Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)



R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016.



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission file number 001-34143

RACKSPACE HOSTING, INC.

(Exact name of registrant as specified in its charter)



Delaware		74-3016523
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1 Fanatical Place

City of Windcrest

San Antonio, Texas 78218

(Address of principal executive offices, including zip code)

(210) 312-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer," "accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer R	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R

On August 4, 2016, 125,805,220 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

RACKSPACE HOSTING, INC.

TABLE OF CONTENTS



Part I - Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of December 31, 2015 and June 30, 2016 (unaudited)	3
	Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2016	4
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2016	5
	Notes to the Unaudited Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33

Part II - Other Information
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 6.	Exhibits	35

Signatures		36

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

References to “we,” “our,” “our company,” “us,” “the company,” “Rackspace Hosting,” or “Rackspace” refer to Rackspace Hosting, Inc. and its consolidated subsidiaries. We have made forward-looking statements in this Quarterly Report on Form 10-Q that are subject to risks and uncertainties. Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are subject to the “safe harbor” created by those sections. The forward-looking statements in this report are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “aspires,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “predicts,” “projects,” “seeks,” “should,” “will” or “would” or the negative of these terms and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements, including our expectation of deceleration of the year-over-year growth rate. We discuss in greater detail many of these risks, uncertainties and other factors in Part I, Item 1A "Risk Factors," contained in our Annual Report on Form 10-K/A for the year ended December 31, 2015. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in “Risk Factors,” within our Annual Report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of the events described in “Risk Factors” within our Annual Report and elsewhere in this report could harm our business.

Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this document completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume 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.

TRADEMARKS AND SERVICE MARKS

Rackspace^®and Fanatical Support^® are service marks of Rackspace US, Inc. registered in the United States and other countries. Other trademarks and tradenames appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ tradenames, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

CONSOLIDATED BALANCE SHEETS



(In millions, except per share data)	December 31, 2015			June 30, 2016
				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	484.7		$	544.3
Accounts receivable, net of allowance for doubtful accounts and customer credits of $7.3 as of December 31, 2015 and $8.0 as of June 30, 2016	174.4			168.6
Prepaid expenses	46.6			45.1
Other current assets	12.7			14.6
Total current assets	718.4			772.6

Property and equipment, net	1,148.0			1,071.6
Goodwill	81.1			80.4
Intangible assets, net	9.1			4.8
Other non-current assets	57.6			67.4
Total assets	$	2,014.2		$	1,996.8

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	136.3		$	155.6
Accrued compensation and benefits	57.3			54.7
Income and other taxes payable	12.0			8.8
Deferred revenue	29.6			28.6
Capital lease obligations	1.7			0.5
Total current liabilities	236.9			248.2

Non-current liabilities:
Debt	492.4			492.8
Finance lease obligations for build-to-suit leases	164.3			153.0
Deferred income taxes	54.8			60.9
Deferred rent	49.5			49.3
Deferred revenue	1.6			1.6
Capital lease obligations	0.2			0.3
Other liabilities	46.4			33.2
Total liabilities	1,046.1			1,039.3

Commitments and Contingencies

Stockholders' equity:
Common stock, $0.001 par value per share: 300.0 shares authorized; 130.9 shares issued and outstanding as of December 31, 2015; 125.8 shares issued and outstanding as of June 30, 2016	0.1			0.1
Additional paid-in capital	834.5			859.7
Accumulated other comprehensive loss	(36.2		)	(62.8		)
Retained earnings	169.7			160.5
Total stockholders’ equity	968.1			957.5
Total liabilities and stockholders’ equity	$	2,014.2		$	1,996.8

See accompanying notes to the unaudited consolidated financial statements.

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions, except per share data)	2015			2016			2015			2016
Net revenue	$	489.4		$	523.6		$	969.6		$	1,041.7
Costs and expenses:
Cost of revenue	165.4			171.5			328.2			351.9
Research and development	33.2			26.9			65.2			54.5
Sales and marketing	64.4			63.8			123.4			127.5
General and administrative	86.5			92.5			173.1			178.2
Depreciation and amortization	97.7			104.6			194.6			208.6
Total costs and expenses	447.2			459.3			884.5			920.7
Gain on sale	—			—			—			24.5
Income from operations	42.2			64.3			85.1			145.5
Other income (expense):
Interest expense	(1.9		)	(10.3		)	(2.3		)	(20.8		)
Interest and other income (expense)	1.4			0.4			(0.6		)	1.5
Total other income (expense)	(0.5		)	(9.9		)	(2.9		)	(19.3		)
Income before income taxes	41.7			54.4			82.2			126.2
Income taxes	13.4			18.6			26.4			41.6
Net income	$	28.3		$	35.8		$	55.8		$	84.6

Other comprehensive income, net of tax
Foreign currency translation adjustments	$	12.4		$	(19.6	)	$	1.2		$	(26.6	)
Other comprehensive income (loss)	12.4			(19.6		)	1.2			(26.6		)
Comprehensive income	$	40.7		$	16.2		$	57.0		$	58.0

Net income per share
Basic	$	0.20		$	0.28		$	0.39		$	0.66
Diluted	$	0.20		$	0.28		$	0.39		$	0.66

Weighted average number of shares outstanding
Basic	142.4			126.1			141.9			128.2
Diluted	144.5			127.0			144.4			129.0

See accompanying notes to the unaudited consolidated financial statements.

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended June 30,
(In millions)	2015			2016
Cash Flows From Operating Activities
Net income	$	55.8		$	84.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	194.6			208.6
Deferred income taxes	(30.3		)	4.9
Share-based compensation expense	40.4			36.2
Excess tax benefits from share-based compensation arrangements	(38.8		)	(26.0		)
Gain on sale	—			(24.5		)
Other operating activities	5.0			6.3
Changes in operating assets and liabilities:
Accounts receivable	(8.3		)	(3.0		)
Prepaid expenses and other current assets	(7.3		)	(0.9		)
Accounts payable, accrued expenses, and other current liabilities	42.9			41.2
Deferred revenue	7.0			(0.4		)
Deferred rent	—			(0.5		)
Other non-current assets and liabilities	7.2			(5.4		)
Net cash provided by operating activities	268.2			321.1
Cash Flows From Investing Activities
Purchases of property and equipment	(197.2		)	(159.6		)
Proceeds from sale	—			27.0
Other investing activities	1.4			(13.9		)
Net cash used in investing activities	(195.8		)	(146.5		)
Cash Flows From Financing Activities
Repayments of debt	(25.1		)	—
Payments for debt issuance costs	—			(0.4		)
Principal payments of capital and build-to-suit leases	(10.0		)	(1.4		)
Payments for deferred acquisition obligations	(0.1		)	—
Repurchase of common stock	—			(133.2		)
Shares of common stock withheld for employee taxes	—			(0.5		)
Proceeds from employee stock plans	28.5			2.9
Excess tax benefits from share-based compensation arrangements	38.8			26.0
Net cash provided by (used in) financing activities	32.1			(106.6		)
Effect of exchange rate changes on cash and cash equivalents	(0.9		)	(8.4		)
Increase in cash and cash equivalents	103.6			59.6
Cash and cash equivalents, beginning of period	213.5			484.7
Cash and cash equivalents, end of period	$	317.1		$	544.3

Supplemental Cash Flow Information
Cash payments for interest, net of amount capitalized	$	1.2		$	4.0
Cash payments for income taxes, net of refunds	$	13.5		$	11.6

Non-cash Investing and Financing Activities
Acquisition of property and equipment by capital leases	$	0.5		$	0.2
Increase in property and equipment in accounts payable and accrued expenses	44.1			1.1
Non-cash purchases of property and equipment	$	44.6		$	1.3

Additional finance lease obligations for build-to-suit leases and other	$	47.3		$	2.9

See accompanying notes to the unaudited consolidated financial statements.

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RACKSPACE HOSTING, INC. AND SUBSIDIARIES—

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies

Nature of Operations

As used in this report, the terms “Rackspace,” “Rackspace Hosting,” “we,” “our company,” “the company,” “us,” or “our” refer to Rackspace Hosting, Inc. and its subsidiaries. Our operations began in 1998 as a limited partnership, and Rackspace Hosting, Inc. was incorporated in Delaware in March 2000. We are a provider of managed cloud services in the business information technology ("IT") market and serve our customers from our data centers on four continents. We help customers tap the power of cloud computing by delivering world-class service on the world's leading technology platforms. We are experts in IT, so our customers do not have to be.

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of Rackspace Hosting, Inc. and our wholly-owned subsidiaries, which include, among others, Rackspace US, Inc., our domestic operating entity, and Rackspace Limited, our United Kingdom operating entity. Intercompany transactions and balances have been eliminated in consolidation.

Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated other comprehensive income (loss). The income tax expense allocated to foreign currency translation adjustments during the three and six months ended June 30, 2016 was $0.2 million and $0.3 million, respectively. There was no income tax expense allocated during the three or six months ended June 30, 2015.

Unaudited Interim Financial Information

The accompanying consolidated financial statements as of June 30, 2016, and for the three and six months ended June 30, 2015 and 2016, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements, and certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2015 included in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on June 13, 2016 (the "Amended 2015 Annual Consolidated Financial Statements"). The unaudited interim consolidated financial statements have been prepared on the same basis as the Amended 2015 Annual Consolidated Financial Statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of our financial position as of June 30, 2016, our results of operations for the three and six months ended June 30, 2015 and 2016, and our cash flows for the six months ended June 30, 2015 and 2016.

The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2016, or for any other interim period, or for any other future year.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and customer credits, property and equipment, fair values of intangible assets and goodwill, useful lives of intangible assets, fair value of share-based compensation, contingencies, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from our estimates.

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Significant Accounting Policies and Estimates

Our Amended 2015 Annual Consolidated Financial Statements include an additional discussion of the significant accounting policies and estimates used in the preparation of our consolidated financial statements. There were no material changes to our significant accounting policies and estimates during the six months ended June 30, 2016.

Revision to Prior Period Financial Statements

As described in our Amended 2015 Annual Consolidated Financial Statements, we have retrospectively revised our financial statements for all periods presented to reflect the correction of an immaterial error for under-reported license expense and the related income tax effect. The impact of this revision on the consolidated statements of comprehensive income for the three and six months ended June 30, 2015 and the consolidated statement of cash flows for the six months ended June 30, 2015 is as follows:



	Three Months Ended June 30, 2015
(In millions, except per share data)	As Previously Reported		Adjustments			As Revised
Consolidated Statement of Comprehensive Income:
Cost of revenue	$	163.9	$	1.5		$	165.4
Income from operations	43.7		(1.5		)	42.2
Income before income taxes	43.2		(1.5		)	41.7
Income taxes	14.0		(0.6		)	13.4
Net income	29.2		(0.9		)	28.3
Comprehensive income	$	41.6	$	(0.9	)	$	40.7
Net income per share
Basic	$	0.20	$	—		$	0.20
Diluted	$	0.20	$	—		$	0.20



	Six Months Ended June 30, 2015
(In millions, except per share data)	As Previously Reported		Adjustments			As Revised
Consolidated Statement of Comprehensive Income:
Cost of revenue	$	325.2	$	3.0		$	328.2
Income from operations	88.1		(3.0		)	85.1
Income before income taxes	85.2		(3.0		)	82.2
Income taxes	27.6		(1.2		)	26.4
Net income	57.6		(1.8		)	55.8
Comprehensive income	$	58.8	$	(1.8	)	$	57.0
Net income per share
Basic	$	0.41	$	(0.02	)	$	0.39
Diluted	$	0.40	$	(0.01	)	$	0.39



	Six Months Ended June 30, 2015
(In millions)	As Previously Reported			Adjustments			As Revised
Consolidated Statement of Cash Flows:
Net income	$	57.6		$	(1.8	)	$	55.8
Deferred income taxes	(29.1		)	(1.2		)	(30.3		)
Other non-current assets and liabilities	$	4.2		$	3.0		$	7.2

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During the second quarter of 2016, we reached an agreement with the license vendor to settle our liability for the under-reported license expense with a cash payment of $10.5 million. Under the terms of the agreement, the vendor legally released us from any additional claims or obligations with respect to certain software license usage for the prior impacted periods. Upon payment in June 2016, we recorded a $4.7 million benefit to license expense within "Cost of revenue" in the consolidated statement of comprehensive income, reflecting the difference between the cash payment of $10.5 million and the total contractual liability of $15.2 million we had accrued as of March 31, 2016.

Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard on revenue recognition. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires capitalization of incremental costs to obtain a contract and significantly expanded quantitative and qualitative disclosures. In August 2015, the FASB issued guidance which deferred the effective date by one year. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual periods beginning after December 15, 2016. We intend to adopt the standard on January 1, 2018. Upon adoption, the new guidance will be applied retrospectively using one of two methods. One method is to apply the guidance retrospectively to each prior period presented with practical expedients available. The second method is to apply the guidance retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. We are continuing to evaluate our method of adoption and the impact this new accounting standard will have on our consolidated financial statements.

In January 2016, the FASB issued a new standard on the recognition and measurement of financial assets and financial liabilities that requires entities to measure most equity investments, except those accounted for under the equity method, at fair value and recognize changes in fair value in net income. The standard will become effective for Rackspace on January 1, 2018 and will be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this new accounting standard will have on our consolidated financial statements.

In February 2016, the FASB issued a new standard on lease accounting that will require lessees to recognize all leases with a term greater than 12 months on the balance sheet, as a lease liability and right-of-use asset. Lease classification will determine whether a lease is reported as a financing transaction in the income statement and statement of cash flows. Additionally, the new standard substantially changes sale-leaseback accounting and replaces current build-to-suit lease accounting guidance. The standard will become effective for Rackspace on January 1, 2019. We anticipate this standard will have a material impact on our consolidated balance sheets, and we are currently evaluating its impact.

In March 2016, the FASB issued guidance that simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This new guidance will become effective for Rackspace on January 1, 2017. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In June 2016, the FASB issued a new standard that requires financial assets measured at amortized cost to be presented at the net amount expected to be collected using an allowance for expected credit losses, to be estimated by management based on historical experience, current conditions, and reasonable and supportable forecasts. The movement from an incurred loss model, required under current GAAP, to an expected loss model will result in the timelier recording of credit losses on financial instruments. This new guidance will become effective for Rackspace on January 1, 2020, with early adoption permitted for annual and interim periods beginning after December 15, 2018, and will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

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2. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions, except per share data)	2015		2016		2015		2016
Basic net income per share:
Net income	$	28.3	$	35.8	$	55.8	$	84.6
Weighted average shares outstanding:
Common stock	142.4		126.1		141.9		128.2
Number of shares used in per share computations	142.4		126.1		141.9		128.2
Net income per share	$	0.20	$	0.28	$	0.39	$	0.66

Diluted net income per share:
Net income	$	28.3	$	35.8	$	55.8	$	84.6
Weighted average shares outstanding:
Common stock	142.4		126.1		141.9		128.2
Stock options, awards and employee share purchase plans	2.1		0.9		2.5		0.8
Number of shares used in per share computations	144.5		127.0		144.4		129.0
Net income per share	$	0.20	$	0.28	$	0.39	$	0.66

We excluded 2.8 million and 5.9 million potential common shares from the computation of dilutive net income per share for the three months ended June 30, 2015 and 2016, respectively, and 2.6 million and 7.1 million potential shares for the six months ended June 30, 2015 and 2016, respectively, because the effect would have been anti-dilutive.

3. Property and Equipment, net

Property and equipment, net, at December 31, 2015 and June 30, 2016 consisted of the following:



(In millions)	December 31, 2015			June 30, 2016
Computers and equipment	$	1,787.2		$	1,827.3
Computer software	370.6			391.9
Furniture and fixtures	63.5			62.8
Buildings and leasehold improvements	355.7			337.5
Land	28.1			27.0
Property and equipment, at cost	2,605.1			2,646.5
Less: Accumulated depreciation and amortization	(1,539.7		)	(1,667.0		)
Work in process	82.6			92.1
Property and equipment, net	$	1,148.0		$	1,071.6

The composition of the work in process balance was as follows:



(In millions)	December 31, 2015		June 30, 2016
Office facility build outs	$	11.5	$	12.0
Data center build outs	49.0		47.0
Capitalized software	22.1		33.1
Work in process	$	82.6	$	92.1

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4. Goodwill

As described in Note 12, "Segment Information," beginning in the first quarter of 2016, we changed our presentation of segment information to reflect changes in the way our business is managed. This resulted in a change to our operating segments and reporting units. We allocated goodwill to our new reporting units using a relative fair value approach.

During the first quarter of 2016, we reduced goodwill by $0.7 million in connection with the sale of certain assets of a non-strategic product line as described in Note 11, "Gain on Sale." There were no additional changes to goodwill during 2016.

As of June 30, 2016, the goodwill balance by operating segment was as follows:



(In millions)	June 30, 2016
Americas	$	58.1
International	22.3
Total goodwill	$	80.4

5. Cost-Method Investments

We have several direct investments accounted for under the cost method. The aggregate carrying amount of these investments, which are recorded as "Other non-current assets" in the consolidated balance sheets, was $11.6 million and $22.8 million as of December 31, 2015 and June 30, 2016, respectively. We have determined that it is not practicable to estimate the fair value of these investments. If we identify events or changes in circumstances that may have a significant adverse effect on the fair value of these investments, we will then estimate their fair values and determine if any decline in the fair value of the investments below carrying value is other-than-temporary. No events or circumstances indicating a potential impairment were identified as of June 30, 2016.

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6. Debt

Debt consisted of:



	December 31, 2015
(In millions)	Revolving Credit Facility		Senior Notes due 2024			Total
Principal balance	$	—	$	500.0		$	500.0
Unamortized debt issuance costs	—		(7.6		)	(7.6		)
Total debt	—		492.4			492.4
Less: current portion of debt	—		—			—
Debt, excluding current portion	$	—	$	492.4		$	492.4



	June 30, 2016
(In millions)	Revolving Credit Facility		Senior Notes due 2024			Total
Principal balance	$	—	$	500.0		$	500.0
Unamortized debt issuance costs	—		(7.2		)	(7.2		)
Total debt	—		492.8			492.8
Less: current portion of debt	—		—			—
Debt, excluding current portion	$	—	$	492.8		$	492.8

Revolving Credit Facility

We are party to a $200 million unsecured revolving credit facility (the "Revolving Credit Facility"). As of June 30, 2016, we had no outstanding borrowings under the Revolving Credit Facility and $0.4 million of undrawn letters of credit. As of the same date, we were in compliance with all of the covenants under this facility.

Senior Notes due 2024

As of June 30, 2016, the outstanding principal amount of the Senior Notes due 2024 (the "Senior Notes") was $500 million. The Senior Notes will mature on January 15, 2024 and bear interest at a rate of 6.5% per year, payable semi-annually on January 15 and July 15 of each year. The first interest payment was made on July 15, 2016. As of June 30, 2016, we were in compliance with all covenants under the Senior Notes indenture.

The fair value of the Senior Notes as of June 30, 2016 was $493.8 million, based on quoted market prices for identical assets that are traded in over-the-counter secondary markets that are not considered active. The fair value of the Senior Notes is classified as Level 2 in the fair value hierarchy.

7. Contingencies

We have contingent liabilities resulting from various litigation, claims and commitments. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. The amount that will ultimately be paid related to these matters may differ from the recorded accruals, and the timing of such payments is uncertain.

We are a party to various claims that certain of our services and technologies infringe the intellectual property rights of others. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, products, or services, and may also cause us to change our business practices and require development of non-infringing products or technologies, which could result in a loss of revenue for us or otherwise harm our business. We have disputed the allegations in these proceedings and intend to vigorously defend ourselves in all such matters.

We cannot predict the impact, if any, that any of the matters described above may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in many of them, we cannot estimate the range of possible losses from them.

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8. Share-Based Compensation

Share-based compensation expense was recognized as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2015			2016			2015			2016
Cost of revenue	$	4.1		$	4.4		$	8.1		$	8.5
Research and development	5.7			2.4			8.9			4.6
Sales and marketing	2.8			2.8			5.5			5.4
General and administrative	7.8			8.8			17.9			17.7
Pre-tax share-based compensation	20.4			18.4			40.4			36.2
Less: Income tax benefit	(6.6		)	(6.2		)	(13.1		)	(11.9		)
Total share-based compensation expense, net of tax	$	13.8		$	12.2		$	27.3		$	24.3

As of June 30, 2016, there was $202.9 million of unrecognized compensation cost, which will be recognized using the straight-line method over a weighted average period of 2.8 years.

9. Taxes

We are subject to U.S. federal income tax and various state, local, and international income taxes in numerous jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. As such, our effective tax rate is impacted by the geographical distribution of income and mix of profits in the various jurisdictions. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file.

We expect a taxable profit in the U.S. and U.K. for the full year 2016 before consideration of excess tax benefits, and therefore we anticipate utilizing benefits of tax deductions related to share-based compensation in 2016. As a result, we have recognized an excess tax benefit in the U.S. and U.K. during the six months ended June 30, 2016.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of share-based compensation expense in an intercompany cost-sharing arrangement. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include share-based compensation from its regulations, and the Internal Revenue Service filed a notice of appeal to the Ninth Circuit of Appeals on February 19, 2016. Until a final decision has been reached, we will continue to monitor developments related to the regulation and the possible impact, if any, of those developments on the consolidated financial statements.

10. Share Repurchase Program

Our board of directors has authorized a share repurchase program under which shares may be repurchased from time to time through both open market and privately negotiated transactions. During the six months ended June 30, 2016, we repurchased $133.2 million, or 6.0 million shares, of our common stock on the open market under this program; these shares were subsequently retired. As of June 30, 2016, $500 million of the amount authorized by the board under the current program remained available for additional purchases.

11. Gain on Sale

On January 5, 2016, we completed the sale of certain assets of a non-strategic product line, consisting primarily of intellectual property with an immaterial remaining net book value, for total consideration of $27.0 million. We recorded a pre-tax gain of $24.5 million on the sale of these assets, reported within “Gain on sale” in the consolidated statement of comprehensive income for the six months ended June 30, 2016.

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12. Segment Information

Rackspace operates solely as a provider of managed cloud services in the business information technology market. Beginning in the first quarter of 2016, we have revised our reportable segments to present Americas and International. These reportable segments are the result of changes in our organization effective January 1, 2016 and represent the way we report both Net revenue and Income before income taxes, which are the primary financial metrics our chief operating decision maker ("CODM") uses to manage our business, including the allocation of resources and performance assessment. In addition, these metrics are inputs for measuring achievement in our non-equity incentive compensation plan and certain performance-vesting equity awards.

Revenue is attributed to each geographic segment based on the location of the Rackspace support team serving the customer. There are no internal revenue transactions between our segments. The Americas segment includes revenue from customers who are supported by Rackspace support teams located primarily in the U.S. and, to a lesser extent, in Latin America. The International segment includes revenue from customers who are supported by Rackspace support teams located in countries outside the U.S. and Latin America.

Direct costs, including employee-related costs of our customer support teams and data center employees, costs to lease and operate our data centers, and selling and marketing expenses are recorded by each segment. Certain expenses related to functions centrally managed by the Americas segment, such as research and development expenses, amortization of internally developed software, and many of our general and administrative expenses, are recorded by the Americas segment and are not allocated. In addition, the gain on the sale of certain assets of a non-strategic product line, as described in Note 11, "Gain on Sale," has been reflected in the Americas segment in the six months ended June 30, 2016. Segment information for total assets and capital expenditures is not presented as this information is not used by our CODM in measuring segment performance or allocating resources between segments.

