Rackspace Announces Record Growth in Second Quarter 2014

SAN ANTONIO--(BUSINESS WIRE)--

Rackspace^® Hosting, Inc. RAX, the #1 managed cloud company, announced financial results for the quarter ended June 30, 2014.

Net revenue for the second quarter of 2014 was $441 million, up 4.8 percent from the previous quarter and 17 percent from the second quarter of 2013. Net revenue for the second quarter of 2014 was positively impacted by currency exchange rates when compared to the previous quarter by $1.9 million and positively impacted when compared to the second quarter of 2013 by $9.9 million.

For the third quarter of 2014, the company is forecasting quarter-over-quarter sequential net revenue growth of 3 to 4.5 percent, resulting in net revenue in the range of $454 million to $461 million.

"This was a record quarter for Rackspace,” said Graham Weston, Chairman and CEO of Rackspace. “We added thousands of new customers, including one of our largest ever, and we saw solid growth from existing customers like Under Armour, SunPower and Alex and Ani. We generated a company record $20 million in incremental revenue in the quarter and revenue per server was an all time high. Total revenue grew 4.3 percent on a constant currency basis, which was the highest rate of growth that we've generated since the fourth quarter of 2012.”

Total server count in the second quarter of 2014 increased to 107,657, up from 106,229 servers at the end of the previous quarter.

Adjusted EBITDA⁽¹⁾ for the quarter was $142 million, a 1.5 percent increase compared to the first quarter of 2014. Adjusted EBITDA margin for the quarter was 32.1 percent compared to 33.2 percent in the previous quarter.

The company expects Adjusted EBITDA margin to be in the range of 31 to 33 percent in the third quarter of 2014.

Net income was $22 million for the quarter, down 11.8 percent from the previous quarter. Net income margin for the quarter was 5.1 percent compared to 6.0 percent for the previous quarter.

Cash flow from operating activities was $125 million for the second quarter of 2014. Capital expenditures were $112 million, including $65 million for purchases of customer gear, $14 million for data center build outs, $7 million for office build outs and $27 million for capitalized software and other projects.

Adjusted Free Cash Flow⁽¹⁾ for the quarter was $26 million. Return on Capital⁽¹⁾ was 10.0 percent in the second quarter, compared to 11.4 percent in the previous quarter. Average monthly revenue per server was $1,375, compared to $1,336 in the previous quarter.

At the end of the second quarter of 2014, cash and cash equivalents were $340 million, and interest-bearing debt including capital lease obligations totaled $42 million.

On a worldwide basis, Rackspace employed 5,798 Rackers as of June 30, 2014, up from 5,743 in the previous quarter.

Rackspace Business Highlights

• Rackspace announced its managed cloud strategy for delivering public cloud services to market, including enhanced service levels and a more transparent service-based pricing model. Rackspace also created developer+^™, a new program for developers that offers essential services needed to build scalable applications. This strategy focuses on Rackspace's historical strength working with businesses and developers who want a strong partner to help design, manage and scale their cloud operations.
• Gartner, Inc. placed Rackspace in the Leaders quadrant of the “Magic Quadrant for Cloud-Enabled Managed Hosting” in both North America and Europe. The Gartner assessment evaluates providers based on the completeness of their vision and their ability to execute. Rackspace was among the 17 providers assessed by Gartner, and one of only two in the Leaders quadrant in North America. In Europe, the firm analyzed 17 providers and Rackspace was one of seven in the Leaders quadrant.
• Rackspace launched OnMetal^™ Cloud Servers to reduce cloud complexity and help cloud applications scale. These API-driven bare metal servers can be spun up as quickly as virtual machines. OnMetal Cloud Servers are designed for customers with rapidly growing infrastructure footprints who value the agility and elasticity of cloud along with the simplicity and cost-efficiency of colocation.
• ObjectRocket demonstrated Automated Online Compaction and its rapid-deployment API at MongoDB World and extended its free backup service to MongoDB databases hosted with any provider. ObjectRocket offers MongoDB users a one-click, automated compaction solution, effectively eliminating the need for what can be a difficult and time consuming manual database maintenance process. Automated Online Compaction allows MongoDB instances to be compacted online and in the background on the ObjectRocket platform.
• Rackspace was named the sixth “best place to work” in the U.K. in the large company category of the U.K.'s 2014 Great Place to Work Awards. This is the 10th consecutive year that Rackspace has been recognized by the Great Place to Work Awards. The awards seek to identify companies with highly committed individuals who help their organization achieve its business objectives and consistently go the extra mile. In addition, the award looks for companies whose leadership team ensures that each employee feels trusted and supported. The award's objective is to recognize a sense of camaraderie and a desire to work for growth, attributes that Rackspace openly demonstrates.

