SOURCE: Rackspace Hosting

Rackspace Hosting

February 17, 2015 16:00 ET

Rackspace Reports Strong Fourth Quarter 2014 Results

Revenue grew 16 percent compared to the fourth quarter of 2013

Adjusted EBITDA grew 25 percent compared to the fourth quarter of 2013

Net income grew 77 percent compared to the fourth quarter of 2013

SAN ANTONIO, TX--(Marketwired - February 17, 2015) - Rackspace® (NYSE: RAX), the #1 managed cloud company, today announced financial results for the quarter that ended December 31, 2014.

On a GAAP basis, net revenue for the fourth quarter of 2014 was $472 million, up 15.8 percent from the fourth quarter of 2013. On a constant currency basis, net revenue grew 16.4 percent from the fourth quarter of 2013.

Adjusted EBITDA for the quarter was $165 million, up 25.3 percent from the fourth quarter of 2013. Net income for the fourth quarter was $36.9 million, for a margin of 7.8 percent, up from 5.1 percent in the fourth quarter of 2013.

For the fourth quarter of 2014, cash flow from operating activities was $151 million, capital expenditures were $105 million, and Adjusted Free Cash Flow was a record $55 million. At the end of the fourth quarter of 2014, cash and cash equivalents were $214 million, and interest-bearing debt including capital lease obligations totaled $49 million. Return on Capital was 15.5 percent in the fourth quarter of 2014 compared to 9.6 percent in the fourth quarter of 2013.

On a worldwide basis, Rackspace employed 5,936 Rackers as of December 31, 2014.

"The strong growth and improving margins that we've posted demonstrate the traction that we're gaining as the leader of the managed cloud segment," said Taylor Rhodes, president and CEO of Rackspace. "We will build on this momentum in 2015 by expanding the specialized expertise that we offer in areas such as ecommerce, big data and security. We're helping more and more businesses leverage the power of the cloud without the pain of managing complex new technologies by themselves."

For the first quarter of 2015, Rackspace expects revenue to grow between 2 percent and 3.5 percent on a constant currency basis. Based on foreign currency movements to date, Rackspace anticipates a 100 basis point headwind to revenue growth in the first quarter, resulting in GAAP revenue in the range of $477 million to $484 million. The company expects adjusted EBITDA margins to be between 32 percent and 34 percent for the first quarter.

For the full year 2015, Rackspace expects revenue to grow between 14 percent and 18 percent on a constant currency basis. Based on foreign currency movements to date, Rackspace anticipates a 200 basis point headwind to revenue growth for the full year of 2015, resulting in GAAP revenue in the range of $2.0 billion to $2.1 billion. The company expects adjusted EBITDA margins to be between 33 percent and 36 percent for the year.

Recent Highlights

  • Rackspace Strengthens Data Tier Leadership With OnMetal™ Cloud Big Data. Rackspace announced the release of its OnMetal Cloud Big Data Platform, which allows customers to deploy bare metal instances of Apache Hadoop® with Spark in just three clicks. The new solution provides an efficient and elastic platform that delivers breakthrough speed for Hadoop and Spark, allowing data scientists to gather insights in minutes rather than hours or days.
  • Rackspace Announced the Newest Release of its Rackspace Hybrid Cloud offering, RackConnect® v3. RackConnect v3 includes new security capabilities, increased scalability and an improved customer experience.
  • Rackspace Announced Cloud Office Suite for Improved Business Collaboration Backed by Fanatical Support®. Rackspace announced it has created a new business unit -- Cloud Office at Rackspace -- to unify its portfolio of industry-leading Rackspace and Microsoft® business productivity and collaboration tools. The suite of solutions available includes hosted Microsoft Exchange and Rackspace Email, Microsoft Lync® and SharePoint® collaboration tools, and Jungle Disk® backup services, all backed by Fanatical Support.
  • Rackspace Appointed Todd Cione as Chief Revenue Officer. In this new role, Cione oversees the operations of the Americas sales and global marketing organizations, while uniting the functions to work seamlessly and strengthen the company's go-to-market strategy.
  • Rackspace Appointed Kevin Costello to Board of Directors. Kevin Costello is a veteran in the Software-as-a-Service (SaaS) industry, bringing more than 25 years of consulting and advisory experience.
  • Rackspace Opened First Office for Latin America in Mexico City. The office will bring the managed cloud and Fanatical Support to its existing customer base of more than a thousand local customers and will support growth in its business in this region.

