EX-99.1 2 rax991_q12014.htm FINANCIAL STATEMENTS AND EXHIBITS rax99.1_Q1 2014


Rackspace Hosting Reports First Quarter 2014 Results
SAN ANTONIO - May 12, 2014 - Rackspace® Hosting, Inc. (NYSE: RAX) announced financial results for the quarter ended March 31, 2014.
Net revenue for the first quarter of 2014 was $421 million, up 3.2% from the previous quarter and 16% from the first quarter of 2013. Net revenue for the first quarter of 2014 was positively impacted by currency exchange rates when compared to the previous quarter by $2.4 million and positively impacted when compared to the first quarter of 2013 by $6.6 million.
For the second quarter of 2014, the company is forecasting quarter-over-quarter sequential net revenue growth of 3% to 4.5%, resulting in net revenue in the range of $434 million to $440 million.
"Our first quarter revenue growth came in as expected and we expect growth to improve in the second quarter," said Graham Weston, Chairman and CEO. "We are encouraged by qualitative factors, including the thousands of new customers we added in the quarter, including one of the largest we've ever landed. We also added significant new workloads for existing customers including Alex and Ani, Appboy, Clarks Shoes, Under Armour and SunPower. Each of these customers values our managed cloud approach and chose us over providers of less expensive unmanaged infrastructure."
Total server count increased to 106,229, up from 103,886 servers at the end of the previous quarter.
Adjusted EBITDA(1) for the quarter was $140 million, a 5.8% increase compared to the fourth quarter of 2013. Adjusted EBITDA margin for the quarter was 33.2% compared to 32.4% in the previous quarter.
The company expects Adjusted EBITDA margin to be in the range of 32% to 34% in the second quarter of 2014.
Net income was $25 million for the quarter, up 22.3% from the previous quarter. Net income margin for the quarter was 6.0% compared to 5.1% for the previous quarter.
Cash flow from operating activities was $142 million for the first quarter of 2014. Capital expenditures were $101 million, including $61 million for purchases of customer gear, $11 million for data center build outs, $9 million for office build outs and $20 million for capitalized software and other projects.
Adjusted Free Cash Flow(1) for the quarter was $40 million. Return on Capital(1) was 11.4% in the first quarter, compared to 9.6% in the prior quarter. Average monthly revenue per server was $1,336, compared to $1,322 in the prior quarter.
At the end of the first quarter of 2014, cash and cash equivalents were $314 million, and interest-bearing debt including capital lease obligations totaled $53 million.
On a worldwide basis, Rackspace employed 5,743 Rackers as of March 31, 2014, up from 5,651 in the previous quarter.

- 1 -



Rackspace Business Highlights
Rackspace appointed Ryan Neading chief information officer. Neading will be responsible for the Rackspace billing systems, internal IT systems and tools, technology operations, operational metrics and interfacing with external suppliers and resource providers. Neading brings with him over a decade of leadership experience and specialization in the high tech industry. Prior to joining Rackspace, Neading served as the co-leader of eBay’s development site in Austin.

Rackspace launched its Digital Services Practice to provide digital marketing expertise. Rackspace Digital delivers expertise to help companies more effectively engage with customers via a website, portal/extranet, mobile app or online store. By working hand-in-hand with software platforms and system integrators, Rackspace Digital provides reliable, fully managed service to help ensure the customer’s brand is never compromised.

Rackspace ranked No. 26 on the Sunday Times "Top 100 Best Companies to Work for in London" list. This is the ninth consecutive year Rackspace has received this award. The Sunday Times recognized Rackspace for its attitude towards Racker training and personal development and reports that Rackspace employees love their jobs, have competitive salaries, and have opportunities for personal career development.

Rackspace, along with Digital Realty Trust, Inc., broke ground on a new 130,000 square foot data center facility located in Crawley, West Sussex. The 15 acre campus will eventually consist of four data suites with 10 MW of total capacity. The initial outlay, which provides 6 MW across two data suites, is due to be delivered in the first half of 2015. 

Rackspace launched ObjectRocket, its NoSQL MongoDB Database-as-a-Service (DBaaS), in its UK data center. With the open source-based MongoDB solution, Rackspace will broaden its portfolio to offer European customers a NoSQL DBaaS for big data applications. This offering will be built upon hardware optimized specifically for MongoDB and will be easily accessed and integrated into existing systems. ObjectRocket is a sharded and fully managed MongoDB service built with a set of tools and APIs designed to maximize uptime and reduce administration time -- all supported by Rackspace Fanatical Support®.

