Rackspace Hosting Reports Fourth Quarter 2010 Results

SAN ANTONIO-Rackspace® Hosting, Inc. (NYSE: RAX), the world’s leader in the hosting and cloud computing industry, announced financial results for the quarter ended December 31, 2010.

Net revenue for the fourth quarter of 2010 was $214.7 million, up 7.5% from the previous quarter and 26.7% from the fourth quarter of 2009. Net revenue for the fourth quarter of 2010 was positively impacted by currency exchange rates when compared to the third quarter of 2010, but was negatively impacted when compared to the fourth quarter of 2009.

Changes in currency exchange rates had a positive impact on net revenue of $1.1 million quarter-over-quarter, and a negative impact on net revenue of $1.7 million on a year-over-year basis.

Managed hosting revenue for the quarter increased to $183.3 million, up from $172.9 million in the prior quarter. Cloud revenue increased to $31.4 million in the quarter, up from $26.8 million in the previous quarter.

Total server count increased to 66,015, up from 63,996 servers at the end of the third quarter of 2010, and total customers increased to 130,291, up from 118,732 at the end of the previous quarter.

“At the beginning of the year we outlined our objectives for 2010, to grow faster than 2009, while maintaining margins and investing in our business. We also said that we expected adjusted free cash flow to be positive at growth rates below 35%. With the year completed, I am very pleased to report that we delivered on all three objectives,” said Bruce Knooihuizen, chief financial officer.

Adjusted EBITDA for the quarter was $72.0 million, a 5.2% increase compared to the third quarter of 2010 and a 28.7% increase compared to the fourth quarter of 2009. The adjusted EBITDA margin for the quarter was 33.5%, down from 34.3% in the previous quarter and up from 33.0% in the fourth quarter of 2009. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by a non-cash charge of $2.9 million for the quarter relating to operating leases.

Net income was $13.5 million for the quarter, up 14.6% from the previous quarter and 49.9% from the fourth quarter of 2009. Net income margin for the quarter was 6.3% compared to 5.9% for the previous quarter and 5.3% in the fourth quarter of 2009.

“While we are pleased that we achieved our goals for 2010, we have even more ambitious plans for 2011 that are designed to position us to succeed well in the future,” said Lanham Napier, president and chief executive officer.

Cash flow from operating activities was $74.3 million for the fourth quarter of 2010. Capital expenditures were $63.5 million, including $38.1 million for purchases of customer gear, $9.8 million for data center build outs, $5.1 million for office build outs and $10.5 million for capitalized software and other projects.

Adjusted free cash flow ⁽¹⁾ for the quarter was $5.6 million.

At the end of the fourth quarter of 2010, cash and cash equivalents were $104.9 million. Debt obligations totaled $131.7 million consisting of $128.9 million related to capital leases and $2.8 million related to current and non-current debt.

On a worldwide basis, Rackspace employed 3,262 Rackers as of December 31, 2010, up from 3,130 Rackers as of September 30, 2010 and 2,774 Rackers as of December 31, 2009.

Rackspace Developments and Business Highlights

• “100 Best Companies to Work For”: Rackspace was again added to FORTUNE magazine’s annual list of the “100 Best Companies to Work For.” FORTUNE has now named Rackspace as one of America’s top workplaces in three of the past four years.
• Cloud Infrastructure in UK: To provide customers with a European-based infrastructure for their cloud-based data footprint, Rackspace launched its cloud infrastructure in the UK. The new UK cloud offerings include Rackspace Cloud Files and Cloud Servers.
• Managed Cloud: Defining a new category in hosting, Rackspace launched Cloud Servers with a managed service level, providing businesses with proactive monitoring, troubleshooting and guidance on how to leverage cloud computing.
• RackConnect and Critical Sites: Rackspace launched two new products for better serving Enterprise customers. RackConnect offers customers a seamless integration of cloud and dedicated hosting. The new Critical Sites service level provides advanced monitoring for customers who rely on their web applications as mission critical components of their business.
• Continued Traction with Channel and Enterprise Customers: Rackspace continued to build out its channel business and drive deeper relationships with its channel partner base. As an example, Magento is working with Rackspace for MagentoGO, their new on-demand hosted e-commerce platform for small businesses. During the fourth quarter of 2010, Rackspace added several new enterprise customers to its installed base including Price Waterhouse Coopers, Major League Gaming and Edelman.

Conference Call and Webcast

Management will host a conference call to discuss the results starting today at 4:30 p.m. ET.

To access the conference call, please dial 888-516-2435 from the United States or dial 719-325-2370 from abroad and reference pass code 1074823. A live webcast and a replay of the conference call will be available on Rackspace’s website, located at ir.rackspace.com.

About Rackspace Hosting

Rackspace Hosting is the world leader in hosting. The San Antonio-based company provides its customers Fanatical Support ® in their portfolio of hosted IT services, including Managed Hosting, Cloud Computing and Email and Apps. 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, 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 continuation or further deterioration of the current difficult economic conditions or further 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-K for the year ended December 31, 2009, filed with the SEC on February 26, 2010 and in Rackspace Hosting’s Form 10-K for the year ended December 31, 2010, expected to be filed on or before March 1, 2011. 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.

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