Non-GAAP Financial Information

Adjusted EBITDA, Adjusted Free Cash Flow, and Return on Capital are non-GAAP financial measures. Rackspace believes these measures provide helpful information with respect to evaluating the company's performance. Other companies may calculate non-GAAP measures differently, limiting their usefulness as a comparative measure. The financial statement tables that accompany this press release include reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures.

Conference Call and Webcast

Rackspace's executive management will host a conference call to discuss the results for the fourth quarter of 2014 starting today at 4:30 p.m. ET.

To access the conference call from the United States and Canada, please dial 800-772-0358; from the United Kingdom, please dial 0800-692-2011; and from Hong Kong, please dial 800-900-872.

A live webcast and a replay of the conference call will be available on Rackspace's website, located at ir.rackspace.com.

About Rackspace

Rackspace (NYSE: RAX) is the #1 managed cloud company. Its technical expertise and Fanatical Support® allow companies to tap the power of the cloud without the pain of hiring experts in dozens of complex technologies. Rackspace is also the leader in hybrid cloud, giving each customer the best fit for its unique needs -- whether on single- or multi-tenant servers, or a combination of those platforms. Rackspace is the founder of OpenStack®, the open-source operating system for the cloud. Headquartered in San Antonio, Rackspace serves more than 300,000 business customers from data centers on four continents. It ranks 29th on Fortune's list of 100 Best Companies to Work For. For more information, visit www.rackspace.com.

Forward-Looking Statements

This press release contains forward-looking statements 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, expected results from the integration of technologies and acquired businesses, or the performance or market share relating to products and services; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include infrastructure failures; the deterioration of economic conditions or fluctuations, disruptions, instability or downturns in the economy; the effectiveness of managing company growth; technological and competitive factors; regulatory factors; and other risks that are described in Rackspace Hosting's Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 10, 2014. Except as required by law, Rackspace Hosting assumes no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Consolidated Statements of Income

         
  Three Months Ended   Year Ended  
  (Unaudited)       (Unaudited) 
(In thousands, except per share data) December 31,
 2013
  September 30,
 2014
  December 31,
 2014
  December 31,
 2013
  December 31,
 2014
 
Net revenue $408,103   $459,776   $472,422   $1,534,786   $1,794,357  
Costs and expenses:                         
 Cost of revenue  133,821    142,954    153,912    492,493    582,334  
 Research and development  24,849    30,718    31,385    90,213    117,006  
 Sales and marketing  55,465    60,582    59,127    208,417    237,548  
 General and administrative  79,128    86,702    82,780    297,520    322,056  
 Depreciation and amortization  87,683    98,307    95,213    313,007    371,884  
  Total costs and expenses  380,946    419,263    422,417    1,401,650    1,630,828  
   Income from operations  27,157    40,513    50,005    133,136    163,529  
Other income (expense):                         
 Interest expense  (656 )  (445 )  (444 )  (3,118 )  (1,913 )
 Interest and other income (expense)  405    (2,191 )  (257 )  741    (2,012 )
  Total other income (expense)  (251 )  (2,636 )  (701 )  (2,377 )  (3,925 )
   Income before income taxes  26,906    37,877    49,304    130,759    159,604  
Income taxes  6,108    12,137    12,388    44,022    49,051  
   Net income $20,798   $25,740   $36,916   $86,737   $110,553  
                          
Net income per share                         
 Basic $0.15   $0.18   $0.26   $0.63   $0.78  
 Diluted $0.14   $0.18   $0.26   $0.61   $0.77  
                          
Weighted average number of shares outstanding                         
 Basic  139,875    142,978    141,776    138,577    141,971  
 Diluted  144,024    144,895    144,526    143,011    144,498  
                    
                    