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 from the United States and Canada please dial 877-246-4118, from the United Kingdom please dial 0800-496-0445, 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 http://ir.rackspace.com.

About Rackspace Hosting

Rackspace (NYSE: RAX) is a leader in managed cloud and founder of OpenStack®, the open-source operating system for the cloud. Hundreds of thousands of customers look to Rackspace to deliver the best-fit infrastructure for their IT needs, leveraging a product portfolio that allows workloads to run where they perform best -- whether on the public cloud, private cloud, dedicated servers, or a combination of platforms. The company's award-winning Fanatical Support® helps customers successfully architect, deploy and run their most critical applications. Headquartered in San Antonio, TX, Rackspace operates data centers on four continents. Rackspace is featured on Fortune's list of 100 Best Companies to Work For. For more information, visit www.rackspace.com.

- 2 -



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-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014, and in Rackspace Hosting’s Form 10-Q for the quarter ended March 31, 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.

Contact:
Investor Relations
Corporate Communications
Jessica Drought
Brandon Brunson
210-312-4191
210-312-1357
ir@rackspace.com
brandon.brunson@rackspace.com
    



- 3 -



Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended
(In thousands, except per share data)
 
March 31,
2013
 
December 31,
2013
 
March 31,
2014
Net revenue
 
$
362,200

 
$
408,103

 
$
421,047

Costs and expenses:
 
 
 
 
 
 
Cost of revenue (1)
 
113,610

 
133,821

 
140,417

Research and development (1)
 
18,375

 
24,849

 
25,192

Sales and marketing (1)
 
49,814

 
55,465

 
57,359

General and administrative (1)
 
67,477

 
79,128

 
71,150

Depreciation and amortization
 
70,111

 
87,683

 
87,805

Total costs and expenses
 
319,387

 
380,946

 
381,923

Income from operations
 
42,813

 
27,157

 
39,124

Other income (expense):
 
 
 
 
 
 
Interest expense
 
(940
)
 
(656
)
 
(495
)
Interest and other income (expense)
 
199

 
405

 
265

Total other income (expense)
 
(741
)
 
(251
)
 
(230
)
Income before income taxes
 
42,072

 
26,906

 
38,894

Income taxes
 
14,811

 
6,108

 
13,448

Net income
 
$
27,261

 
$
20,798

 
$
25,446

 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
Basic
 
$
0.20

 
$
0.15

 
$
0.18

Diluted
 
$
0.19

 
$
0.14

 
$
0.18

 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
 
 
Basic
 
137,742

 
139,875

 
141,048

Diluted
 
143,177

 
144,024

 
143,815


(1)
As previously reported in the 10-Q filing for the three months ended March 31, 2013, certain reclassifications have been made to prior period amounts in order to conform to the current period's presentation. For more information, refer to our Form 10-Q for the quarter ended March 31, 2014.



- 4 -



Consolidated Balance Sheets
(In thousands)
December 31, 2013
 
March 31, 2014
 
 
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
259,733

 
$
313,835

Accounts receivable, net of allowance for doubtful accounts and customer credits of $3,891 as of December 31, 2013 and $4,548 as of March 31, 2014
123,898

 
118,507

Deferred income taxes
12,637

 
11,592

Prepaid expenses
30,782

 
27,175

Other current assets
11,918

 
12,277

Total current assets
438,968

 
483,386

 
 
 
 
Property and equipment, net
890,776

 
925,136

Goodwill
81,084

 
81,084

Intangible assets, net
23,880

 
21,863

Other non-current assets
57,089

 
55,480

Total assets
$
1,491,797

 
$
1,566,949

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
122,047

 
$
148,180

Accrued compensation and benefits
62,459

 
57,316

Income and other taxes payable
11,388

 
18,927

Current portion of deferred revenue
22,868

 
21,550

Current portion of capital lease obligations
37,885

 
31,462

Current portion of debt
1,861

 
1,888

Total current liabilities
258,508

 
279,323

 
 
 
 
Non-current liabilities:
 
 
 