Conference Call and Webcast

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

To access the conference call from the United States and Canada, please dial 800-786-0540, from the United Kingdom, please dial 0800-496-0445, and from Hong Kong, please dial 800-900-872.

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

About Rackspace Hosting

Rackspace RAX is the #1 managed cloud company. Its technical expertise and Fanatical Support^® allow companies to tap the power of the cloud without the pain of hiring experts in dozens of complex technologies. Rackspace is also the leader in hybrid cloud, giving each customer the best fit for its unique needs -- whether on single- or multi-tenant servers, or a combination of those platforms. Rackspace is the founder of OpenStack^®, the open-source operating system for the cloud. Headquartered in San Antonio, Rackspace serves more than 200,000 business customers from data centers on four continents. It ranks 29th on Fortune's list of 100 Best Companies to Work For. For more information, visit www.rackspace.com.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of Rackspace Hosting could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements concerning expected operational and financial results, long-term investment strategies, growth plans, expected results from the integration of technologies and acquired businesses, or the performance or market share relating to products and services; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include infrastructure failures; the deterioration of economic conditions or fluctuations, disruptions, instability or downturns in the economy; the effectiveness of managing company growth; technological and competitive factors; regulatory factors; and other risks that are described in Rackspace Hosting's Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014, and in Rackspace Hosting's Form 10-Q for the quarter ended June 30, 2014. Except as required by law, Rackspace Hosting assumes no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Consolidated Statements of Income

(Unaudited)

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
(In thousands, except per share data)		2013				2014				2014				2013				2014
Net revenue		$	375,847			$	421,047			$	441,112			$	738,047			$	862,159
Costs and expenses:
Cost of revenue		117,658				140,417				145,051				231,268				285,468
Research and development (1)		23,216				25,192				29,711				41,591				54,903
Sales and marketing		52,269				57,359				60,480				102,083				117,839
General and administrative (1)		72,840				71,150				81,424				140,317				152,574
Depreciation and amortization		74,460				87,805				90,559				144,571				178,364
Total costs and expenses		340,443				381,923				407,225				659,830				789,148
Income from operations		35,404				39,124				33,887				78,217				73,011
Other income (expense):
Interest expense		(833		)		(495		)		(529		)		(1,773		)		(1,024		)
Interest and other income (expense)		(303		)		265				171				(104		)		436
Total other income (expense)		(1,136		)		(230		)		(358		)		(1,877		)		(588		)
Income before income taxes		34,268				38,894				33,529				76,340				72,423
Income taxes		11,901				13,448				11,078				26,712				24,526
Net income		$	22,367			$	25,446			$	22,451			$	49,628			$	47,897
Net income per share
Basic		$	0.16			$	0.18			$	0.16			$	0.36			$	0.34
Diluted		$	0.16			$	0.18			$	0.16			$	0.34			$	0.33
Weighted average number of shares outstanding
Basic		138,011				141,048				142,079				139,463				141,558
Diluted		142,178				143,815				144,093				144,180				143,910

(1) Certain reclassifications have been made to amounts previously reported for the three and six months ended June 30, 2013 in order to conform to the current period's presentation. For more information, refer to our Form 10-Q for the quarter ended June 30, 2014.

Consolidated Balance Sheets

(In thousands)		December 31, 2013				June 30, 2014
						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	259,733			$	340,344
Accounts receivable, net of allowance for doubtful accounts and customer credits of $3,891 as of December 31, 2013 and $4,672 as of June 30, 2014		123,898				130,911
Deferred income taxes		12,637				11,769
Prepaid expenses		30,782				27,239
Other current assets		11,918				7,470
Total current assets		438,968				517,733
Property and equipment, net		890,776				972,830
Goodwill		81,084				81,084
Intangible assets, net		23,880				20,043
Other non-current assets		57,089				56,285
Total assets		$	1,491,797			$	1,647,975
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	122,047			$	147,285
Accrued compensation and benefits		62,459				65,700
Income and other taxes payable		11,388				18,578
Current portion of deferred revenue		22,868				20,742
Current portion of capital lease obligations		37,885				25,639
Current portion of debt		1,861				1,108
Total current liabilities		258,508				279,052
Non-current liabilities:
Deferred revenue		3,662				2,506
Capital lease obligations		25,048				14,982
Finance lease obligations for assets under construction		—				36,262
Debt		124				18
Deferred income taxes		69,729				54,645
Deferred rent		43,046				47,693
Other liabilities		36,268				41,620
Total liabilities		436,385				476,778
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Common stock		141				143
Additional paid-in capital		636,660				696,109
Accumulated other comprehensive income (loss)		(4,536		)		3,901
Retained earnings		423,147				471,044
Total stockholders' equity		1,055,412				1,171,197
Total liabilities and stockholders' equity		$	1,491,797			$	1,647,975