Information related to our segments is as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2015		2016		2015		2016
Net revenue:
Americas	$	357.1	$	386.1	$	706.3	$	769.7
International	132.3		137.5		263.3		272.0
Total net revenue	$	489.4	$	523.6	$	969.6	$	1,041.7

Income before income taxes:
Americas	$	9.7	$	22.6	$	14.8	$	63.5
International	32.0		31.8		67.4		62.7
Total income before income taxes	$	41.7	$	54.4	$	82.2	$	126.2

Depreciation and amortization:
Americas	$	75.5	$	80.3	$	152.4	$	159.5
International	22.2		24.3		42.2		49.1
Total depreciation and amortization	$	97.7	$	104.6	$	194.6	$	208.6

13. Subsequent Event

On July 5, 2016, we entered into a definitive agreement to sell the assets, consisting primarily of intellectual property with an immaterial remaining net book value, of a non-strategic product line. We expect to enter into a transition services agreement with the buyer in connection with this sale. The sale is expected to close during the third quarter of 2016, subject to certain closing conditions. If this sale closes, we expect to recognize a pre-tax gain on the disposal of these assets in our consolidated statement of comprehensive income in the third quarter of 2016.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help readers understand our results of operations, financial condition and cash flows and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this document and with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2015.

The MD&A is organized as follows:


•	Overview - Discussion of the nature of our business and overall analysis of financial highlights and key metrics in order to provide context for the remainder of the MD&A.


•	Results of Operations - An analysis of our financial results comparing the three and six months ended June 30, 2016 and June 30, 2015.


•	Liquidity and Capital Resources - Discussion of our financial condition, sources of liquidity, changes in cash flows and capital expenditure requirements.


•	Supplemental Information - Description and reconciliation of Non-GAAP Financial Measures used throughout this MD&A and financial information and key metrics for the most recent five quarters.

This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See “Special Note Regarding Forward-Looking Statements” contained elsewhere in this document.

Overview

Description of our Business

Rackspace is the world leader in the managed cloud segment of the business information technology ("IT") market. As a global company, we sell our services in more than 120 countries and serve our customers from data centers on four continents. We help customers tap the power of cloud computing by delivering world-class service on the world's leading technology platforms. We are experts in IT, so our customers do not have to be.

We sell our services to small and medium-sized businesses, as well as large enterprises. The majority of our revenue is generated by our operations in the U.S. and U.K. Additionally, we have operations in Switzerland, Hong Kong, Australia, and Mexico. Our growth strategy includes targeting additional international customers as we continue our expansion in continental Europe, the Asia-Pacific region and Latin America.

We have two reportable segments: Americas and International. Revenue is attributed to each geographic segment based on the location of the Rackspace support team serving the customer. The Americas segment includes revenue from customers who are supported by Rackspace support teams located primarily in the U.S. and, to a lesser extent, in Latin America, and the International segment includes revenue from customers who are supported by Rackspace support teams located in countries outside the U.S. and Latin America.

Highlights from the second quarter of 2016 include:


•	Net revenue of $524 million on revenue growth of 7.0% from the second quarter of 2015;


•	We purchased and retired $66 million of our common stock through our authorized share repurchase program;


•	We announced a strategic relationship with Cloud Technology Partners to deliver professional and managed services for enterprises leveraging the leading computing platforms, including AWS and Microsoft Azure;


•	We launched our OpenStack Everywhere offering that enables customers to run a fully managed OpenStack private cloud in their data center of choice, whether it's in their own, a third-party data center, a Rackspace-supported third-party colocation facility or a Rackspace data center.

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Revision to Prior Period Financial Statements

As described in our Annual Report on Form 10-K/A for the year ended December 31, 2015 and in Item 1 of Part I, "Financial Statements - Note 1, Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies," we have retrospectively revised our financial statements for all periods presented to reflect the correction of an immaterial error for under-reported license expense and the related income tax effect.

Financial Highlights and Key Metrics

We carefully track several financial and operational metrics to monitor and manage our growth, financial performance, and capacity. Our key metrics are structured around growth, profitability, capital efficiency and infrastructure capacity and utilization.

The following discussion includes the presentation of constant currency revenue growth, Adjusted EBITDA, and Return on Capital, which are non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Other companies may calculate non-GAAP measures differently, limiting their usefulness as a comparative measure. We believe constant currency revenue growth, Adjusted EBITDA, and Return on Capital provide helpful information with respect to evaluating our performance. We have reconciled each of these non-GAAP measures to the applicable most directly comparable GAAP measure in the “Supplemental Information” section of this MD&A.

Growth



	Three Months Ended
(Dollar amounts in millions, except average monthly revenue per server)	June 30, 2015			March 31, 2016			June 30, 2016
	June 30, 2015			March 31, 2016			June 30, 2016
Net revenue	$	489.4		$	518.1		$	523.6
Revenue growth (year over year)	11.0		%	7.9		%	7.0		%
Constant currency revenue growth (year over year)	13.7		%	9.2		%	8.2		%

Number of servers deployed at period end	116,329			116,507			114,231
Average monthly revenue per server	$	1,416		$	1,472		$	1,513

Number of employees (Rackers) at period end	6,115			6,203			6,199

Total net revenue for the three months ended June 30, 2016 increased $6 million, or 1.1%, from the three months ended March 31, 2016. Net revenue growth was positively impacted by a weaker U.S. dollar relative to other foreign currencies on a sequential quarter basis. Net revenue for the three months ended June 30, 2016 would have been approximately $1 million lower had foreign exchange rates remained constant from the three months ended March 31, 2016, resulting in a constant currency revenue growth rate of 0.8%.

On a year-over-year basis, net revenue grew $34 million, or 7.0%, due, in part, to the favorable impact of a large, multi-year agreement that began to materialize in the third quarter of 2015. Net revenue for the three months ended June 30, 2016 includes the negative impact of approximately $6 million due to changes in foreign exchange rates, resulting in a constant currency growth rate of 8.2%. In addition, the sale of certain assets of a non-strategic product line in January 2016 had a negative impact on revenue of $3 million when compared to the three months ended June 30, 2015.

We had a total of 114,231 servers deployed as of June 30, 2016, a decrease of 2,098 servers from June 30, 2015 and a decrease of 2,276 servers from March 31, 2016. During the second quarter of 2016, we decommissioned approximately 3,400 servers in order to replace older and less efficient gear. The decommissioned equipment was fully depreciated and retired as of June 30, 2016.

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Profitability



	Three Months Ended
(Dollar amounts in millions, except per share amounts)	June 30, 2015			March 31, 2016			June 30, 2016
(Dollar amounts in millions, except per share amounts)	June 30, 2015			March 31, 2016			June 30, 2016
Income from operations	$	42.2		$	81.2		$	64.3
Operating income margin	8.6		%	15.7		%	12.3		%

Net income	$	28.3		$	48.8		$	35.8
Net income margin	5.8		%	9.4		%	6.8		%
Diluted net income per share	$	0.20		$	0.37		$	0.28

Adjusted EBITDA	$	160.3		$	178.5		$	187.3
Adjusted EBITDA margin	32.8		%	34.5		%	35.8		%

On a sequential quarter basis, operating income margin and net income margin decreased 340 basis points and 260 basis points, respectively, primarily due to a gain in the first quarter on the sale of certain assets of a non-strategic product line, which contributed 470 basis points and 320 basis points to first quarter operating income margin and net income margin, respectively. The negative impact of this first quarter gain was partially offset by an $11 million decrease in sequential license expense, primarily resulting from a $4.7 million benefit related to a previously recorded contractual obligation that was settled in the second quarter of 2016 and a $3.8 million benefit from the release of certain other license accruals during the second quarter. Adjusted EBITDA margin increased 130 basis points to 35.8% for the three months ended June 30, 2016 compared to 34.5% for the three months ended March 31, 2016, primarily due to the positive impact of lower license expense in the second quarter.

On a year-over-year basis our margins improved, as operating income margin increased 370 basis points to 12.3%, net income margin increased 100 basis points to 6.8%, and Adjusted EBITDA margin increased 300 basis points to 35.8%. Our margins were positively impacted by lower license expense for the three months ended June 30, 2016, as described above, as compared to the prior year period and lower spending on marketing activities. The positive impact to our net income margin from these decreases in expense was partially offset by an $8 million increase in interest expense related to our Senior Notes issued in November 2015.

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Capital Efficiency, Infrastructure Capacity and Utilization



	Three Months Ended
(Dollar amounts in millions)	June 30, 2015			March 31, 2016			June 30, 2016
(Dollar amounts in millions)	June 30, 2015			March 31, 2016			June 30, 2016
Capital expenditures
Customer gear	$	117.3		$	46.2		$	47.4
Data center build outs	15.8			13.1			9.7
Office build outs	3.3			0.3			1.1
Capitalized software and other projects	15.2			19.2			23.9
Total capital expenditures	$	151.6		$	78.8		$	82.1

Capital efficiency and returns
Average total assets	$	1,756.0		$	2,019.8		$	2,011.1
Return on assets (annualized)	6.4		%	9.7		%	7.1		%

Average capital base	$	961.2		$	1,026.6		$	991.0
Return on capital (annualized)	11.8		%	14.4		%	16.4		%
Capital turnover (annualized)	2.04			2.02			2.11

Infrastructure capacity and utilization
Megawatts under contract at period end (1)	63.6			62.2			62.2
Megawatts available for customer use at period end (2)	54.1			56.0			56.4
Megawatts utilized at period end	31.6			32.1			32.0
Annualized net revenue per average Megawatt of power utilized	$	62.5		$	64.5		$	65.3


(1)	Megawatts under contract at period end represents data center capacity for which we have a contract enabling us to take control of the space.


(2)	Megawatts available for customer use at period end represents data center capacity that is built-out and is being used to provide service to customers.

Capital expenditures in the three months ended June 30, 2016 increased to $82.1 million from $78.8 million in the three months ended March 31, 2016. We expect capital expenditures to increase in the remaining quarters of 2016. Higher capital expenditures in the three months ended June 30, 2015 were mainly due to increased purchases of customer gear to support the opening of a new London data center in addition to a large customer gear software purchase at the end of the second quarter of 2015.

On a sequential quarter basis, Return on Assets ("ROA") decreased from 9.7% for the three months ended March 31, 2016 to 7.1% for the three months ended June 30, 2016 due to lower net income, as previously described. Return on Capital ("ROC") increased from 14.4% for the three months ended March 31, 2016 to 16.4% for the three months ended June 30, 2016, primarily due to an increase in sequential quarter income from operations, as adjusted for the first quarter gain on sale. The positive impact of a 3% decrease in the average capital base was offset by a slightly higher effective tax rate. The decrease in our average capital base also resulted in an increase in capital turnover, from 2.02 for the three months ended March 31, 2016 to 2.11 for the three months ended June 30, 2016.

On a year-over-year basis, ROA increased from 6.4% to 7.1%. This was driven by an increase in net income between periods, partially offset a 15% increase in our average total assets. ROC increased from 11.8% to 16.4% primarily due to an increase in income from operations between periods, partially offset by a 3% increase in our average capital base and an increase in our effective tax rate. Capital turnover increased to 2.11 for the three months ended June 30, 2016 from 2.04 for the same period of 2015.

Subsequent Event

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Results of Operations

The following tables set forth our results of operations for the specified periods and as a percentage of our revenue for those same periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

Consolidated Statements of Income:



	Three Months Ended
(In millions)	June 30, 2015			September 30, 2015			December 31, 2015			March 31, 2016			June 30, 2016
Net revenue	$	489.4		$	508.9		$	522.8		$	518.1		$	523.6
Costs and expenses:
Cost of revenue	165.4			172.7			180.7			180.4			171.5
Research and development	33.2			29.9			29.8			27.6			26.9
Sales and marketing	64.4			61.8			58.3			63.7			63.8
General and administrative	86.5			88.2			90.1			85.7			92.5
Depreciation and amortization	97.7			101.3			104.0			104.0			104.6
Total costs and expenses	447.2			453.9			462.9			461.4			459.3
Gain on sale	—			—			—			24.5			—
Income from operations	42.2			55.0			59.9			81.2			64.3
Other income (expense):
Interest expense	(1.9		)	(2.8		)	(6.2		)	(10.5		)	(10.3		)
Interest and other income (expense)	1.4			(1.1		)	0.5			1.1			0.4
Total other income (expense)	(0.5		)	(3.9		)	(5.7		)	(9.4		)	(9.9		)
Income before income taxes	41.7			51.1			54.2			71.8			54.4
Income taxes	13.4			15.6			23.1			23.0			18.6
Net income	$	28.3		$	35.5		$	31.1		$	48.8		$	35.8

Consolidated Statements of Income, as a Percentage of Net Revenue:



	Three Months Ended
(Percent of net revenue)	June 30, 2015		September 30, 2015		December 31, 2015		March 31, 2016		June 30, 2016
Net revenue	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of revenue	33.8	%	34.0	%	34.6	%	34.8	%	32.8	%
Research and development	6.8	%	5.9	%	5.7	%	5.3	%	5.1	%
Sales and marketing	13.2	%	12.1	%	11.2	%	12.3	%	12.2	%
General and administrative	17.7	%	17.3	%	17.2	%	16.6	%	17.7	%
Depreciation and amortization	20.0	%	19.9	%	19.9	%	20.1	%	20.0	%
Total costs and expenses	91.4	%	89.2	%	88.5	%	89.1	%	87.7	%
Gain on sale	—	%	—	%	—	%	4.7	%	—	%
Income from operations	8.6	%	10.8	%	11.5	%	15.7	%	12.3	%
Other income (expense):
Interest expense	(0.4	)%	(0.5	)%	(1.2	)%	(2.0	)%	(2.0	)%
Interest and other income (expense)	0.3	%	(0.2	)%	0.1	%	0.2	%	0.1	%
Total other income (expense)	(0.1	)%	(0.8	)%	(1.1	)%	(1.8	)%	(1.9	)%
Income before income taxes	8.5	%	10.0	%	10.4	%	13.9	%	10.4	%
Income taxes	2.7	%	3.1	%	4.4	%	4.4	%	3.5	%
Net income	5.8	%	7.0	%	6.0	%	9.4	%	6.8	%

Due to rounding, totals may not equal the sum of the line items in the table above.

