Rackspace Reports Third Quarter 2014 Financial Results 

Rackspace announced financial results for the quarter ended September 30, 2014.

Net revenue for the third quarter of 2014 was $460 million, up 4.2 percent from the previous quarter and 18.3 percent from the third quarter of 2013. On a constant currency basis, net revenue grew 4.4 percent from the previous quarter and 16.1 percent from the third quarter of 2013.

For the fourth quarter of 2014, the company is forecasting total net revenue to range between $469 and $476 million. This range includes an expected negative foreign currency impact of approximately $5 million in the quarter or 110 basis points of sequential growth. Our expected range of net revenue assumes sequential growth of 3.0 percent to 4.5 percent on a constant currency basis, or growth of 2.0 percent to 3.5 percent on a GAAP basis.

"We are pleased with our operating performance this quarter and encouraged by the momentum we are seeing in the business,” said Taylor Rhodes, president and CEO of Rackspace. "We are poised to capitalize on the massive opportunity ahead in the managed cloud market, where we see increasing demand for our managed services and expertise. And while we made strong progress this year, we’re determined to continually improve our execution and seize our future.”

Total server count in the third quarter of 2014 increased to 110,453, up from 107,657 servers at the end of the previous quarter. Revenue per server grew to $1,405 per month up from $1,375 in the previous quarter.

Adjusted EBITDA for the quarter was $159 million, a 12.0 percent increase compared to the second quarter of 2014. Adjusted EBITDA margin for the quarter was 34.5 percent compared to 32.1 percent in the previous quarter.

Based on our forecasted net revenue range, we expect Adjusted EBITDA margin to range between 33 percent to 35 percent for the fourth quarter of 2014.

Net income was $26 million for the quarter, up 14.6 percent from the previous quarter. Net income margin for the quarter was 5.6 percent compared to 5.1 percent for the previous quarter.

Cash flow from operating activities was $125 million for the third quarter of 2014. Capital expenditures were $117 million, including $79 million for purchases of customer gear, $15 million for data center build outs, $3 million for office build outs and $20 million for capitalized software and other projects.

Adjusted Free Cash Flow for the quarter was $41 million. Return on Capital was 11.7 percent in the third quarter, compared to 10.0 percent in the previous quarter.

At the end of the third quarter of 2014, cash and cash equivalents were $349 million, and interest-bearing debt including capital lease obligations totaled $31 million.

On a worldwide basis, Rackspace employed 5,939 Rackers as of September 30, 2014, up from 5,798 in the previous quarter.

In addition, after a review of the company’s growth strategy, capex requirements, capital structure, and cash flow profile, the company’s Board of Directors authorized a repurchase of up to $500 million of the company’s stock over the next two years. The company intends to execute a $200 million accelerated share repurchase as its first initiative under this program. Rackspace intends to fund these share repurchases through a combination of its available cash balance and existing line of credit. The remaining $300 million will be available for purchases in future periods and the actual timing, method, number and value of any shares repurchased will be determined by the company at its discretion.

Microsoft Private Cloud Support Announced

Rackspace also announced today it expanded its Managed Private Cloud product portfolio and joined the Microsoft Cloud OS Network, adding Fanatical Support for the Microsoft Cloud Platform. This includes expertise and support for Windows Server with Hyper-V, System Center and Azure Pack. The offering is now in general availability in all U.S. data centers providing customers with SLA-backed management across the underlying infrastructure, guest operating systems, and select applications including Microsoft Exchange, SharePoint and Lync. The expanded portfolio gives customers the additional choice to host applications on Microsoft-based private clouds that offer hybrid connections to Azure, along with a breadth of other Rackspace managed platform options such as dedicated servers and public cloud.

Other Recent Highlights

• Taylor Rhodes Named CEO and a Member of the Board of Directors. Rhodes is a Rackspace veteran who has served in a variety of leadership positions within the company since 2007, including several roles directly responsible for delivering Rackspace's renowned Fanatical Support to customers globally. He retains his previous role as president and remains responsible for the company's operations worldwide.
• Lila Tretikov Appointed to Board of Directors. Tretikov is a Bay Area technology leader and active member of the open-source community with over 15 years of technology experience. Tretikov serves as the executive director of the Wikimedia Foundation, the nonprofit organization that operates Wikipedia, where she is responsible for leading the Foundation, setting its strategy, and managing day-to-day operations.
• Brian Kelly Appointed Chief Security Officer. Kelly will be responsible for overseeing physical and information security efforts for Rackspace and its customers globally. Kelly has more than 30 years of experience in security strategy and technology governance, risk and compliance and investigations in both the public and private sector.
• Successful Rackspace::Solve Events in San Francisco, New York and Chicago. The full-day summits featured industry thought leaders, partners and 27 Rackspace customers. Each shared opinions on the future of technology and discussed how Rackspace helped solve some of their toughest IT challenges.
• Fanatical Support of Google Apps for Work. Rackspace now offers managed IT services and support for the full Google Apps for Work technology suite including Gmail, Drive and Hangouts. Through this collaboration, the Google Apps for Work at Rackspace offering provides customers with award-winning Fanatical Support and a specific set of migration, deployment and account management services.
• ObjectRocket by Rackspace Added High-Performance Redis Data Store. The addition of Redis to ObjectRocket further enables Rackspace to monitor, manage and support databases for developers. This strengthens Rackspace’s data tier offering by providing instant-on, high performance, highly available Redis instances and helps simplify life for developers similar to the ObjectRocket for MongoDB offering.