Consolidated Balance Sheets

          
(In thousands)  December 31, 2013   December 31, 2014  
       (Unaudited)  
ASSETS           
Current assets:           
 Cash and cash equivalents  $259,733   $213,505  
 Accounts receivable, net of allowance for doubtful accounts and customer credits of $3,891 as of December 31, 2013 and $5,334 as of December 31, 2014   123,898    156,455  
 Deferred income taxes   12,637    9,260  
 Prepaid expenses   30,782    33,628  
 Other current assets   11,918    8,895  
  Total current assets   438,968    421,743  
            
Property and equipment, net   890,776    1,057,684  
Goodwill   81,084    81,084  
Intangible assets, net   23,880    16,592  
Other non-current assets   57,089    47,181  
   Total assets  $1,491,797   $1,624,284  
            
LIABILITIES AND STOCKHOLDERS' EQUITY           
Current liabilities:           
 Accounts payable and accrued expenses  $122,047   $137,295  
 Accrued compensation and benefits   62,459    66,696  
 Income and other taxes payable   11,388    11,783  
 Deferred revenue   22,868    20,851  
 Capital lease obligations   37,885    14,969  
 Debt   1,861    25,124  
  Total current liabilities   258,508    276,718  
            
Non-current liabilities:           
 Deferred revenue   3,662    1,425  
 Capital lease obligations   25,048    8,946  
 Finance lease obligations for assets under construction   -    109,991  
 Debt   124    -  
 Deferred income taxes   69,729    71,228  
 Deferred rent   43,046    49,899  
 Other liabilities   36,268    32,283  
  Total liabilities   436,385    550,490  
            
Commitments and Contingencies
          
            
Stockholders' equity:           
 Common stock   141    141  
 Additional paid-in capital   636,660    696,029  
 Accumulated other comprehensive loss   (4,536 )  (20,685 )
 Retained earnings   423,147    398,309  
  Total stockholders' equity   1,055,412    1,073,794  
   Total liabilities and stockholders' equity  $1,491,797   $1,624,284  
         
         

Consolidated Statements of Cash Flows

          
   Three Months Ended   Year Ended  
   (Unaudited)       (Unaudited) 
(in thousands)  December 31,
 2013
  September 30,
 2014
  December 31,
 2014
  December 31,
 2013
  December 31,
 2014
 
Cash Flows From Operating Activities                          
 Net income  $20,798   $25,740   $36,916   $86,737   $110,553  
 Adjustments to reconcile net income to net cash provided by operating activities:                          
  Depreciation and amortization   87,683    98,307    95,213    313,007    371,884  
  Deferred income taxes   (12,407 )  (11,046 )  30,553    (2,102 )  413  
  Share-based compensation expense   17,188    19,842    20,166    59,645    70,005  
  Excess tax benefits from share-based compensation arrangements   (16,156 )  (16,990 )  10,838    (33,539 )  (34,473 )
  Other operating activities   755    2,381    2,435    5,490    8,242  
  Changes in operating assets and liabilities:                          
   Accounts receivable   (10,344 )  (6,609 )  (25,952 )  (34,473 )  (41,681 )
   Prepaid expenses and other current assets   6,290    (24,454 )  16,083    (12,270 )  (1,116 )
   Accounts payable, accrued expenses, and other current liabilities   8,355    41,886    (38,458 )  35,303    55,424  
   Deferred revenue   4,176    (1,431 )  1,210    5,367    (3,742 )
   Deferred rent   2,279    1,928    1,120    11,564    7,417  
   Other non-current assets and liabilities   901    (4,126 )  762    9,331    (416 )
 Net cash provided by operating activities   109,518    125,428    150,886    444,060    542,510  
                           
Cash Flows From Investing Activities                          
 Purchases of property and equipment   (126,723 )  (124,129 )  (107,209 )  (452,596 )  (430,335 )
 Acquisitions, net of cash acquired   (3,727 )  -    -    (9,930 )  -  
 All other investing activities   110    317    285    (1,698 )  2,230  
  Net cash used in investing activities   (130,340 )  (123,812 )  (106,924 )  (464,224 )  (428,105 )
                           