Deferred revenue
3,662

 
2,935

Capital lease obligations
25,048

 
19,905

Finance lease obligations for assets under construction

 
17,604

Debt
124

 
71

Deferred income taxes
69,729

 
61,282

Deferred rent
43,046

 
45,377

Other liabilities
36,268

 
40,440

Total liabilities
436,385

 
466,937

 
 
 
 
COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
Stockholders' equity:
 
 
 
Common stock
141

 
142

Additional paid-in capital
636,660

 
652,994

Accumulated other comprehensive loss
(4,536
)
 
(1,717
)
Retained earnings
423,147

 
448,593

Total stockholders’ equity
1,055,412

 
1,100,012

Total liabilities and stockholders’ equity
$
1,491,797

 
$
1,566,949


- 5 -



Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
(in thousands)
March 31,
2013
 
December 31,
2013
 
March 31,
2014
Cash Flows From Operating Activities
 
 
 
 
 
Net income
$
27,261

 
$
20,798

 
$
25,446

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
70,111

 
87,683

 
87,805

Loss on disposal of equipment, net
240

 
100

 
228

Provision for bad debts and customer credits
1,060

 
655

 
1,813

Deferred income taxes
6,553

 
(12,407
)
 
(10,119
)
Deferred rent
3,965

 
2,279

 
2,256

Share-based compensation expense
12,183

 
17,188

 
12,732

Excess tax benefits from share-based compensation arrangements
(4,299
)
 
(16,156
)
 
(15,100
)
Changes in certain assets and liabilities:
 
 
 
 
 
Accounts receivable
(6,268
)
 
(10,344
)
 
3,870

Prepaid expenses and other current assets
(5,637
)
 
6,290

 
3,337

Accounts payable and accrued expenses
3,062

 
8,355

 
30,251

Deferred revenue
1,242

 
4,176

 
(2,110
)
All other operating activities
4,320

 
901

 
1,250

Net cash provided by operating activities
113,793

 
109,518

 
141,659

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Purchases of property and equipment
(105,541
)
 
(126,723
)
 
(84,953
)
Acquisitions, net of cash acquired
(6,203
)
 
(3,727
)
 

All other investing activities
8

 
110

 
455

Net cash used in investing activities
(111,736
)
 
(130,340
)
 
(84,498
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Principal payments of capital leases
(18,938
)
 
(14,652
)
 
(12,586
)
Principal payments of notes payable
(51
)
 
(52
)
 
(52
)
Payments for deferred acquisition obligations
(1,179
)
 
(57
)
 
(57
)
Receipt of Texas Enterprise Fund grant

 

 
5,500

Common shares withheld for employee withholding taxes

 

 
(13,620
)
Proceeds from employee stock plans
1,714

 
8,971

 
2,122

Excess tax benefits from share-based compensation arrangements
4,299

 
16,156

 
15,100

Net cash provided by (used in) financing activities
(14,155
)
 
10,366

 
(3,593
)
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1,336
)
 
194

 
534

 
 
 
 
 
 
Increase (decrease) in cash and cash equivalents
(13,434
)
 
(10,262
)
 
54,102

 
 
 
 
 
 
Cash and cash equivalents, beginning of period
292,061

 
269,995

 
259,733

 
 
 
 
 
 
Cash and cash equivalents, end of period
$
278,627

 
$
259,733

 
$
313,835

 
 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
 
Non-cash purchases of property and equipment
$
19,858

 
$
(4,116
)
 
$
15,741



- 6 -



Key Metrics - Quarter to Date
(Unaudited)
 
Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server)
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
Growth
 
 
 
 
 
 
 
 
 
Dedicated cloud, net revenue
$
271,311

 
$
276,845

 
$
280,215

 
$
291,265

 
$
299,689

Public cloud, net revenue
$
90,889

 
$
99,002

 
$
108,421

 
$
116,838

 
$
121,358

Net revenue
$
362,200

 
$
375,847

 
$
388,636

 
$
408,103

 
$
421,047

Revenue growth (year over year)
20.2
 %
 
17.8
 %
 
15.7
 %
 
15.6
 %
 
16.2
 %
 
 
 
 
 
 
 
 
 