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Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Net Revenue

Net revenue increased $34 million, or 7%, primarily due to both the acquisition of new customers and incremental services rendered to existing customers. In particular, net revenue for the three months ended June 30, 2016 was favorably impacted by a large, multi-year agreement that began to materialize in the third quarter of 2015.

Net revenue was negatively impacted by a stronger U.S. dollar relative to the functional currencies of our foreign operations, as net revenue for the three months ended June 30, 2016 would have been $6 million higher had foreign exchange rates remained constant from the prior year. In addition, the sale of a non-strategic product line in January 2016 had a negative impact on revenue of $3 million when compared to the three months ended June 30, 2015.

Net revenue for the Americas segment increased $29 million, or 8%, to $386 million for the three months ended June 30, 2016 compared to $357 million for the three months ended June 30, 2015. Net revenue for the International segment increased $5 million, or 4%, to $138 million for the three months ended June 30, 2016 compared to $132 million for the three months ended June 30, 2015.

Cost of Revenue

Cost of revenue primarily consists of employee-related costs of our customer support teams and data center employees, as well as the costs to lease and operate our data centers. Many of our data center costs vary with the volume of services sold, including power, bandwidth, software licenses and costs related to maintenance and the replacement of IT equipment components.

Cost of revenue increased $6 million, or 4%, driven by higher employee-related expenses partially offset by lower license expense. Employee-related expenses increased $12 million driven by an 8% increase in average headcount to support business growth and higher average salaries. License costs decreased $8 million, primarily due to a $4.7 million benefit related to a previously recorded contractual obligation that was settled in the second quarter of 2016 and a $3.8 million benefit from the release of certain other license accruals.

As a percentage of net revenue, cost of revenue decreased 100 basis points, from 33.8% in the three months ended June 30, 2015 to 32.8% in the three months ended June 30, 2016. This decrease was primarily driven by a 200 basis point decrease in license costs, of which 160 basis points relates to the benefits described above, partially offset by a 130 basis point increase in employee-related expenses.

Research and Development Expenses

Research and development expenses are mainly costs for employees and consultants who are focused on the deployment of new technologies to address emerging trends and the development and enhancement of proprietary tools.

Research and development expenses decreased $6 million, or 19%, primarily due to a decrease in employee-related expenses driven by a 13% decrease in average headcount and lower share-based compensation expense due to a $3 million expense in the prior year period related to the acceleration of vesting of certain awards. As a percentage of net revenue, research and development expenses decreased 170 basis points, from 6.8% in the three months ended June 30, 2015 to 5.1% in the three months ended June 30, 2016.

Sales and Marketing Expenses

Sales and marketing expenses consist of employee-related costs of our sales and marketing employees, including sales commissions, compensation paid to certain channel partners, and costs for advertising and promoting our services and to generate customer demand.

Sales and marketing expenses decreased $1 million, or 1%. Employee-related expenses increased $5 million, largely driven by higher average salaries and an increase in commissions; however, this was more than offset by a decrease in spending on marketing activities and professional fees. As a percentage of net revenue, sales and marketing expenses decreased 100 basis points, from 13.2% in the three months ended June 30, 2015 to 12.2% in the three months ended June 30, 2016.

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General and Administrative Expenses

General and administrative expenses include employee-related and facility costs for functions such as finance and accounting, human resources, information technology, and legal, as well as professional fees, general corporate costs and overhead.

General and administrative expenses increased $6 million, or 7%. Employee-related expenses increased $3 million driven by a 3% increase in average headcount, an increase in employee paid time off expense due to a modification of our paid time off benefit policy that resulted in lower expense in 2015, and higher share-based compensation expense. Additionally, internal software support and maintenance expenses increased $4 million, largely due to increased usage and the addition of new software tools. As a percentage of net revenue, general and administrative expenses remained consistent at 17.7%.

Depreciation and Amortization Expense

Depreciation and amortization expense includes depreciation of our data center equipment, leasehold improvements and infrastructure, and amortization of our customer-based intangible assets related to acquisitions, internally-developed technology, and software licenses purchased from third-party vendors.

Depreciation and amortization expense increased $7 million, or 7%. This increase was primarily due to purchases of property and equipment to support the growth of our business. In addition, we recorded an impairment expense of $3 million during the three months ended June 30, 2016 for customer gear assets that are not expected to be used to support customers. As a percentage of net revenue, depreciation and amortization expense remained consistent at 20.0%.

Other Income (Expense)

Other expense increased $9 million, from $1 million for the three months ended June 30, 2015 to $10 million for the three months ended June 30, 2016, primarily due to interest expense of $8 million on our Senior Notes issued in November 2015.

Income before Income Taxes

Income before income taxes increased $13 million, or 30%. This increase was attributable to the Americas segment, as income before income taxes for this segment increased to $23 million for the three months ended June 30, 2016 compared to $10 million for the same period of 2015. Income before income taxes for the International segment remained consistent at $32 million.

Income Taxes

Our effective tax rate increased from 32.2% for the three months ended June 30, 2015 to 34.0% for the three months ended June 30, 2016. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income, tax credits, contingency reserves for uncertain tax positions and permanent differences between the book and tax treatment of certain items. Our U.S. earnings are generally taxed at higher rates than our foreign earnings.

Net Income

Net income increased $8 million, or 27%. Net income per diluted share was $0.28 in the three months ended June 30, 2016, an increase of $0.08 from the same period of 2015. Net income per diluted share for the three months ended June 30, 2016 includes the positive impact of a 12% decrease in our weighted-average diluted shares outstanding, primarily due to the purchase and retirement of shares under our share repurchase program.

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Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Consolidated Statements of Income:



	Six Months Ended
(In millions)	June 30, 2015			June 30, 2016
Net revenue	$	969.6		$	1,041.7
Costs and expenses:
Cost of revenue	328.2			351.9
Research and development	65.2			54.5
Sales and marketing	123.4			127.5
General and administrative	173.1			178.2
Depreciation and amortization	194.6			208.6
Total costs and expenses	884.5			920.7
Gain on sale	—			24.5
Income from operations	85.1			145.5
Other income (expense):
Interest expense	(2.3		)	(20.8		)
Interest and other income (expense)	(0.6		)	1.5
Total other income (expense)	(2.9		)	(19.3		)
Income before income taxes	82.2			126.2
Income taxes	26.4			41.6
Net income	$	55.8		$	84.6

Consolidated Statements of Income, as a Percentage of Net Revenue:



	Six Months Ended
(Percent of net revenue)	June 30, 2015		June 30, 2016
Net revenue	100.0	%	100.0	%
Costs and expenses:
Cost of revenue	33.8	%	33.8	%
Research and development	6.7	%	5.2	%
Sales and marketing	12.7	%	12.2	%
General and administrative	17.9	%	17.1	%
Depreciation and amortization	20.1	%	20.0	%
Total costs and expenses	91.2	%	88.4	%
Gain on sale	—	%	2.4	%
Income from operations	8.8	%	14.0	%
Other income (expense):
Interest expense	(0.2	)%	(2.0	)%
Interest and other income (expense)	(0.1	)%	0.1	%
Total other income (expense)	(0.3	)%	(1.9	)%
Income before income taxes	8.5	%	12.1	%
Income taxes	2.7	%	4.0	%
Net income	5.8	%	8.1	%

Due to rounding, totals may not equal the sum of the line items in the table above.

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Net Revenue

Net revenue increased $72 million, or 7%, primarily due to both the acquisition of new customers and incremental services rendered to existing customers. In particular, net revenue for the six months ended June 30, 2016 was favorably impacted by a large, multi-year agreement that began to materialize in the third quarter of 2015.

Net revenue was negatively impacted by a stronger U.S. dollar relative to the functional currencies of our foreign operations, as net revenue for the six months ended June 30, 2016 would have been $13 million higher had foreign exchange rates remained constant from the prior year. In addition, the sale of a non-strategic product line in January 2016 had a negative impact on revenue of $6 million when compared to the six months ended June 30, 2015.

Net revenue for the Americas segment increased $63 million, or 9%, to $770 million for the six months ended June 30, 2016 compared to $706 million for the six months ended June 30, 2015. Net revenue for the International segment increased $9 million, or 3%, to $272 million for the six months ended June 30, 2016 compared to $263 million for the six months ended June 30, 2015.

Cost of Revenue

Cost of revenue increased $24 million, or 7%. This was primarily due to a $23 million increase in employee-related expenses driven by an 8% increase in average headcount to support business growth, higher average salaries, and an increase in employee paid time off expense due to a modification of our paid time off benefit policy that resulted in lower expense in 2015. These increases were partially offset by a decrease in non-equity incentive bonus expense due to a lower bonus payout percentage. License costs decreased $5 million, primarily due to a $4.7 million benefit related to a previously recorded contractual obligation that was settled in the second quarter of 2016 and a $3.8 million benefit from the release of certain other license accruals, partially offset by higher volume to support our growth. Data center costs increased $1 million as higher maintenance expense was mostly offset by a decrease in rent and electricity due in part to the consolidation of our London data centers into our new, more efficient facility, which opened in 2015. As a percentage of net revenue, cost of revenue remained consistent at 33.8%.

Research and Development Expenses

Research and development expenses decreased $11 million, or 16%, due to a decrease in employee-related expenses driven by a 13% decrease in average headcount, lower share-based compensation expense, and lower non-equity incentive bonus expense due to a lower bonus payout percentage, partially offset by an increase in employee paid time off expense due to a modification of our paid time off benefit policy that resulted in lower expense in 2015. As a percentage of net revenue, research and development expenses decreased 150 basis points, from 6.7% in the six months ended June 30, 2015 to 5.2% in the six months ended June 30, 2016.

Sales and Marketing Expenses

Sales and marketing expenses increased $4 million, or 3%. Employee-related expenses increased $9 million, driven by higher average salaries, an increase in commissions, and an increase in employee paid time off expense due to a modification of our paid time off benefit policy that resulted in lower expense in 2015. This was partially offset by a decrease in spending on marketing activities. As a percentage of net revenue, sales and marketing expenses decreased 50 basis points, from 12.7% in the six months ended June 30, 2015 to 12.2% in the six months ended June 30, 2016.

General and Administrative Expenses

General and administrative expenses increased $5 million, or 3%. Employee-related expenses increased $3 million driven by a 5% increase in average headcount and an increase in employee paid time off expense due to a modification of our paid time off benefit policy that resulted in lower expense in 2015, partially offset by a decrease in non-equity incentive bonus expense due to a lower bonus payout percentage. Additionally, internal software support and maintenance expenses increased $4 million, largely due to increased usage and the addition of new software tools. These increases were partially offset by a $1 million decrease in professional fees related to consulting services. As a percentage of net revenue, general and administrative expenses decreased 80 basis points, from 17.9% in the six months ended June 30, 2015 to 17.1% in the six months ended June 30, 2016.