Cash Flows From Financing Activities                          
 Principal payments of capital leases   (14,652 )  (8,957 )  (7,133 )  (65,860 )  (39,635 )
 Proceeds from debt   -    -    25,000    -    25,000  
 Repayments of debt   (52 )  (967 )  (35 )  (1,915 )  (1,901 )
 Payments for deferred acquisition obligations   (57 )  (55 )  (55 )  (1,353 )  (223 )
 Receipt of Texas Enterprise Fund grant   -    -    -    -    5,500  
 Repurchase of common stock   -    -    (200,000 )  -    (200,000 )
 Shares of common stock withheld for employee taxes   -    -    -    -    (13,620 )
 Proceeds from employee stock plans   8,971    3,268    15,099    23,817    33,120  
 Excess tax benefits from share-based compensation arrangements   16,156    16,990    (10,838 )  33,539    34,473  
  Net cash provided by (used in) financing activities   10,366    10,279    (177,962 )  (11,772 )  (157,286 )
                           
  Effect of exchange rate changes on cash and cash equivalents   194    (2,759 )  (1,975 )  (392 )  (3,347 )
                           
  Increase (decrease) in cash and cash equivalents   (10,262 )  9,136    (135,975 )  (32,328 )  (46,228 )
  Cash and cash equivalents, beginning of period   269,995    340,344    349,480    292,061    259,733  
   Cash and cash equivalents, end of period  $259,733   $349,480   $213,505   $259,733   $213,505  
                           
Supplemental Cash Flow Information                          
 Non-cash purchases of property and equipment (1)  $(4,116 ) $(6,706 ) $(2,580 ) $19,493   $4,804  
                     
(1)Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.
  
  

Key Metrics - Quarter to Date
(Unaudited)
 

  
   Three Months Ended  
(Dollar amounts in thousands, except average monthly revenue per server)  December 31,
 2013
  March 31,
 2014
  June 30,
 2014
  September 30,
 2014
  December 31,
 2014
 
Growth                          
 Dedicated cloud, net revenue  $291,265   $299,689   $310,647   $319,601   $324,729  
 Public cloud, net revenue  $116,838   $121,358   $130,465   $140,175   $147,693  
  Net revenue  $408,103   $421,047   $441,112   $459,776   $472,422  
  Revenue growth (year over year)   15.6 %  16.2 %  17.4 %  18.3 %  15.8 %
                           
  Net upgrades (monthly average)   1.1 %  0.9 %  1.5 %  1.4 %  1.2 %
  Churn (monthly average)   -0.7 %  -0.6 %  -0.7 %  -0.6 %  -0.5 %
   Growth in installed base (monthly average) (1)   0.4 %  0.3 %  0.8 %  0.8 %  0.7 %
                           
 Number of employees (Rackers) at period end   5,651    5,743    5,798    5,939    5,936  
 Number of servers deployed at period end   103,886    106,229    107,657    110,453    112,628  
 Average monthly revenue per server  $1,322   $1,336   $1,375   $1,405   $1,412  
                           
Profitability                          
 Income from operations  $27,157   $39,124   $33,887   $40,513   $50,005  
 Depreciation and amortization  $87,683   $87,805   $90,559   $98,307   $95,213  
 Share-based compensation expense:                          
  Cost of revenue  $3,877   $3,791   $4,127   $4,175   $4,353  
  Research and development  $2,521   $2,780   $3,293   $3,399   $3,109  
  Sales and marketing  $1,766   $2,091   $2,062   $2,637   $2,783  
  General and administrative  $9,024   $4,070   $7,783   $9,631   $9,921  
   Total share-based compensation expense  $17,188   $12,732   $17,265   $19,842   $20,166  
    Adjusted EBITDA (2)  $132,028   $139,661   $141,711   $158,662   $165,384  
                           
    Adjusted EBITDA margin   32.4 %  33.2 %  32.1 %  34.5 %  35.0 %
    Operating income margin   6.7 %  9.3 %  7.7 %  8.8 %  10.6 %
                           