Consolidated Statements of Cash Flows

(Unaudited)

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
(in thousands)		2013				2014				2014				2013				2014
Cash Flows From Operating Activities
Net income		$	22,367			$	25,446			$	22,451			$	49,628			$	47,897
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		74,460				87,805				90,559				144,571				178,364
Loss (gain) on disposal of equipment, net		(15		)		228				(69		)		225				159
Provision for bad debts and customer credits		1,301				1,813				1,454				2,361				3,267
Deferred income taxes		(8,444		)		(10,119		)		(8,975		)		(1,891		)		(19,094		)
Deferred rent		1,519				2,256				2,113				5,484				4,369
Share-based compensation expense		13,315				12,732				17,265				25,498				29,997
Excess tax benefits from share-based compensation arrangements		(11,898		)		(15,100		)		(13,221		)		(16,197		)		(28,321		)
Changes in certain assets and liabilities:
Accounts receivable		(7,220		)		3,870				(12,990		)		(13,488		)		(9,120		)
Prepaid expenses and other current assets		5,081				3,337				3,918				(556		)		7,255
Accounts payable and accrued expenses		12,473				30,251				21,745				15,535				51,996
Deferred revenue		823				(2,110		)		(1,411		)		2,065				(3,521		)
All other operating activities		2,437				1,250				1,698				6,757				2,948
Net cash provided by operating activities		106,199				141,659				124,537				219,992				266,196
Cash Flows From Investing Activities
Purchases of property and equipment		(119,836		)		(84,953		)		(114,044		)		(225,377		)		(198,997		)
Acquisitions, net of cash acquired		—				—				—				(6,203		)		—
All other investing activities		(380		)		455				1,173				(372		)		1,628
Net cash used in investing activities		(120,216		)		(84,498		)		(112,871		)		(231,952		)		(197,369		)
Cash Flows From Financing Activities
Principal payments of capital leases		(16,612		)		(12,586		)		(10,959		)		(35,550		)		(23,545		)
Principal payments of notes payable		(846		)		(52		)		(847		)		(897		)		(899		)
Payments for deferred acquisition obligations		(59		)		(57		)		(56		)		(1,238		)		(113		)
Receipt of Texas Enterprise Fund grant		—				5,500				—				—				5,500
Common shares withheld for employee withholding taxes		—				(13,620		)		—				—				(13,620		)
Proceeds from employee stock plans		4,686				2,122				12,631				6,400				14,753
Excess tax benefits from share-based compensation arrangements		11,898				15,100				13,221				16,197				28,321
Net cash provided by (used in) financing activities		(933		)		(3,593		)		13,990				(15,088		)		10,397
Effect of exchange rate changes on cash and cash equivalents		(625		)		534				853				(1,961		)		1,387
Increase (decrease) in cash and cash equivalents		(15,575		)		54,102				26,509				(29,009		)		80,611
Cash and cash equivalents, beginning of period		278,627				259,733				313,835				292,061				259,733
Cash and cash equivalents, end of period		$	263,052			$	313,835			$	340,344			$	263,052			$	340,344
Supplemental Cash Flow Information:
Non-cash purchases of property and equipment (1)		$	(13,311	)		$	15,741			$	(1,651	)		$	6,547			$	14,090

(1) Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.