 
Net upgrades (monthly average)
0.9
 %
 
1.5
 %
 
1.5
 %
 
1.1
 %
 
0.9
 %
Churn (monthly average)
-0.8
 %
 
-0.8
 %
 
-0.8
 %
 
-0.7
 %
 
-0.6
 %
Growth in installed base (monthly average) (2)
0.1
 %
 
0.7
 %
 
0.7
 %
 
0.4
 %
 
0.3
 %
 
 
 
 
 
 
 
 
 
 
Number of employees (Rackers) at period end
5,043
 
5,272
 
5,450
 
5,651
 
5,743
Number of servers deployed at period end
94,122
 
98,884
 
101,967
 
103,886
 
106,229
Average monthly revenue per server
$
1,308

 
$
1,298

 
$
1,290

 
$
1,322

 
$
1,336

 
 
 
 
 
 
 
 
 
 
Profitability
 
 
 
 
 
 
 
 
 
Income from operations
$
42,813

 
$
35,404

 
$
27,762

 
$
27,157

 
$
39,124

Depreciation and amortization
$
70,111

 
$
74,460

 
$
80,753

 
$
87,683

 
$
87,805

Share-based compensation expense
 
 
 
 
 
 
 
 
 
Cost of revenue
$
2,519

 
$
2,735

 
$
3,453

 
$
3,877

 
$
3,791

Research and development
$
1,528

 
$
1,813

 
$
2,306

 
$
2,521

 
$
2,780

Sales and marketing
$
1,658

 
$
1,744

 
$
2,149

 
$
1,766

 
$
2,091

General and administrative
$
6,478

 
$
7,023

 
$
9,051

 
$
9,024

 
$
4,070

Total share-based compensation expense
$
12,183

 
$
13,315

 
$
16,959

 
$
17,188

 
$
12,732

Adjusted EBITDA (1)
$
125,107

 
$
123,179

 
$
125,474

 
$
132,028

 
$
139,661

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA margin
34.5
 %
 
32.8
 %
 
32.3
 %
 
32.4
 %
 
33.2
 %
 
 
 
 
 
 
 
 
 
 
Operating income margin
11.8
 %
 
9.4
 %
 
7.1
 %
 
6.7
 %
 
9.3
 %
 
 
 
 
 
 
 
 
 
 
Income from operations
$
42,813

 
$
35,404

 
$
27,762

 
$
27,157

 
$
39,124

Effective tax rate
35.2
 %
 
34.7
 %
 
40.7
 %
 
22.7
 %
 
34.6
 %
Net operating profit after tax (NOPAT) (1)
$
27,743

 
$
23,119

 
$
16,463

 
$
20,992

 
$
25,587

NOPAT margin
7.7
 %
 
6.2
 %
 
4.2
 %
 
5.1
 %
 
6.1
 %
 
 
 
 
 
 
 
 
 
 
Capital efficiency and returns
 
 
 
 
 
 
 
 
 
Interest bearing debt
$
105,807

 
$
88,434

 
$
72,579

 
$
64,918

 
$
53,326

Stockholders' equity
$
879,035

 
$
933,897

 
$
988,708

 
$
1,055,412

 
$
1,100,012

Less: Excess cash
$
(235,163
)
 
$
(217,950
)
 
$
(223,359
)
 
$
(210,761
)
 
$
(263,309
)
Capital base
$
749,679

 
$
804,381

 
$
837,928

 
$
909,569

 
$
890,029

Average capital base
$
734,493

 
$
777,030

 
$
821,155

 
$
873,749

 
$
899,799

Capital turnover (annualized)
1.97
 
1.93
 
1.89
 
1.87
 
1.87
 
 
 
 
 
 
 
 
 
 
Return on capital (annualized) (1)
15.1
 %
 
11.9
 %
 
8.0
 %
 
9.6
 %
 
11.4
 %

- 7 -



 
Three Months Ended
(Dollar amounts in thousands, except average monthly revenue per server)
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
Capital expenditures
 
 
 
 
 
 
 
 
 
Cash purchases of property and equipment
$
105,541

 
$
119,836

 
$
100,496

 
$
126,723

 
$
84,953

Non-cash purchases of property and equipment (3)
$
19,858

 
$
(13,311
)
 
$
17,062

 
$
(4,116
)
 
$
15,741

Total capital expenditures
$
125,399

 
$
106,525

 
$
117,558

 
$
122,607

 
$
100,694

 
 