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Depreciation and Amortization Expense

Depreciation and amortization expense increased $14 million, or 7%. The increase was due to purchases of property and equipment to support the growth of our business. In addition, we recorded an impairment expense of $3 million during the six months ended June 30, 2016 for customer gear assets that are not expected to be used to support customers. As a percentage of net revenue, depreciation and amortization expense decreased 10 basis points, from 20.1% in the six months ended June 30, 2015 to 20.0% in the six months ended June 30, 2016.

Gain on Sale

On January 5, 2016, we completed the sale of assets, consisting primarily of intellectual property with an immaterial remaining net book value, of a non-strategic product line. This resulted in a pre-tax gain of $24.5 million. See "Notes to the Unaudited Consolidated Financial Statements - Note 11, Gain on Sale" for more information on this transaction.

Other Income (Expense)

Other expense increased $16 million, from $3 million for the six months ended June 30, 2015 to $19 million for the six months ended June 30, 2016, primarily due to interest expense on our Senior Notes issued in November 2015.

Income before Income Taxes

Income before income taxes increased $44 million, or 54%. Income before income taxes for the Americas segment increased $49 million, to $64 million for the six months ended June 30, 2016 compared to $15 million for the same period of 2015, partly driven by the $24.5 million gain on sale as described above. Income before income taxes for the International segment decreased $5 million, to $63 million for the six months ended June 30, 2016 compared to $67 million for the six months ended June 30, 2015.

Income Taxes

Our effective tax rate increased from 32.2% for the six months ended June 30, 2015 to 32.9% for the six months ended June 30, 2016. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income, tax credits, contingency reserves for uncertain tax positions and permanent differences between the book and tax treatment of certain items. Our U.S. earnings are generally taxed at higher rates than our foreign earnings.

Net Income

Net income increased $29 million, or 52%, driven by higher net revenue and the gain from our sale of a non-strategic product line, partially offset by higher expenses to support our growth. Net income per diluted share was $0.66 in the six months ended June 30, 2016, an increase of $0.27 from the same period of 2015. Net income per diluted share for the six months ended June 30, 2016 includes the positive impact of an 11% decrease in our weighted-average diluted shares outstanding, primarily due to the purchase and retirement of shares under our share repurchase program.

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Liquidity and Capital Resources

We primarily finance our operations and capital expenditures with internally-generated cash from operations and, if necessary, borrowings under our revolving credit facility. We believe that our existing cash on hand together with current sources of funds will be sufficient to meet our operating and capital needs in the foreseeable future.

Our long-term future capital requirements will depend on many factors, most importantly our revenue growth and our investments in new technologies and services. Our future ability to generate cash from operations will depend on our financial performance, general economic conditions, technology trends and developments, and other factors. We could seek additional funding in the form of debt or equity. We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase plans, and our overall cost of capital. As of June 30, 2016, our target debt level under our capital structure policy is 0.75X Adjusted EBITDA for the most recent four quarters.

At June 30, 2016, we held $544 million in cash and cash equivalents, of which $189 million is held by foreign entities. We consider the undistributed earnings of our foreign subsidiaries as of June 30, 2016 to be permanently reinvested and, accordingly, no U.S. income taxes have been provided thereon. We have not repatriated earnings to the U.S., and we do not anticipate the need to do so in the future as we believe sources of funds available in the U.S. are sufficient to meet our domestic liquidity needs arising in the ordinary course of business.

We have a revolving credit facility with a total commitment of $200 million and the option to increase this amount by up to an additional $200 million, subject to certain terms and conditions. As of June 30, 2016, we had no outstanding borrowings under the revolving credit facility and $0.4 million of undrawn letters of credit, and we were in compliance with all of the covenants under the facility.

We also have $500 million aggregate principal amount of Senior Notes outstanding. The Senior Notes will mature on January 15, 2024 and bear interest at a rate of 6.5% per year. The first semi-annual interest payment was made on July 15, 2016. As of June 30, 2016, we were in compliance with all covenants under the Senior Notes indenture.

Our board of directors has authorized a share repurchase program under which shares may be repurchased from time to time through both open market and privately negotiated transactions. During the six months ended June 30, 2016, we repurchased $133 million, or 6.0 million shares, of our common stock on the open market under this program; these shares were subsequently retired. As of June 30, 2016, approximately $500 million of the amount authorized by the board under the current program remained available for additional purchases.

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Cash Flows

The following table sets forth a summary of certain cash flow information for the periods indicated:



	Six Months Ended June 30,
(In millions)	2015			2016
Cash provided by operating activities	$	268.2		$	321.1
Cash used in investing activities	$	(195.8	)	$	(146.5	)
Cash provided by (used in) financing activities	$	32.1		$	(106.6	)

Cash Provided by Operating Activities

Net cash provided by operating activities is primarily generated from cash received from customers offset by cash payments made for employee and consultant compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), data center costs, license costs, marketing programs, taxes, and other general corporate expenditures.

Net cash provided by operating activities increased $53 million, or 20%, from the first six months of 2015 compared to the first six months of 2016. This was driven by a $63 million increase in net income adjusted for non-cash and non-operating items such as depreciation and amortization expense, deferred income taxes, share-based compensation expense, excess tax benefits from share-based compensation arrangements, and the gain on sale of certain assets of a non-strategic product line. This increase was partially offset by an $11 million decrease in cash provided by net changes in operating assets and liabilities. The change in other non-current assets and liabilities resulted in a $13 million decrease in operating cash flow, primarily related to the settlement of our previously recorded contractual obligations for license costs. The change in deferred revenue resulted in a $7 million decrease in operating cash flow as we received a larger amount of advance payments during the first six months of 2015 than we did during the first six months of 2016. Partially offsetting these decreases to operating cash flow were increases of $6 million and $5 million resulting from the changes in prepaid expenses and other current assets and accounts receivable, respectively.

Cash Used in Investing Activities

Net cash used in investing activities primarily consists of capital expenditures to meet the demands of our growing customer base. The largest outlays of cash are for purchases of customer gear, data center and office build-outs, and capitalized payroll costs related to internal-use software development.

Net cash used in investing activities decreased $49 million, or 25%, from the first six months of 2015 compared to the first six months of 2016, largely driven by $27 million of proceeds received in 2016 from the sale of certain assets of a non-strategic product line. Additionally, there was a $38 million decrease in cash purchases of property and equipment due to higher capital expenditures in the first six months of 2015 for customer gear, largely attributable to the opening of our new London data center. The impact of these items was partially offset by a change of $15 million between periods in net cash outflows for other investing activities, primarily related to a cost-method investment made in the first six months of 2016.

Cash Provided by or Used in Financing Activities

Financing activities generally include cash activity related to debt and other long-term credit arrangements (i.e. capital and finance lease obligations), including proceeds from and repayments of borrowings, and cash activity related to the issuance and repurchase of equity.

Net cash used in financing activities was $107 million during the first six months of 2016 compared to net cash provided by financing activities of $32 million during the first six months of 2015, representing a change of $139 million. The largest driver of this change was a cash outflow of $133 million during the first six months of 2016 for the repurchase of common stock under our share repurchase program. Additionally, proceeds from employee stock plans were $26 million lower during the first six months of 2016 compared to the first six months of 2015. The impact of these drivers was partially offset by the repayment of $25 million on our previous credit facility during the first six months of 2015.

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Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. These entities are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates have not changed from those described in our Annual Report on Form 10-K/A filed with the SEC on June 13, 2016 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

Recent Accounting Pronouncements Not Yet Adopted

For a description of accounting pronouncements recently issued but not yet adopted, see Item 1 of Part I, "Financial Statements - Note 1, Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies."

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Supplemental Information

Non-GAAP Financial Measures

Throughout this MD&A, we have utilized certain non-GAAP financial measures to supplement our analysis of financial performance. For each of these non-GAAP financial measures, we have described the reasons for their use and have provided reconciliations to the most directly comparable GAAP measure below.

Return on Capital ("ROC")

We believe that ROC is an important metric for investors in evaluating our company’s performance. ROC measures how effectively a company generates profits from the capital that is deployed. We calculate ROC by dividing net operating profit after tax by our average capital base. The following table presents a reconciliation of ROC to Return on Assets, which we calculate directly from amounts on the Consolidated Statements of Comprehensive Income and the Consolidated Balance Sheets.



	Three Months Ended
(In millions)	June 30, 2015			September 30, 2015			December 31, 2015			March 31, 2016			June 30, 2016
Net income	$	28.3		$	35.5		$	31.1		$	48.8		$	35.8

Income from operations	$	42.2		$	55.0		$	59.9		$	81.2		$	64.3
Adjustment for gain on sale	—			—			—			(24.5		)	—
Adjustment for build-to-suit lease impact (1)	(0.4		)	(1.1		)	(2.3		)	(2.2		)	(2.6		)
Income from operations, adjusted	$	41.8		$	53.9		$	57.6		$	54.5		$	61.7
Effective tax rate	32.2		%	30.4		%	42.6		%	32.1		%	34.0		%
Net operating profit after tax (NOPAT)	$	28.4		$	37.5		$	33.1		$	37.0		$	40.7

Total assets at period end	$	1,826.6		$	1,749.2		$	2,014.2		$	2,025.4		$	1,996.8
Add: Unamortized debt issuance costs (2)	—			—			7.6			7.4			7.2
Less: Excess cash (3)	(258.4		)	(128.0		)	(422.0		)	(472.0		)	(481.5		)
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable	(256.4		)	(236.9		)	(205.6		)	(213.0		)	(219.1		)
Less: Deferred revenue (current and non-current)	(29.7		)	(31.8		)	(31.2		)	(29.0		)	(30.2		)
Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for build-to-suit leases	(299.7		)	(294.9		)	(315.0		)	(313.6		)	(296.4		)
Capital base	$	982.4		$	1,057.6		$	1,048.0		$	1,005.2		$	976.8

Average total assets	$	1,756.0		$	1,787.9		$	1,881.7		$	2,019.8		$	2,011.1
Average capital base	$	961.2		$	1,020.0		$	1,052.8		$	1,026.6		$	991.0

Return on assets (annualized)	6.4		%	8.0		%	6.6		%	9.7		%	7.1		%
Return on capital (annualized)	11.8		%	14.7		%	12.6		%	14.4		%	16.4		%


(1)	Reflects additional expense we would have expected to record if our build-to-suit lease arrangements had been deemed operating leases instead of finance lease obligations for build-to-suit leases. Calculated as the excess of estimated straight-line rent expense over actual depreciation expense for completed real estate projects under build-to-suit lease arrangements.


(2)	Amount recorded as a direct deduction from the carrying value of the long-term debt liability in the consolidated balance sheets.


(3)	Defined 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.

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Adjusted EBITDA

We use Adjusted EBITDA as a supplemental measure to review and assess our performance. Adjusted EBITDA is a metric that is used by analysts and investors for comparative and valuation purposes. We disclose this metric in order to support and facilitate the dialogue with research analysts and investors.

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, less gain on sale. The following table presents a reconciliation of Adjusted EBITDA to net income.



	Three Months Ended
(In millions)	June 30, 2015			September 30, 2015			December 31, 2015			March 31, 2016			June 30, 2016
Net revenue	$	489.4		$	508.9		$	522.8		$	518.1		$	523.6

Net income	$	28.3		$	35.5		$	31.1		$	48.8		$	35.8
Plus: Income taxes	13.4			15.6			23.1			23.0			18.6
Plus: Total other (income) expense	0.5			3.9			5.7			9.4			9.9
Plus: Depreciation and amortization	97.7			101.3			104.0			104.0			104.6
Plus: Share-based compensation expense	20.4			19.6			18.1			17.8			18.4
Less: Gain on sale	—			—			—			(24.5		)	—
Adjusted EBITDA	$	160.3		$	175.9		$	182.0		$	178.5		$	187.3

Net income margin	5.8		%	7.0		%	6.0		%	9.4		%	6.8		%
Adjusted EBITDA margin	32.8		%	34.6		%	34.8		%	34.5		%	35.8		%

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Constant currency revenue growth

We use constant currency revenue growth as an additional metric for understanding and assessing our growth excluding the effect of foreign currency rate fluctuations on our international business operations. We also believe this is an important metric to help investors evaluate our performance in comparison to prior periods. The information presented is calculated by translating current period results using the average exchange rate from the comparative period rather than the actual exchange rates in effect during the respective period. The following table presents a reconciliation of constant currency revenue growth.



