Rackspace Hosting, Inc (RAX)

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Rackspace Hosting, Inc. (RAX)

Q4 2009 Earnings Call Transcript

February 16, 2010 4:30 pm ET

Executives

Jason Luce – VP, Finance

Lanham Napier – CEO and President

Bruce Knooihuizen – SVP, CFO and Treasurer

Analysts

Winston Len – Goldman Sachs

Chris Larsen – Piper Jaffray

Jonathan Schildkraut – Jefferies

Bryan McGrath – Credit Suisse

Simon Flannery – Morgan Stanley

Chad Bartley – Pacific Crest

Gray Powell – Wells Fargo

Steve Salberta – Boenning & Scattergood

Patrick Walravens – JMP Securities

Alex Kurtz [ph] – Merriman & Company [ph]

Frank Louthan – Raymond & James

Eric Suppiger – Signal Hill

Presentation

Operator

Ladies and gentlemen, good day and welcome to Rackspace Hosting’s fourth quarter 2008 earnings conference call. As a reminder, today’s conference is being recorded. At this time all lines are in a listen-only mode to prevent background noise. After the speakers’ remarks there will be a Q&A session. (Operator instructions)

It is now my pleasure to introduce Jason Luce, Vice President of Finance for Rackspace. Please go ahead, sir.

Jason Luce

Good afternoon. Thank you for joining Rackspace’s fourth quarter and full year 2009 earnings conference call. I’m here today with Lanham Napier, our CEO and Bruce Knooihuizen, our CFO.

We issued a press release after the close of the market today with our unaudited financial results for the fourth quarter and full year of 2009. If you do not have a copy please visit the Investor section of our Web site at ir.rackspace.com, where this call is also being webcast.

The primary purpose of today’s call is to discuss the fourth quarter and full year 2009 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 results could differ materially from those expressed or implied by the forward-looking statements and assumptions.

All statements, other than a 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, the performance for 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 infrastructure failures, the potential deterioration of economic conditions, and other risks that are described in our third quarter Form 10-Q filed with the SEC on November 12, 2009, and our Form 10-K for the year that will be filed on/or before March 1st, 2010.

These forward-looking statements speak as of today. Except as required by law we assume 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.

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. We just posted on our Web site as mentioned previously. Following our prepared remarks today, we’ll open the call for your questions.

Okay, let’s get started.

Lanham Napier

Thank you for joining us today. In a moment Bruce Knooihuizen will share our strong fourth quarter and full year results. But before he does I want to briefly touch on the business, the market opportunity for us and our aggressive pursuit to build upon our market leadership at 2010.

Today, we are the leader in the Hosting and Cloud Computing industry. A massive and emerging sector that’s virtually untapped. During our 11-year history, Rackspace has made significant progress and create a real value for customers, Rackers and stockholders. We have built our company in a sustainable fashion and at this point we have won the first phase of our industry development.

As we work out to our future, we are well-positioned to seize in even merger opportunity. The ongoing trend for business is to purchase IT as a service from a company like ours have accelerated. Because business leaders continue to scrutinize IT budgets and they recognize that an in-house computing infrastructure provide them with a competitive advantage.

Today, more than 90% of corporate computing takes place inside of company’s offices. In the future, the vast majority of corporate computing will occur to a service provider like Rackspace. Why will this happen? It’s pretty simply. We’re cheaper, faster and more reliable and we’re purpose built to deliver technology outcomes. More and more corporate IT organizations are looking for partner to help them run their computing infrastructure.

In the Fanatical Support the Rackspace provides to its customers continue to prove to be a compelling proposition. The size of the opportunity is hard to precisely calculate but we know it’s massive. We estimate there are 50 million servers in the world today and we manage about 0.1% of these in our facilities.

As to demand for computing grows we have the opportunity to compete and serve this market. The shift in the computing landscape will be bigger and faster than the shift for mainframe to client server computing or LAN, or any other recent trend, simply because there is much more computing in the world today. The market opportunity for us is billions of dollars and global in nature.

Traditional technology markets are blurring as companies enter new segments. For example, Cisco has entered the data center provisioning business as part of its strategy to become one of the major systems companies in the world. Google, Microsoft and Amazon all see the potential in the market and are therefore positioning for growth while we move quickly to strengthen our market position.

We have spent the past year preparing for the next cycle of growth. We have a strong position in the market today. Because our specialized focus on Host a computing, our unique culture of customer service known as Fanatical Support, and our unique hyper portfolio approach that combines dedicated Hosting and Cloud Hosting.

During 2010, we will aggressively pursue market leadership in the next larger phase of hosting and cloud computing. We will make discipline investments to reach even greater levels of scale. We are expanding our operational capabilities and giving our Rackers better tools to deliver Fanatical Support to our customers. Rackspace will only be great if our customer say we are. And this brings our Fanatical Support model must continue to serve them well. That does tend to invest in our typical depth with specific technologies of software development.

We are investing heavily in our leadership because we need leaders that have experience and executing to capture large opportunities. And lead a second drive even greater performance for our customer facing service teams. So what’s this all mean? In 2009, given the extreme uncertainty in the economy, we were focused on cash and margins and we proved that we could flex our model.

We showed separated ourselves from the pack and emerge as a stronger competitor. In 2010, we will shift our primary focus to growth. Although we remain committed to enhancing our profitability, we believe that it’s best to focus more on growth this year to increase market share at this stage of the technology adoption life cycle.

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