 
 
 
 
 
 
 
 
Customer gear
$
85,690

 
$
73,022

 
$
73,784

 
$
65,291

 
$
60,688

Data center build outs
$
13,228

 
$
10,085

 
$
12,441

 
$
22,524

 
$
10,963

Office build outs
$
7,860

 
$
1,683

 
$
6,700

 
$
14,860

 
$
9,212

Capitalized software and other projects
$
18,621

 
$
21,735

 
$
24,633

 
$
19,932

 
$
19,831

Total capital expenditures
$
125,399

 
$
106,525

 
$
117,558

 
$
122,607

 
$
100,694

 
 
 
 
 
 
 
 
 
 
Infrastructure capacity and utilization
 
 
 
 
 
 
 
 
 
Megawatts under contract at period end
59.4

 
59.6

 
60.0

 
60.0

 
58.1

Megawatts available for use at period end
38.8

 
44.4

 
46.9

 
46.9

 
45.3

Megawatts utilized at period end
24.7

 
26.0

 
27.0

 
27.4

 
28.1

Annualized net revenue per average Megawatt of power utilized
$
59,499

 
$
59,305

 
$
58,662

 
$
60,015

 
$
60,691


(1)
See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures below.
(2)
Due to rounding, totals may not equal the sum of the line items in the table above.
(3)
Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.



- 8 -



Consolidated Quarterly Statements of Income
(Unaudited)
 
Three Months Ended
(In thousands)
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
Net revenue
$
362,200

 
$
375,847

 
$
388,636

 
$
408,103

 
$
421,047

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue
113,610

 
117,658

 
127,404

 
133,821

 
140,417

Research and development
18,375

 
23,216

 
23,773

 
24,849

 
25,192

Sales and marketing
49,814

 
52,269

 
50,869

 
55,465

 
57,359

General and administrative
67,477

 
72,840

 
78,075

 
79,128

 
71,150

Depreciation and amortization
70,111

 
74,460

 
80,753

 
87,683

 
87,805

Total costs and expenses
319,387

 
340,443

 
360,874

 
380,946

 
381,923

Income from operations
42,813

 
35,404

 
27,762

 
27,157

 
39,124

Other income (expense):
 
 
 

 
 
 
 
 
 
Interest expense
(940
)
 
(833
)
 
(689
)
 
(656
)
 
(495
)
Interest and other income (expense)
199

 
(303
)
 
440

 
405

 
265

Total other income (expense)
(741
)
 
(1,136
)
 
(249
)
 
(251
)
 
(230
)
Income before income taxes
42,072

 
34,268

 
27,513

 
26,906

 
38,894

Income taxes
14,811

 
11,901

 
11,202

 
6,108

 
13,448

Net income
$
27,261

 
$
22,367

 
$
16,311

 
$
20,798

 
$
25,446

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
(Percent of net revenue)
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
Net revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue
31.4
 %
 
31.3
 %
 
32.8
 %
 
32.8
 %
 
33.3
 %
Research and development
5.1
 %
 
6.2
 %
 
6.1
 %
 
6.1
 %
 
6.0
 %
Sales and marketing
13.8
 %
 
13.9
 %
 
13.1
 %
 
13.6
 %
 
13.6
 %
General and administrative
18.6
 %
 
19.4
 %
 
20.1
 %
 
19.4
 %
 
16.9
 %
Depreciation and amortization
19.4
 %
 
19.8
 %
 
20.8
 %
 
21.5
 %
 
20.9
 %
Total costs and expenses
88.2
 %
 
90.6
 %
 
92.9
 %
 
93.3
 %
 
90.7
 %
Income from operations
11.8
 %
 
9.4
 %
 
7.1
 %
 
6.7
 %
 
9.3
 %
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(0.3
)%
 
(0.2
)%
 
(0.2
)%
 
(0.2
)%
 
(0.1
)%
Interest and other income (expense)
0.1
 %
 
(0.1
)%
 
0.1
 %
 
0.1
 %
 
0.1
 %
Total other income (expense)
(0.2
)%
 
(0.3
)%
 
(0.1
)%
 
(0.1
)%
 
(0.1
)%
Income before income taxes
11.6
 %
 
9.1
 %
 
7.1
 %
 
6.6
 %
 
9.2
 %
Income taxes
4.1
 %
 
3.2
 %
 
2.9
 %
 
1.5
 %
 
3.2
 %
Net income
7.5
 %
 
6.0
 %
 
4.2
 %
 
5.1
 %
 
6.0
 %
Due to rounding, totals may not equal the sum of the line items in the table above.