	Three Months Ended
(In millions)	Net Revenue			Foreign Currency Translation			Net Revenue in Constant Currency
June 30, 2016	$	523.6		$	(1.1	)	$	522.5
March 31, 2016	518.1			—			518.1
Dollar change	$	5.5					$	4.4
Percent change	1.1		%				0.8		%

June 30, 2016	$	523.6		$	6.1		$	529.7
June 30, 2015	489.4			—			489.4
Dollar change	$	34.2					$	40.3
Percent change	7.0		%				8.2		%

March 31, 2016	$	518.1		$	6.4		$	524.5
March 31, 2015	480.2			—			480.2
Dollar change	$	37.9					$	44.3
Percent change	7.9		%				9.2		%

June 30, 2015	$	489.4		$	12.1		$	501.5
June 30, 2014	441.2			—			441.2
Dollar change	$	48.2					$	60.3
Percent change	11.0		%				13.7		%

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Free Cash Flow

We use Free Cash Flow as a supplemental measure to analyze cash flows generated from our operations because we believe it is useful to investors in evaluating our ability to fund capital expenditures, which continue to be a significant investment required by our business.

We define Free Cash Flow as net cash provided by operating activities less cash purchases of property and equipment, plus excess tax benefits from share-based compensation arrangements. Excess tax benefits represent tax deductions for share-based compensation expense in excess of book compensation expense and reduce our income taxes payable. We have included the impact of excess tax benefits in Free Cash Flow to be consistent with the treatment of other tax benefits.

Free Cash Flow has limitations, including the fact that it does not represent the residual cash flow exclusively available for discretionary expenditures because we are obligated to make payments for debt service and other contractual obligations which have not been deducted from this measure. Therefore, Free Cash Flow should be evaluated in addition to, and not as a substitute for, other financial measures prepared in accordance with GAAP. The following table presents a reconciliation of Free Cash Flow to the most directly comparable GAAP financial measure, net cash provided by operating activities.



	Three Months Ended						Six Months Ended
(In millions)	June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016
Net cash provided by operating activities	$	122.9		$	164.9		$	268.2		$	321.1
Less: Cash purchases of property and equipment	(104.7		)	(76.7		)	(197.2		)	(159.6		)
Plus: Excess tax benefits from share-based compensation arrangements	18.6			10.2			38.8			26.0
Free cash flow	$	36.8		$	98.4		$	109.8		$	187.5

Quarterly Key Metrics

The following table sets forth our quarterly key metrics for each of our most recent five quarters as of the period ended June 30, 2016. The quarterly data presented below has been prepared on a basis consistent with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2015 and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information. You should read this information in conjunction with the consolidated financial statements and the related notes included elsewhere in this document and with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2015. Our results for these quarterly periods are not necessarily indicative of the results of operations for a full year or any period.



	Three Months Ended
(Dollar amounts in millions, except average monthly revenue per server)	June 30, 2015			September 30, 2015			December 31, 2015			March 31, 2016			June 30, 2016
	June 30, 2015			September 30, 2015			December 31, 2015			March 31, 2016			June 30, 2016
Growth
Net revenue	$	489.4		$	508.9		$	522.8		$	518.1		$	523.6
Revenue growth (year over year)	11.0		%	10.7		%	10.7		%	7.9		%	7.0		%

Number of employees (Rackers) at period end	6,115			6,177			6,189			6,203			6,199
Number of servers deployed at period end (1)	116,329			118,654			118,177			116,507			114,231
Average monthly revenue per server	$	1,416		$	1,444		$	1,472		$	1,472		$	1,513

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	Three Months Ended
(Dollar amounts in millions, except average monthly revenue per server)	June 30, 2015			September 30, 2015			December 31, 2015			March 31, 2016			June 30, 2016
	June 30, 2015			September 30, 2015			December 31, 2015			March 31, 2016			June 30, 2016
Profitability
Net income	$	28.3		$	35.5		$	31.1		$	48.8		$	35.8
Net income margin	5.8		%	7.0		%	6.0		%	9.4		%	6.8		%

Income from operations	$	42.2		$	55.0		$	59.9		$	81.2		$	64.3
Depreciation and amortization	$	97.7		$	101.3		$	104.0		$	104.0		$	104.6
Share-based compensation expense:
Cost of revenue	$	4.1		$	4.2		$	4.5		$	4.1		$	4.4
Research and development	$	5.7		$	2.4		$	2.4		$	2.2		$	2.4
Sales and marketing	$	2.8		$	2.7		$	1.5		$	2.6		$	2.8
General and administrative	$	7.8		$	10.3		$	9.7		$	8.9		$	8.8
Total share-based compensation expense	$	20.4		$	19.6		$	18.1		$	17.8		$	18.4
Gain on sale	$	—		$	—		$	—		$	(24.5	)	$	—
Adjusted EBITDA (2)	$	160.3		$	175.9		$	182.0		$	178.5		$	187.3
Adjusted EBITDA margin	32.8		%	34.6		%	34.8		%	34.5		%	35.8		%

Operating income margin	8.6		%	10.8		%	11.5		%	15.7		%	12.3		%

Income from operations	$	42.2		$	55.0		$	59.9		$	81.2		$	64.3
Adjustment for gain on sale	$	—		$	—		$	—		$	(24.5	)	$	—
Adjustment for build-to-suit lease impact (3)	$	(0.4	)	$	(1.1	)	$	(2.3	)	$	(2.2	)	$	(2.6	)
Income from operations, adjusted	$	41.8		$	53.9		$	57.6		$	54.5		$	61.7
Effective tax rate	32.2		%	30.4		%	42.6		%	32.1		%	34.0		%
Net operating profit after tax (NOPAT) (2)	$	28.4		$	37.5		$	33.1		$	37.0		$	40.7
NOPAT margin	5.8		%	7.4		%	6.3		%	7.1		%	7.8		%

Capital efficiency and returns
Average total assets	$	1,756.0		$	1,787.9		$	1,881.7		$	2,019.8		$	2,011.1
Return on assets (annualized)	6.4		%	8.0		%	6.6		%	9.7		%	7.1		%

Interest bearing debt (4)	$	6.9		$	143.6		$	501.9		$	501.3		$	500.8
Stockholders' equity	$	1,233.9		$	1,042.0		$	968.1		$	975.9		$	957.5
Less: Excess cash	$	(258.4	)	$	(128.0	)	$	(422.0	)	$	(472.0	)	$	(481.5	)
Capital base	$	982.4		$	1,057.6		$	1,048.0		$	1,005.2		$	976.8
Average capital base	$	961.2		$	1,020.0		$	1,052.8		$	1,026.6		$	991.0
Capital turnover (annualized)	2.04			2.00			1.99			2.02			2.11
Return on capital (annualized) (2)	11.8		%	14.7		%	12.6		%	14.4		%	16.4		%

Capital expenditures
Cash purchases of property and equipment	$	104.7		$	134.7		$	143.0		$	82.9		$	76.7
Non-cash purchases of property and equipment (5)	$	46.9		$	(7.0	)	$	(46.5	)	$	(4.1	)	$	5.4
Total capital expenditures	$	151.6		$	127.7		$	96.5		$	78.8		$	82.1

Customer gear	$	117.3		$	87.1		$	61.8		$	46.2		$	47.4
Data center build outs	$	15.8		$	18.8		$	10.6		$	13.1		$	9.7
Office build outs	$	3.3		$	6.1		$	7.8		$	0.3		$	1.1
Capitalized software and other projects	$	15.2		$	15.7		$	16.3		$	19.2		$	23.9
Total capital expenditures	$	151.6		$	127.7		$	96.5		$	78.8		$	82.1

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	Three Months Ended
(Dollar amounts in millions, except average monthly revenue per server)	June 30, 2015		September 30, 2015		December 31, 2015		March 31, 2016		June 30, 2016
	June 30, 2015		September 30, 2015		December 31, 2015		March 31, 2016		June 30, 2016
Infrastructure capacity and utilization
Megawatts under contract at period end (6)	63.6		63.6		62.2		62.2		62.2
Megawatts available for customer use at period end (7)	54.1		55.3		54.4		56.0		56.4
Megawatts utilized at period end	31.6		32.7		32.2		32.1		32.0
Annualized net revenue per average Megawatt of power utilized	$	62.5	$	63.3	$	64.5	$	64.5	$	65.3

(1)

During the fourth quarter of 2015, we decommissioned approximately 2,400 servers in order to replace older, less efficient gear and also as part of the migration of customers from existing data centers to our new London data center. The process of replacing older, less efficient gear continued in Q1 2016 and Q2 2016 as approximately 1,600 and 3,400 additional servers, respectively, were decommissioned.


(2)	See discussion and reconciliation of our Non-GAAP financial measures to the most comparable GAAP measures.


(3)	Reflects additional expense we would have expected to record if our build-to-suit lease arrangements had been deemed operating leases instead of finance lease obligations for build-to-suit leases. Calculated as the excess of estimated straight-line rent expense over actual depreciation expense for completed real estate projects under build-to-suit lease arrangements.


(4)	Includes the outstanding principal amount of debt and capital lease obligations.


(5)	Non-cash purchases of property and equipment primarily represents changes in amounts accrued but not yet paid.


(6)	Megawatts under contract at period end represents data center capacity for which we have a contract enabling us to take control of the space.


(7)	Megawatts available for customer use at period end represents data center capacity that is built-out and is being used to provide service to customers.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to our market risks since December 31, 2015. For a discussion of our exposure to market risk, refer to Part II, Item 7A "Quantitative and Qualitative Disclosures about Market Risk," contained in our Annual Report on Form 10-K/A for the year-ended December 31, 2015.

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ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, as of the end of the period covered by this quarterly report (the “Evaluation Date”). Due to the material weakness described below, our chief executive officer and chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective as of June 30, 2016.

Management concluded there was a material weakness in the design and operating effectiveness of controls over the recognition, measurement, and disclosure of certain complex software license agreements. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify necessary changes to our process for completely and accurately capturing license usage. This resulted in inaccurate usage reports utilized in determining obligations under certain software license agreements. Upon identification of the error, we self-reported to the affected supplier, recorded a liability of $13.6 million for under-reported license expense and corrected the usage reports going forward. The reduction to net income as result of this error, net of the related income tax impact, was $1.4 million, $3.2 million, and $3.8 million in the years ended December 31, 2013, 2014, and 2015, respectively. The material weakness arose in a prior period and resulted in immaterial misstatements to the previously released consolidated financial statements as of and for the years ended December 31, 2013, 2014 and 2015. Refer to Item 1 of Part I, "Financial Statements - Note 1, Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies" for further information on the impact these errors had on the consolidated financial statements.

To remediate this material weakness, we are in the process of enhancing our control processes around calculating software license expense by (i) formalizing the process of timely identifying changes in software license agreements that could impact reporting criteria; (ii) implementing more comprehensive review procedures to ensure the completeness and accuracy of the reports utilized in license reporting; (iii) developing a formal change management process related to the underlying code in reports utilized to determine software license obligations; and (iv) developing more robust review standards over software license expense. Our internal audit department will also conduct a review of the enhanced process during 2016 to ensure the aforementioned control processes are operating effectively.

Notwithstanding this material weakness, our chief executive officer and chief financial officer have each concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows of our company and its subsidiaries in conformity with accounting principles generally accepted in the United States of America. We are in the process of remediating the underlying causes of the material weakness as described above.

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting during our most recent quarterly reporting period identified in connection with management’s evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than the remediation efforts related to the material weakness described above.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

For a discussion of legal proceedings, see "Notes to the Unaudited Consolidated Financial Statements - Note 7, Contingencies."

ITEM 1A – RISK FACTORS

For a discussion of our risk factors, refer to Part I, Item 1A "Risk Factors," contained in our Annual Report on Form 10-K/A for the year-ended December 31, 2015. As of June 30, 2016, there had been no material change in this information, except for the following risk factor provided below.