  Income from operations  $27,157   $39,124   $33,887   $40,513   $50,005  
  Effective tax rate   22.7 %  34.6 %  33.0 %  32.0 %  25.1 %
    Net operating profit after tax (NOPAT) (2)  $20,992   $25,587   $22,704   $27,549   $37,454  
    NOPAT margin   5.1 %  6.1 %  5.1 %  6.0 %  7.9 %
                           
Capital efficiency and returns                          
 Interest bearing debt  $64,918   $53,326   $41,747   $31,472   $49,039  
 Stockholders' equity  $1,055,412   $1,100,012   $1,171,197   $1,223,772   $1,073,794  
 Less: Excess cash  $(210,761 ) $(263,309 ) $(287,411 ) $(294,307 ) $(156,814 )
  Capital base  $909,569   $890,029   $925,533   $960,937   $966,019  
  Average capital base  $873,749   $899,799   $907,781   $943,235   $963,478  
   Capital turnover (annualized)   1.87    1.87    1.94    1.95    1.96  
                           
   Return on capital (annualized) (2)   9.6 %  11.4 %  10.0 %  11.7 %  15.5 %
                           
Capital expenditures                    
 Cash purchases of property and equipment  $126,723   $84,953  $114,044   $124,129   $107,209  
 Non-cash purchases of property and equipment (3)  $(4,116 ) $15,741  $(1,651 ) $(6,706 ) $(2,580 )
  Total capital expenditures  $122,607   $100,694  $112,393   $117,423   $104,629  
                          
 Customer gear  $65,291   $60,688  $64,767   $78,677   $72,488  
 Data center build outs  $22,524   $10,963  $13,767   $14,825   $11,079  
 Office build outs  $14,860   $9,212  $6,857   $3,464   $1,633  
 Capitalized software and other projects  $19,932   $19,831  $27,002   $20,457   $19,429  
  Total capital expenditures  $122,607   $100,694  $112,393   $117,423   $104,629  
                          
Infrastructure capacity and utilization                         
 Megawatts under contract at period end   60.0    58.1   58.1    58.1    58.1  
 Megawatts available for use at period end   46.9    45.3   45.4    45.4    49.7  
 Megawatts utilized at period end   27.4    28.1   29.0    29.9    30.5  
 Annualized net revenue per average Megawatt of power utilized  $60,015   $60,691  $61,802   $62,448   $62,572  
                    
(1)Due to rounding, totals may not equal the sum of the line items in the table above.
(2)See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.
(3)Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.
  
  
Key Metrics - Year to Date
(Unaudited)
 
  
   Year Ended December 31,  
(Dollar amounts in thousands, except average monthly revenue per server)  2013   2014  
Growth           
 Dedicated cloud, net revenue  $1,119,636   $1,254,666  
 Public cloud, net revenue  $415,150   $539,691  
  Net revenue  $1,534,786   $1,794,357  
  Revenue growth (year over year)   17.2 %  16.9 %
            
 Net upgrades (monthly average)   1.3 %  1.3 %
 Churn (monthly average)   -0.8 %  -0.6 %
  Growth in installed base (monthly average) (1)   0.5 %  0.7 %
            
 Number of employees (Rackers) at period end   5,651    5,936  
 Number of servers deployed at period end   103,886    112,628  
 Average monthly revenue per server  $1,307   $1,382  
            
Profitability           
 Income from operations  $133,136   $163,529  
 Depreciation and amortization  $313,007   $371,884  
 Share-based compensation expense:           
  Cost of revenue  $12,584   $16,446  
  Research and development  $8,168   $12,581  
  Sales and marketing  $7,317   $9,573  
  General and administrative  $31,576   $31,405  
   Total share-based compensation expense  $59,645   $70,005  
    Adjusted EBITDA (2)  $505,788   $605,418  
            
    Adjusted EBITDA margin   33.0 %  33.7 %
    Operating income margin   8.7 %  9.1 %
            
  Income from operations  $133,136   $163,529  
  Effective tax rate   33.7 %  30.7 %
    Net operating profit after tax (NOPAT) (2)  $88,269   $113,326  
    NOPAT margin   5.8 %  6.3 %
            
