Rackspace Hosting, Inc (RAX)

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Rackspace Hosting (RAX)

Q2 2011 Earnings Call

August 04, 2011 4:30 pm ET

Executives

A. Napier - Chief Executive Officer, President and Executive Director

Jason Luce -

Karl Pichler - Acting Chief Financial Officer

Analysts

Colby Synesael - Cowen and Company, LLC

Christopher Larsen - Piper Jaffray Companies

Gray Powell - Wells Fargo Securities, LLC

Jonathan Schildkraut - Evercore Partners Inc.

Patrick Walravens - JMP Securities LLC

Louie DiPalma

Simon Flannery - Morgan Stanley

Scott Goldman - Goldman Sachs Group Inc.

Gregory Dunham - Crédit Suisse AG

Mitesh Dhruv - Merrill Lynch

Presentation

Operator

Good day or good afternoon, ladies and gentlemen, and welcome to the Rackspace Hosted Second Quarter 2011 Earnings Release Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] It is now my pleasure to introduce Mr. Jason Luce, Vice President of Finance for Rackspace. Mr. Luce, you may begin.

Jason Luce

Good afternoon. Thank you for joining Rackspace's Second Quarter 2011 Earnings Call. I'm here today with Lanham Napier, our CEO; and Karl Pichler, our CFO.

We issued a press release after the close of the market today with our unaudited financial results for the second quarter of 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 the second quarter 2011 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 proved incorrect, our results could differ materially from those expressed or implied by the forward-looking statements and assumptions.

All statements other than historical fact 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 31, 2010, and filed with the SEC on February 22, 2011, and in Rackspace Hosting's Form 10-Q for the quarter ended June 30, 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. Lanham?

A. Napier

Good afternoon, and thank you for joining Rackspace's Second Quarter Earnings Call. This quarter, we are hosting our call from our international headquarters in London. It's been an insightful week here in the U.K. We have met with a variety of existing and perspective customers, and it's clear that there is an insatiable thirst for cloud computing for businesses around the world. We think these businesses are looking at Rackspace to be the service leader in the cloud and to do so on a global basis.

At the beginning of the year, we communicated that our goals for 2011 are to accelerate revenue growth while also investing to strengthen our business and improve our long-term economic model. At the halfway point in the year, we believe we have made excellent progress toward these objectives. Thanks to all the customers who trust us to run their mission-critical business applications and the tireless commitment of our Rackers. We're happy to announce that we recently achieved $1 billion of annualized run rate revenue this past June. The opportunity ahead of us is massive. And the amateur of Rackspace has never felt better. Here are some of the highlights from the second quarter.

#1, revenue growth accelerated to 32% on a year-over-year basis and 7.5% on a sequential basis. We've been able to drive higher growth in 2011 through continued rapid growth in our public cloud business, which grew by 85% in Q2 on a year-over-year basis, improved traction in serving large enterprises, customers leveraging our enhanced portfolio of products and services and by a meaningful pickup in sales to existing customers, which we measure as installed base growth.

Monthly installed base growth remained at 0.9% per month for the quarter. Although we are not, at prerecession installed base growth was approximately 1.5% per month on average, 0.9% for the first 6 months of 2011 is higher than the 0.2% that we achieved in 2009 and the 0.5% that we averaged in 2010. As you know, growing sales to our existing customers is a key pillar of our growth strategy and a tangible proof point that we use to measure the value we bring to our differentiated service model.

Three, in addition to accelerating growth, we are pleased with our investments and profits in the second quarter. In February, we outlined our plans to not only increase share in the massive cloud computing market, but also improve our long-term business model to deliver better profits and returns. With the improvements made in the second quarter, we are on track to accomplish our goals for 2011.

In Q2, adjusted EBITDA grew 31% year-over-year, and our margin profile remained stable. Net income grew 57%, with higher margins at 7.1%. Maintaining margins while improving capital efficiency leads to higher returns, and as a result, return on capital improved to 14.4% in the second quarter.

Although it has taken us nearly 12 years to achieve our first $1 billion of run rate revenue, we believe it will take a fraction of that time to attain the second. Before we end the call over to Karl to go through the numbers in detail, we'd like to outline what we're doing to achieve this next milestone.

First, we believe the cloud computing era represents the biggest market opportunity in all of technology. One that could represent a multibillion dollar revenue stream for Rackspace, and we've only just begun to tap into that opportunity. While the overall size of the market opportunity for Rackspace is difficult to precisely calculate, we know that it is massive and growing rapidly. More and more corporations are discovering that using a specialized service provider is a better, faster, cheaper way to address their IT capacity needs. Pay less and get more.

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