Our business is affected by general economic conditions, and uncertainties affecting markets in which we operate and economic volatility could adversely impact our business.

Our business and results of operations are affected by conditions in the global capital markets and the economy generally. A general economic slowdown and volatility in economic conditions could adversely affect our business. Concerns over the slow economic recovery, the level of U.S. national debt, currency fluctuations and volatility, the stability of the EU and the exit of the United Kingdom, the rate of growth of China and other Asian economies, unemployment, the availability and cost of credit, the U.S. housing market, inflation levels, negative interest rates, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and the markets.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding the company’s purchases of its common stock during the three months ended June 30, 2016.



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (2)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs
April 1, 2016 - April 30, 2016	1,980,813	$	23.85	1,980,813	$	518,417,302
May 1, 2016 - May 31, 2016	819,870	$	22.68	812,157	$	500,000,000
Total	2,800,683			2,792,970


(1)	The total number of shares purchased for the month of May 2016 includes 7,713 of shares of common stock withheld for employee taxes.

(2)

On November 6, 2014, our board of directors authorized a program to repurchase up to $500 million of our common stock. On August 5, 2015, our board of directors increased the authorization under the existing program to a total of up to $1 billion, in addition to $200 million already purchased under the initial authorization. The updated program was announced on August 10, 2015 and will remain in effect for a period not to exceed 24 months from authorization. Under this program, shares may be repurchased from time to time through both open market and privately negotiated transactions.

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ITEM 6 – EXHIBITS



Exhibit Number		Description
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase


*	Filed herewith.


**	Furnished herewith; not deemed to be filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, on August 9, 2016.



			Rackspace Hosting, Inc.


Date:	August 9, 2016	By:	/s/ Karl Pichler
			Karl Pichler
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)



Date:	August 9, 2016	By:	/s/ Joseph Saporito
			Joseph Saporito
			Chief Accounting Officer
			(Principal Accounting Officer)

- 36 -



Date:	August 9, 2016	By:	/s/ William Taylor Rhodes
			William Taylor Rhodes
			President and Chief Executive Officer
			(Principal Executive Officer)



Date:	August 9, 2016	By:	/s/ William Taylor Rhodes
			William Taylor Rhodes
			President and Chief Executive Officer
			(Principal Executive Officer)

Document and Entity Information - shares	6 Months Ended
Document and Entity Information - shares	Jun. 30, 2016	Aug. 04, 2016
Document and Entity Information [Abstract]
Entity Registrant Name	RACKSPACE HOSTING, INC.
Entity Central Index Key	0001107694
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Period End Date	Jun. 30, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		125,805,220

Consolidated Balance Sheets (Parentheticals) - USD ($) shares in Millions, $ in Millions	Jun. 30, 2016	Dec. 31, 2015
Current assets:
Allowance for doubtful accounts and customer credits	$ 8.0	$ 7.3
Stockholders' equity:
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	300.0	300.0
Common stock, shares issued	125.8	130.9
Common stock, shares outstanding	125.8	130.9

Cost-Method Investments	6 Months Ended
Cost-Method Investments	Jun. 30, 2016
Investments, All Other Investments [Abstract]
Cost-Method Investments	Cost-Method Investments We have several direct investments accounted for under the cost method. The aggregate carrying amount of these investments, which are recorded as "Other non-current assets" in the consolidated balance sheets, was $11.6 million and $22.8 million as of December 31, 2015 and June 30, 2016, respectively. We have determined that it is not practicable to estimate the fair value of these investments. If we identify events or changes in circumstances that may have a significant adverse effect on the fair value of these investments, we will then estimate their fair values and determine if any decline in the fair value of the investments below carrying value is other-than-temporary. No events or circumstances indicating a potential impairment were identified as of June 30, 2016.


1.	I have reviewed this quarterly report on Form 10-Q of Rackspace Hosting, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting; and


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Consolidated Balance Sheets - USD ($) $ in Millions	Jun. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 544.3	$ 484.7
Accounts receivable, net of allowance for doubtful accounts and customer credits of $7.3 as of December 31, 2015 and $8.0 as of June 30, 2016	168.6	174.4
Prepaid expenses	45.1	46.6
Other current assets	14.6	12.7
Total current assets	772.6	718.4
Property and equipment, net	1,071.6	1,148.0
Goodwill	80.4	81.1
Intangible assets, net	4.8	9.1
Other non-current assets	67.4	57.6
Total assets	1,996.8	2,014.2
Current liabilities:
Accounts payable and accrued expenses	155.6	136.3
Accrued compensation and benefits	54.7	57.3
Income and other taxes payable	8.8	12.0
Deferred revenue	28.6	29.6
Capital lease obligations	0.5	1.7
Total current liabilities	248.2	236.9
Non-current liabilities:
Debt	492.8	492.4
Finance lease obligations for build-to-suit leases	153.0	164.3
Deferred income taxes	60.9	54.8
Deferred rent	49.3	49.5
Deferred revenue	1.6	1.6
Capital lease obligations	0.3	0.2
Other liabilities	33.2	46.4
Total liabilities	1,039.3	1,046.1
Commitments and Contingencies
Stockholders' equity:
Common stock, $0.001 par value per share: 300.0 shares authorized; 130.9 shares issued and outstanding as of December 31, 2015; 125.8 shares issued and outstanding as of June 30, 2016	0.1	0.1
Additional paid-in capital	859.7	834.5
Accumulated other comprehensive loss	(62.8)	(36.2)
Retained earnings	160.5	169.7
Total stockholders’ equity	957.5	968.1
Total liabilities and stockholders’ equity	$ 1,996.8	$ 2,014.2

Consolidated Statements of Comprehensive Income - USD ($) shares in Millions, $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Net revenue	$ 523.6	$ 489.4	$ 1,041.7	$ 969.6
Costs and expenses:
Cost of revenue	171.5	165.4	351.9	328.2
Research and development	26.9	33.2	54.5	65.2
Sales and marketing	63.8	64.4	127.5	123.4
General and administrative	92.5	86.5	178.2	173.1
Depreciation and amortization	104.6	97.7	208.6	194.6
Total costs and expenses	459.3	447.2	920.7	884.5
Gain on sale	0.0	0.0	24.5	0.0
Income from operations	64.3	42.2	145.5	85.1
Other income (expense):
Interest expense	(10.3)	(1.9)	(20.8)	(2.3)
Interest and other income (expense)	0.4	1.4	1.5	(0.6)
Total other income (expense)	(9.9)	(0.5)	(19.3)	(2.9)
Income before income taxes	54.4	41.7	126.2	82.2
Income taxes	18.6	13.4	41.6	26.4
Net income	35.8	28.3	84.6	55.8
Other comprehensive income, net of tax
Foreign currency translation adjustments	(19.6)	12.4	(26.6)	1.2
Other comprehensive income (loss)	(19.6)	12.4	(26.6)	1.2
Comprehensive income	$ 16.2	$ 40.7	$ 58.0	$ 57.0
Net income per share
Basic	$ 0.28	$ 0.20	$ 0.66	$ 0.39
Diluted	$ 0.28	$ 0.20	$ 0.66	$ 0.39
Weighted average number of shares outstanding
Basic	126.1	142.4	128.2	141.9
Diluted	127.0	144.5	129.0	144.4

Consolidated Statements of Cash Flows - USD ($) $ in Millions	6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015
Cash Flows From Operating Activities
Net income	$ 84.6	$ 55.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	208.6	194.6
Deferred income taxes	4.9	(30.3)
Share-based compensation expense	36.2	40.4
Excess tax benefits from share-based compensation arrangements	(26.0)	(38.8)
Gain on sale	(24.5)	0.0
Other operating activities	6.3	5.0
Changes in operating assets and liabilities:
Accounts receivable	(3.0)	(8.3)
Prepaid expenses and other current assets	(0.9)	(7.3)
Accounts payable, accrued expenses, and other current liabilities	41.2	42.9
Deferred revenue	(0.4)	7.0
Deferred rent	(0.5)	0.0
Other non-current assets and liabilities	(5.4)	7.2
Net cash provided by operating activities	321.1	268.2
Cash Flows From Investing Activities
Purchases of property and equipment	(159.6)	(197.2)
Proceeds from sale	27.0	0.0
Other investing activities	(13.9)	1.4
Net cash used in investing activities	(146.5)	(195.8)
Cash Flows From Financing Activities
Repayments of debt	0.0	(25.1)
Payments for debt issuance costs	(0.4)	0.0
Principal payments of capital and build-to-suit leases	(1.4)	(10.0)
Payments for deferred acquisition obligations	0.0	(0.1)
Repurchase of common stock	(133.2)	0.0
Shares of common stock withheld for employee taxes	(0.5)	0.0
Proceeds from employee stock plans	2.9	28.5
Excess tax benefits from share-based compensation arrangements	26.0	38.8
Net cash provided by (used in) financing activities	(106.6)	32.1
Effect of exchange rate changes on cash and cash equivalents	(8.4)	(0.9)
Increase in cash and cash equivalents	59.6	103.6
Cash and cash equivalents, beginning of period	484.7	213.5
Cash and cash equivalents, end of period	544.3	317.1
Supplemental Cash Flow Information
Cash payments for interest, net of amount capitalized	4.0	1.2
Cash payments for income taxes, net of refunds	11.6	13.5
Non-cash Investing and Financing Activities
Non-cash purchases of property and equipment	1.3	44.6
Additional finance lease obligations for build-to-suit leases and other	2.9	47.3
Acquisition of property and equipment by capital leases
Non-cash Investing and Financing Activities
Non-cash purchases of property and equipment	0.2	0.5
Increase in property and equipment in accounts payable and accrued expenses
Non-cash Investing and Financing Activities
Non-cash purchases of property and equipment	$ 1.1	$ 44.1

Contingencies	6 Months Ended
Contingencies	Jun. 30, 2016
Commitments and Contingencies Disclosure [Abstract]
Contingencies	Contingencies We have contingent liabilities resulting from various litigation, claims and commitments. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. The amount that will ultimately be paid related to these matters may differ from the recorded accruals, and the timing of such payments is uncertain. We are a party to various claims that certain of our services and technologies infringe the intellectual property rights of others. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, products, or services, and may also cause us to change our business practices and require development of non-infringing products or technologies, which could result in a loss of revenue for us or otherwise harm our business. We have disputed the allegations in these proceedings and intend to vigorously defend ourselves in all such matters. We cannot predict the impact, if any, that any of the matters described above may have on our business, results of operations, financial position, or cash flows. Because of the inherent uncertainties of such matters, including the early stage and lack of specific damage claims in many of them, we cannot estimate the range of possible losses from them.

Taxes	6 Months Ended
Taxes	Jun. 30, 2016
Income Tax Disclosure [Abstract]
Taxes	Taxes We are subject to U.S. federal income tax and various state, local, and international income taxes in numerous jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions and the timing of recognizing revenue and expenses. As such, our effective tax rate is impacted by the geographical distribution of income and mix of profits in the various jurisdictions. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We expect a taxable profit in the U.S. and U.K. for the full year 2016 before consideration of excess tax benefits, and therefore we anticipate utilizing benefits of tax deductions related to share-based compensation in 2016. As a result, we have recognized an excess tax benefit in the U.S. and U.K. during the six months ended June 30, 2016. On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of share-based compensation expense in an intercompany cost-sharing arrangement. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include share-based compensation from its regulations, and the Internal Revenue Service filed a notice of appeal to the Ninth Circuit of Appeals on February 19, 2016. Until a final decision has been reached, we will continue to monitor developments related to the regulation and the possible impact, if any, of those developments on the consolidated financial statements.

Share Repurchase Program	6 Months Ended
Share Repurchase Program	Jun. 30, 2016
Stockholders' Equity Note [Abstract]
Share Repurchase Program	Share Repurchase Program Our board of directors has authorized a share repurchase program under which shares may be repurchased from time to time through both open market and privately negotiated transactions. During the six months ended June 30, 2016, we repurchased $133.2 million, or 6.0 million shares, of our common stock on the open market under this program; these shares were subsequently retired. As of June 30, 2016, $500 million of the amount authorized by the board under the current program remained available for additional purchases.