Capital efficiency and returns           
 Interest bearing debt  $64,918   $49,039  
 Stockholders' equity  $1,055,412   $1,073,794  
 Less: Excess cash  $(210,761 ) $(156,814 )
  Capital base  $909,569   $966,019  
  Average capital base  $804,173   $930,417  
   Capital turnover   1.91    1.93  
            
   Return on capital (2)   11.0 %  12.2 %
            
Capital expenditures           
 Cash purchases of property and equipment  $452,596   $430,335  
 Non-cash purchases of property and equipment (3)  $19,493   $4,804  
  Total capital expenditures  $472,089   $435,139  
            
 Customer gear  $297,787   $276,620  
 Data center build outs  $58,278   $50,634  
 Office build outs  $31,103   $21,166  
 Capitalized software and other projects  $84,921   $86,719  
  Total capital expenditures  $472,089   $435,139  
            
Infrastructure capacity and utilization           
 Megawatts under contract at period end   60.0    58.1  
 Megawatts available for use at period end   46.9    49.7  
 Megawatts utilized at period end   27.4    30.5  
 Net revenue per average Megawatt of power utilized  $59,442   $61,917  
  
(1)Due to rounding, totals may not equal the sum of the line items in the table above.
(2)See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.
(3)Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.
  
  

Consolidated Quarterly Statements of Income
(Unaudited)

      
      
   Three Months Ended  
(In thousands)  December 31,
 2013
  March 31,
 2014
  June 30,
 2014
  September 30,
 2014
  December 31,
 2014
 
Net revenue  $408,103   $421,047   $441,112   $459,776   $472,422  
Costs and expenses:                          
 Cost of revenue   133,821    140,417    145,051    142,954    153,912  
 Research and development   24,849    25,192    29,711    30,718    31,385  
 Sales and marketing   55,465    57,359    60,480    60,582    59,127  
 General and administrative   79,128    71,150    81,424    86,702    82,780  
 Depreciation and amortization   87,683    87,805    90,559    98,307    95,213  
  Total costs and expenses   380,946    381,923    407,225    419,263    422,417  
   Income from operations   27,157    39,124    33,887    40,513    50,005  
Other income (expense):                          
 Interest expense   (656 )  (495 )  (529 )  (445 )  (444 )
 Interest and other income (expense)   405    265    171    (2,191 )  (257 )
  Total other income (expense)   (251 )  (230 )  (358 )  (2,636 )  (701 )
   Income before income taxes   26,906    38,894    33,529    37,877    49,304  
Income taxes   6,108    13,448    11,078    12,137    12,388  
   Net income  $20,798   $25,446   $22,451   $25,740   $36,916  
                           
   Three Months Ended  
(Percent of net revenue)  December 31,
 2013
  March 31,
 2014
  June 30,
 2014
  September 30,
 2014
  December 31,
 2014
 
Net revenue   100.0 %  100.0 %  100.0 %  100.0 %  100.0 %
Costs and expenses:                          
 Cost of revenue   32.8 %  33.3 %  32.9 %  31.1 %  32.6 %
 Research and development   6.1 %  6.0 %  6.7 %  6.7 %  6.6 %
 Sales and marketing   13.6 %  13.6 %  13.7 %  13.2 %  12.5 %
 General and administrative   19.4 %  16.9 %  18.5 %  18.9 %  17.5 %
 Depreciation and amortization   21.5 %  20.9 %  20.5 %  21.4 %  20.2 %
  Total costs and expenses   93.3 %  90.7 %  92.3 %  91.2 %  89.4 %
   Income from operations   6.7 %  9.3 %  7.7 %  8.8 %  10.6 %
Other income (expense):                          
 Interest expense   (0.2 )%  (0.1 )%  (0.1 )%  (0.1 )%  (0.1 )%
 Interest and other income (expense)   0.1 %  0.1 %  0.0 %  (0.5 )%  (0.1 )%
  Total other income (expense)   (0.1 )%  (0.1 )%  (0.1 )%  (0.6 )%  (0.1 )%
   Income before income taxes   6.6 %  9.2 %  7.6 %  8.2 %  10.4 %
Income taxes   1.5 %  3.2 %  2.5 %  2.6 %  2.6 %
   Net income   5.1 %  6.0 %  5.1 %  5.6 %  7.8 %
                     
Due to rounding, totals may not equal the sum of the line items in the table above.  
  