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(1) 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 table below:

 
Three Months Ended
(Dollars in thousands)
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
Net revenue
$
362,200

 
$
375,847

 
$
388,636

 
$
408,103

 
$
421,047

 
 
 
 
 
 
 
 
 
 
Income from operations
$
42,813

 
$
35,404

 
$
27,762

 
$
27,157

 
$
39,124

 
 
 
 
 
 
 
 
 
 
Net income
$
27,261

 
$
22,367

 
$
16,311

 
$
20,798

 
$
25,446

   Plus: Income taxes
14,811

 
11,901

 
11,202

 
6,108

 
13,448

   Plus: Total other (income) expense
741

 
1,136

 
249

 
251

 
230

   Plus: Depreciation and amortization
70,111

 
74,460

 
80,753

 
87,683

 
87,805

   Plus: Share-based compensation expense
12,183

 
13,315

 
16,959

 
17,188

 
12,732

Adjusted EBITDA
$
125,107

 
$
123,179

 
$
125,474

 
$
132,028

 
$
139,661

 
 
 
 
 
 
 
 
 
 
Operating income margin
11.8
%
 
9.4
%
 
7.1
%
 
6.7
%
 
9.3
%
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA margin
34.5
%
 
32.8
%
 
32.3
%
 
32.4
%
 
33.2
%

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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); calculated on a quarterly basis.

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 Comprehensive 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 Comprehensive 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.


- 11 -



See our reconciliation of the calculation of ROC to the calculation of return on assets in the table below:
 
Three Months Ended
(Dollars in thousands)
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
Income from operations
$
42,813

 
$
35,404

 
$
27,762

 
$
27,157

 
$
39,124

Effective tax rate
35.2
%
 
34.7
%
 
40.7
%
 
22.7
%
 
34.6
%
Net operating profit after tax (NOPAT)
$
27,743

 
$
23,119

 
$
16,463

 
$
20,992

 
$
25,587

 
 
 
 
 
 
 
 
 
 
Net income
$
27,261

 
$
22,367

 
$
16,311

 
$
20,798

 
$
25,446

 
 
 
 
 
 
 
 
 
 
Total assets at period end
$
1,348,350

 
$
1,377,928

 
$
1,451,769

 
$
1,491,797

 
$
1,566,949

Less: Excess cash
(235,163
)
 
(217,950
)
 
(223,359
)
 
(210,761
)
 
(263,309
)
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable
(197,686
)
 
(178,552
)
 
(213,268
)
 
(195,894
)
 
(224,423
)
Less: Deferred revenue (current and non-current)
(21,811
)
 
(22,636
)
 
(22,211
)
 
(26,530
)
 
(24,485
)
Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction
(144,011
)
 
(154,409
)
 
(155,003
)
 
(149,043
)
 
(164,703
)
Capital base
$
749,679

 
$
804,381

 
$
837,928

 
$
909,569

 
$
890,029

 
 
 
 
 
 
 
 
 
 
Average total assets
$
1,321,951

 
$
1,363,139

 
$
1,414,849

 
$
1,471,783

 
$
1,529,373

Average capital base
$
734,493

 
$
777,030

 
$
821,155

 
$
873,749

 
$
899,799

 
 
 
 
 
 
 
 
 
 
Return on assets (annualized)
8.2
%
 
6.6
%
 
4.6
%
 
5.7
%
 
6.7
%
Return on capital (annualized)
15.1
%
 
11.9
%
 
8.0
%
 
9.6
%
 
11.4
%

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
 
Three Months Ended
(In thousands)
March 31, 2013
 
March 31, 2014
Adjusted EBITDA
$
125,107

 
$
139,661

Non-cash deferred rent
3,965

 
2,256

Total capital expenditures
(125,399
)
 
(100,694
)
Cash payments for interest, net
(1,051
)
 
(432
)
Cash payments for income taxes, net
(3,839
)
 
(886
)
Adjusted free cash flow
$
(1,217
)
 
$
39,905



- 12 -