Gain on Sale	6 Months Ended
Gain on Sale	Jun. 30, 2016
Discontinued Operations and Disposal Groups [Abstract]
Gain on Sale	Gain on Sale On January 5, 2016, we completed the sale of certain assets of a non-strategic product line, consisting primarily of intellectual property with an immaterial remaining net book value, for total consideration of $27.0 million. We recorded a pre-tax gain of $24.5 million on the sale of these assets, reported within “Gain on sale” in the consolidated statement of comprehensive income for the six months ended June 30, 2016.

Subsequent Event	6 Months Ended
Subsequent Event	Jun. 30, 2016
Subsequent Events [Abstract]
Subsequent Event	Subsequent Event On July 5, 2016, we entered into a definitive agreement to sell the assets, consisting primarily of intellectual property with an immaterial remaining net book value, of a non-strategic product line. We expect to enter into a transition services agreement with the buyer in connection with this sale. The sale is expected to close during the third quarter of 2016, subject to certain closing conditions. If this sale closes, we expect to recognize a pre-tax gain on the disposal of these assets in our consolidated statement of comprehensive income in the third quarter of 2016.

Summary of Significant Accounting Policies (Policies)	6 Months Ended
Summary of Significant Accounting Policies (Policies)	Jun. 30, 2016
Accounting Policies [Abstract]
Basis of Consolidation	The accompanying consolidated financial statements include the accounts of Rackspace Hosting, Inc. and our wholly-owned subsidiaries, which include, among others, Rackspace US, Inc., our domestic operating entity, and Rackspace Limited, our United Kingdom operating entity. Intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency Translation	Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated other comprehensive income (loss).
Basis of Accounting	The accompanying consolidated financial statements as of June 30, 2016, and for the three and six months ended June 30, 2015 and 2016, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X.
Use of Estimates	The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and customer credits, property and equipment, fair values of intangible assets and goodwill, useful lives of intangible assets, fair value of share-based compensation, contingencies, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from our estimates.
Recent Accounting Pronouncements Not Yet Adopted	In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard on revenue recognition. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires capitalization of incremental costs to obtain a contract and significantly expanded quantitative and qualitative disclosures. In August 2015, the FASB issued guidance which deferred the effective date by one year. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual periods beginning after December 15, 2016. We intend to adopt the standard on January 1, 2018. Upon adoption, the new guidance will be applied retrospectively using one of two methods. One method is to apply the guidance retrospectively to each prior period presented with practical expedients available. The second method is to apply the guidance retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. We are continuing to evaluate our method of adoption and the impact this new accounting standard will have on our consolidated financial statements. In January 2016, the FASB issued a new standard on the recognition and measurement of financial assets and financial liabilities that requires entities to measure most equity investments, except those accounted for under the equity method, at fair value and recognize changes in fair value in net income. The standard will become effective for Rackspace on January 1, 2018 and will be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this new accounting standard will have on our consolidated financial statements. In February 2016, the FASB issued a new standard on lease accounting that will require lessees to recognize all leases with a term greater than 12 months on the balance sheet, as a lease liability and right-of-use asset. Lease classification will determine whether a lease is reported as a financing transaction in the income statement and statement of cash flows. Additionally, the new standard substantially changes sale-leaseback accounting and replaces current build-to-suit lease accounting guidance. The standard will become effective for Rackspace on January 1, 2019. We anticipate this standard will have a material impact on our consolidated balance sheets, and we are currently evaluating its impact. In March 2016, the FASB issued guidance that simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This new guidance will become effective for Rackspace on January 1, 2017. We are currently evaluating the impact this guidance will have on our consolidated financial statements. In June 2016, the FASB issued a new standard that requires financial assets measured at amortized cost to be presented at the net amount expected to be collected using an allowance for expected credit losses, to be estimated by management based on historical experience, current conditions, and reasonable and supportable forecasts. The movement from an incurred loss model, required under current GAAP, to an expected loss model will result in the timelier recording of credit losses on financial instruments. This new guidance will become effective for Rackspace on January 1, 2020, with early adoption permitted for annual and interim periods beginning after December 15, 2018, and will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Cost-Method Investments	We have determined that it is not practicable to estimate the fair value of these investments. If we identify events or changes in circumstances that may have a significant adverse effect on the fair value of these investments, we will then estimate their fair values and determine if any decline in the fair value of the investments below carrying value is other-than-temporary.
Contingencies	We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated.
Segment Information	Beginning in the first quarter of 2016, we have revised our reportable segments to present Americas and International. These reportable segments are the result of changes in our organization effective January 1, 2016 and represent the way we report both Net revenue and Income before income taxes, which are the primary financial metrics our chief operating decision maker ("CODM") uses to manage our business, including the allocation of resources and performance assessment. In addition, these metrics are inputs for measuring achievement in our non-equity incentive compensation plan and certain performance-vesting equity awards. Revenue is attributed to each geographic segment based on the location of the Rackspace support team serving the customer. There are no internal revenue transactions between our segments. The Americas segment includes revenue from customers who are supported by Rackspace support teams located primarily in the U.S. and, to a lesser extent, in Latin America. The International segment includes revenue from customers who are supported by Rackspace support teams located in countries outside the U.S. and Latin America. Direct costs, including employee-related costs of our customer support teams and data center employees, costs to lease and operate our data centers, and selling and marketing expenses are recorded by each segment. Certain expenses related to functions centrally managed by the Americas segment, such as research and development expenses, amortization of internally developed software, and many of our general and administrative expenses, are recorded by the Americas segment and are not allocated.

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies (Details 1)	3 Months Ended		6 Months Ended
	Jun. 30, 2016 USD ($) continent	Jun. 30, 2015 USD ($)	Jun. 30, 2016 USD ($) continent	Jun. 30, 2015 USD ($)
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Number of continents on which we have data centers \| continent	4		4
Income tax expense allocated to foreign currency translation adjustments \| $	$ 200,000	$ 0	$ 300,000	$ 0

Company Overview, Basis of Presentation, and Summary of Significant Accounting Policies (Details 3) - Settlement of Liability for Under Reported License Expense - USD ($) $ in Millions	3 Months Ended
	Jun. 30, 2016	Mar. 31, 2016
Settlement of Liability for Under Reported License Expense
Settlement payment	$ 10.5
License expense (benefit)	$ (4.7)
Contractual liability		$ 15.2

Property and Equipment, net (Details) - USD ($) $ in Millions	Jun. 30, 2016	Dec. 31, 2015
Property and equipment
Property and equipment, at cost	$ 2,646.5	$ 2,605.1
Less: Accumulated depreciation and amortization	(1,667.0)	(1,539.7)
Work in process	92.1	82.6
Property and equipment, net	1,071.6	1,148.0
Computers and equipment
Property and equipment
Property and equipment, at cost	1,827.3	1,787.2
Computer software
Property and equipment
Property and equipment, at cost	391.9	370.6
Furniture and fixtures
Property and equipment
Property and equipment, at cost	62.8	63.5
Buildings and leasehold improvements
Property and equipment
Property and equipment, at cost	337.5	355.7
Land
Property and equipment
Property and equipment, at cost	27.0	28.1
Office facility build outs
Property and equipment
Work in process	12.0	11.5
Data center build outs
Property and equipment
Work in process	47.0	49.0
Capitalized software
Property and equipment
Work in process	$ 33.1	$ 22.1

Goodwill (Details) - USD ($)	3 Months Ended
Goodwill (Details) - USD ($)	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015
Goodwill
Reduction in goodwill in connection with sale of certain assets of a non-strategic product line	$ 0	$ 700,000
Goodwill	80,400,000		$ 81,100,000
Americas
Goodwill
Goodwill	58,100,000
International
Goodwill
Goodwill	$ 22,300,000

Cost-Method Investments (Details) - USD ($) $ in Millions	Jun. 30, 2016	Dec. 31, 2015
Investments, All Other Investments [Abstract]
Aggregate carrying amount of cost-method investments, not evaluated for impairment	$ 22.8	$ 11.6

Debt (Details) - USD ($)	6 Months Ended
Debt (Details) - USD ($)	Jun. 30, 2016	Dec. 31, 2015
Debt
Principal balance	$ 500,000,000	$ 500,000,000
Unamortized debt issuance costs	(7,200,000)	(7,600,000)
Total debt	492,800,000	492,400,000
Less: current portion of debt	0	0
Debt, excluding current portion	492,800,000	492,400,000
Revolving Credit Facility
Debt
Principal balance	0	0
Unamortized debt issuance costs	0	0
Total debt	0	0
Less: current portion of debt	0	0
Debt, excluding current portion	0	0
Revolving Credit Facility
Borrowing capacity of revolving credit facility	200,000,000
Undrawn letters of credit	$ 400,000
Covenant compliance	in compliance with all of the covenants under this facility
Senior Notes due 2024
Debt
Principal balance	$ 500,000,000	500,000,000
Unamortized debt issuance costs	(7,200,000)	(7,600,000)
Total debt	492,800,000	492,400,000
Less: current portion of debt	0	0
Debt, excluding current portion	$ 492,800,000	$ 492,400,000
Senior Notes due 2024
Maturity date	Jan. 15, 2024
Stated Interest Rate	6.50%
Date of first required payment	Jul. 15, 2016
Covenant compliance	in compliance with all covenants under the Senior Notes indenture
Senior Notes due 2024 \| Level 2 in the fair value hierarchy
Senior Notes due 2024
Fair value	$ 493,800,000

Share-Based Compensation (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
Share-Based Compensation (Details) - USD ($) $ in Millions	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	$ 18.4	$ 20.4	$ 36.2	$ 40.4
Less: Income tax benefit	(6.2)	(6.6)	(11.9)	(13.1)
Total share-based compensation expense, net of tax	12.2	13.8	24.3	27.3
Share-Based Compensation Expense, Aggregate Disclosures
Unrecognized compensation cost	202.9		$ 202.9
Weighted-average period over which the unrecognized compensation cost will be recognized using the straight-line method			2 years 9 months 18 days
Cost of revenue
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	4.4	4.1	$ 8.5	8.1
Research and development
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	2.4	5.7	4.6	8.9
Sales and marketing
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	2.8	2.8	5.4	5.5
General and administrative
Allocation of share-based compensation expense to income statement line items
Pre-tax share-based compensation	$ 8.8	$ 7.8	$ 17.7	$ 17.9

Share Repurchase Program (Details) - Common Stock shares in Millions, $ in Millions	6 Months Ended
	Jun. 30, 2016 USD ($) shares
Value of shares repurchased and subsequently retired during period	$ 133.2
Number of shares repurchased and subsequently retired during period \| shares	6.0
Amount authorized by the board that remains available for additional purchases under the share repurchase program	$ 500.0

Gain on Sale (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
Gain on Sale (Details) - USD ($) $ in Millions	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015	Jan. 05, 2016
Gain on Sale
Pre-tax gain recorded on the sale of certain assets of a non-strategic product line	$ 0.0	$ 0.0	$ 24.5	$ 0.0
Disposal Group, Disposed of by Sale, Not Discontinued Operations
Gain on Sale
Total consideration received for sale of certain assets of a non-strategic product line					$ 27.0
Disposal Group, Disposed of by Sale, Not Discontinued Operations \| Gain on sale
Gain on Sale
Pre-tax gain recorded on the sale of certain assets of a non-strategic product line			$ 24.5

Segment Information (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
Segment Information (Details) - USD ($) $ in Millions	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Net revenue:
Net revenue	$ 523.6	$ 489.4	$ 1,041.7	$ 969.6
Income before income taxes:
Income before income taxes	54.4	41.7	126.2	82.2
Depreciation and amortization:
Depreciation and amortization	104.6	97.7	208.6	194.6
Americas
Net revenue:
Net revenue	386.1	357.1	769.7	706.3
Income before income taxes:
Income before income taxes	22.6	9.7	63.5	14.8
Depreciation and amortization:
Depreciation and amortization	80.3	75.5	159.5	152.4
International
Net revenue:
Net revenue	137.5	132.3	272.0	263.3
Income before income taxes:
Income before income taxes	31.8	32.0	62.7	67.4
Depreciation and amortization:
Depreciation and amortization	$ 24.3	$ 22.2	$ 49.1	$ 42.2