Non-GAAP Financial Measures

Adjusted EBITDA (Non-GAAP financial measure)

We use Adjusted EBITDA as a supplemental measure to review and assess our performance. We define Adjusted EBITDA as net income, plus income taxes, total other (income) expense, depreciation and amortization, and non-cash charges for share-based compensation. 

Adjusted EBITDA is a metric that is used in our industry by the investment community for comparative and valuation purposes. We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.

Note that Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States (GAAP) and should not be considered a substitute for operating income, which we consider to be the most directly comparable GAAP measure. Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, you should not consider Adjusted EBITDA in isolation or as a substitute for net income or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

See our reconciliation of Adjusted EBITDA to net income in the tables below:

      
   Three Months Ended  
(Dollars in thousands)  December 31,
 2013
  March 31,
 2014
  June 30,
 2014
  September 30,
 2014
  December 31,
 2014
 
Net revenue  $408,103   $421,047   $441,112   $459,776   $472,422  
                           
Income from operations  $27,157   $39,124   $33,887   $40,513   $50,005  
                           
Net income  $20,798   $25,446   $22,451   $25,740   $36,916  
 Plus: Income taxes   6,108    13,448    11,078    12,137    12,388  
 Plus: Total other (income) expense   251    230    358    2,636    701  
 Plus: Depreciation and amortization   87,683    87,805    90,559    98,307    95,213  
 Plus: Share-based compensation expense   17,188    12,732    17,265    19,842    20,166  
Adjusted EBITDA  $132,028   $139,661   $141,711   $158,662   $165,384  
                           
Operating income margin   6.7 %  9.3 %  7.7 %  8.8 %  10.6 %
                           
Adjusted EBITDA margin   32.4 %  33.2 %  32.1 %  34.5 %  35.0 %
                     
                     
      
   Year Ended December 31,  
(Dollars in thousands)  2013   2014  
Net revenue  $1,534,786   $1,794,357  
            
Income from operations  $133,136   $163,529  
            
Net income  $86,737   $110,553  
 Plus: Income taxes   44,022    49,051  
 Plus: Total other (income) expense   2,377    3,925  
 Plus: Depreciation and amortization   313,007    371,884  
 Plus: Share-based compensation expense   59,645    70,005  
Adjusted EBITDA  $505,788   $605,418  
            
Operating income margin   8.7 %  9.1 %
            
Adjusted EBITDA margin   33.0 %  33.7 %
         

Return on Capital (ROC) (Non-GAAP financial measure)

We define Return on Capital (ROC) as follows:

ROC = Net operating profit after tax (NOPAT) 
  Average capital base 

NOPAT = Income from operations x (1 - effective tax rate)

Average capital base = Average of (interest bearing debt + stockholders' equity - excess cash) = Average of (total assets - excess cash - accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable - deferred revenue - other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction).

Year-to-date average balances are based on an average calculated using the quarter-end balances at the beginning of the period and all other quarter ending balances included in the period.

We define excess cash as the amount of cash and cash equivalents that exceeds our operating cash requirements, which is calculated as three percent of our annualized net revenue for the three months prior to the period end. We will periodically review the calculation and adjust it to reflect our projected cash requirements for the upcoming year.

We believe that ROC is an important metric for investors in evaluating our company's performance. ROC relates after-tax operating profits with the capital that is placed into service. It is therefore a performance metric that incorporates both the Statement of Income and the Balance Sheet. ROC measures how successfully capital is deployed within a company.

Note that ROC is not a measure of financial performance under GAAP and should not be considered a substitute for return on assets, which we calculate directly from amounts on the Statement of Income and the Balance Sheet. ROC has limitations as an analytical tool, and when assessing our operating performance, you should not consider ROC in isolation or as a substitute for other financial data prepared in accordance with GAAP. Other companies may calculate ROC differently than we do, limiting its usefulness as a comparative measure.

