this serves as a significant competitive advantage and differentiates our customer value proposition in the marketplace. Fourth, I will outline the metrics we believe will be most important for judging our business performance on an ongoing basis.

To our first point, there is incredible growth opportunity in hosting and we believe Rackspace is extremely well positioned to capitalize on it. Tier-I research estimated the worldwide hosting market to be $12.3 billion in 2007 with projected annual growth rates of 26% to $24.4 billion in 2010. In 2007 we were the world’s largest hosting provider by revenue based on the same data set.

Looking at our business from a long-term perspective, we believe that growth in hosting will come in many forms. Businesses have very diverse IT needs and we believe that over time more of them will be delivered over the web making hosting a basic foundation for IT which we deliver as a consumable service.

Hosting means computing as a service and it is growing fast because it is becoming a new and better way for businesses to efficiently buy IT and computing. Hosting makes IT easier to use, more valuable and cheaper as technology becomes more prevalent for businesses, yet at the same time more complicated and expensive. The typical approach for the internally managed sever closet is clumsy, expensive and difficult to maintain.

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