See our reconciliation of the calculation of ROC to the calculation of return on assets in the tables below:

      
   Three Months Ended  
(Dollars in thousands)  December 31, 
2013
  March 31, 
2014
  June 30, 
2014
  September 30, 
2014
  December 31, 
2014
 
Income from operations  $27,157   $39,124   $33,887   $40,513   $50,005  
Effective tax rate   22.7 %  34.6 %  33.0 %  32.0 %  25.1 %
 Net operating profit after tax (NOPAT)  $20,992   $25,587   $22,704   $27,549   $37,454  
                           
 Net income  $20,798   $25,446   $22,451   $25,740   $36,916  
                           
Total assets at period end  $1,491,797   $1,566,949   $1,647,975   $1,724,542   $1,624,284  
 Less: Excess cash   (210,761 )  (263,309 )  (287,411 )  (294,307 )  (156,814 )
 Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable   (195,894 )  (224,423 )  (231,563 )  (244,397 )  (215,774 )
 Less: Deferred revenue (current and non-current)   (26,530 )  (24,485 )  (23,248 )  (21,437 )  (22,276 )
 Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction   (149,043 )  (164,703 )  (180,220 )  (203,464 )  (263,401 )
  Capital base  $909,569   $890,029   $925,533   $960,937   $966,019  
                           
  Average total assets  $1,471,783   $1,529,373   $1,607,462   $1,686,259   $1,674,413  
  Average capital base  $873,749   $899,799   $907,781   $943,235   $963,478  
                           
  Return on assets (annualized)   5.7 %  6.7 %  5.6 %  6.1 %  8.8 %
  Return on capital (annualized)   9.6 %  11.4 %  10.0 %  11.7 %  15.5 %
                     
                     
      
   Year Ended December 31,  
(Dollars in thousands)  2013   2014  
Income from operations  $133,136   $163,529  
Effective tax rate   33.7 %  30.7 %
 Net operating profit after tax (NOPAT)  $88,269   $113,326  
            
 Net income  $86,737   $110,553  
            
Total assets at period end  $1,491,797   $1,624,284  
 Less: Excess cash   (210,761 )  (156,814 )
 Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable   (195,894 )  (215,774 )
 Less: Deferred revenue (current and non-current)   (26,530 )  (22,276 )
 Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction   (149,043 )  (263,401 )
  Capital base  $909,569   $966,019  
            
  Average total assets  $1,393,079   $1,611,109  
  Average capital base  $804,173   $930,417  
            
  Return on assets (Net income/Average total assets)   6.2 %  6.9 %
  Return on capital (NOPAT/Average capital base)   11.0 %  12.2 %
         

Adjusted Free Cash Flow (Non-GAAP financial measure)

We define Adjusted Free Cash Flow as Adjusted EBITDA plus non-cash deferred rent, less total capital expenditures (including non-cash purchases of property and equipment), cash payments for interest, net, and cash payments for income taxes, net.

We believe that Adjusted Free Cash Flow is a performance metric used by investors to evaluate the strength and performance of a company's ongoing business. Note that Adjusted Free Cash Flow is not a measure of financial performance under GAAP and may not be comparable to similarly titled measures reported by other companies.

See our reconciliation of Adjusted Free Cash Flow to Adjusted EBITDA below, as well as our reconciliation of Adjusted EBITDA to net income provided above.

          
   Three Months Ended   Year Ended  
(In thousands)  December 31, 2013   December 31, 2014   December 31, 2013   December 31, 2014  
Adjusted EBITDA  $132,028   $165,384   $505,788   $605,418  
 Non-cash deferred rent   2,279    1,120    11,564    7,417  
 Total capital expenditures   (122,607 )  (104,629 )  (472,089 )  (435,139 )
 Cash payments for interest, net of interest received   (609 )  (331 )  (3,096 )  (1,643 )
 Cash payments for income taxes, net of refunds   (2,575 )  (6,700 )  (14,930 )  (13,518 )
  Adjusted free cash flow  $8,516   $54,844   $27,237   $162,535  
                   

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