Key Metrics - Quarter to Date

(Unaudited)

		Three Months Ended
(Dollar amounts in thousands,		June 30,				September 30,				December 31,				March 31,				June 30,
except average monthly revenue per server)		2013				2013				2013				2014				2014
Growth
Dedicated cloud, net revenue		$	276,845			$	280,215			$	291,265			$	299,689			$	310,647
Public cloud, net revenue		$	99,002			$	108,421			$	116,838			$	121,358			$	130,465
Net revenue		$	375,847			$	388,636			$	408,103			$	421,047			$	441,112
Revenue growth (year over year)		17.8		%		15.7		%		15.6		%		16.2		%		17.4		%
Net upgrades (monthly average)		1.5		%		1.5		%		1.1		%		0.9		%		1.5		%
Churn (monthly average)		-0.8		%		-0.8		%		-0.7		%		-0.6		%		-0.7		%
Growth in installed base (monthly average) (2)		0.7		%		0.7		%		0.4		%		0.3		%		0.8		%
Number of employees (Rackers) at period end		5,272				5,450				5,651				5,743				5,798
Number of servers deployed at period end		98,884				101,967				103,886				106,229				107,657
Average monthly revenue per server		$	1,298			$	1,290			$	1,322			$	1,336			$	1,375
Profitability
Income from operations		$	35,404			$	27,762			$	27,157			$	39,124			$	33,887
Depreciation and amortization		$	74,460			$	80,753			$	87,683			$	87,805			$	90,559
Share-based compensation expense
Cost of revenue		$	2,735			$	3,453			$	3,877			$	3,791			$	4,127
Research and development		$	1,813			$	2,306			$	2,521			$	2,780			$	3,293
Sales and marketing		$	1,744			$	2,149			$	1,766			$	2,091			$	2,062
General and administrative		$	7,023			$	9,051			$	9,024			$	4,070			$	7,783
Total share-based compensation expense		$	13,315			$	16,959			$	17,188			$	12,732			$	17,265
Adjusted EBITDA (1)		$	123,179			$	125,474			$	132,028			$	139,661			$	141,711
Adjusted EBITDA margin		32.8		%		32.3		%		32.4		%		33.2		%		32.1		%
Operating income margin		9.4		%		7.1		%		6.7		%		9.3		%		7.7		%
Income from operations		$	35,404			$	27,762			$	27,157			$	39,124			$	33,887
Effective tax rate		34.7		%		40.7		%		22.7		%		34.6		%		33.0		%
Net operating profit after tax (NOPAT) (1)		$	23,119			$	16,463			$	20,992			$	25,587			$	22,704
NOPAT margin		6.2		%		4.2		%		5.1		%		6.1		%		5.1		%
Capital efficiency and returns
Interest bearing debt		$	88,434			$	72,579			$	64,918			$	53,326			$	41,747
Stockholders' equity		$	933,897			$	988,708			$	1,055,412			$	1,100,012			$	1,171,197
Less: Excess cash		$	(217,950	)		$	(223,359	)		$	(210,761	)		$	(263,309	)		$	(287,411	)
Capital base		$	804,381			$	837,928			$	909,569			$	890,029			$	925,533
Average capital base		$	777,030			$	821,155			$	873,749			$	899,799			$	907,781
Capital turnover (annualized)		1.93				1.89				1.87				1.87				1.94
Return on capital (annualized) (1)		11.9		%		8.0		%		9.6		%		11.4		%		10.0		%
Capital expenditures
Cash purchases of property and equipment		$	119,836			$	100,496			$	126,723			$	84,953			$	114,044
Non-cash purchases of property and equipment (3)		$	(13,311	)		$	17,062			$	(4,116	)		$	15,741			$	(1,651	)
Total capital expenditures		$	106,525			$	117,558			$	122,607			$	100,694			$	112,393
Customer gear		$	73,022			$	73,784			$	65,291			$	60,688			$	64,767
Data center build outs		$	10,085			$	12,441			$	22,524			$	10,963			$	13,767
Office build outs		$	1,683			$	6,700			$	14,860			$	9,212			$	6,857
Capitalized software and other projects		$	21,735			$	24,633			$	19,932			$	19,831			$	27,002
Total capital expenditures		$	106,525			$	117,558			$	122,607			$	100,694			$	112,393
Infrastructure capacity and utilization
Megawatts under contract at period end		59.6				60.0				60.0				58.1				58.1
Megawatts available for use at period end		44.4				46.9				46.9				45.3				45.4
Megawatts utilized at period end		26.0				27.0				27.4				28.1				29.0
Annualized net revenue per average Megawatt of power utilized		$	59,305			$	58,662			$	60,015			$	60,691			$	61,802

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

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

(3) Non-cash purchases of property and equipment represents changes in amounts accrued for purchases under vendor financing and other deferred payment arrangements.

Consolidated Quarterly Statements of Income

(Unaudited)

		Three Months Ended
		June 30,				September 30,				December 31,				March 31,				June 30,
(In thousands)		2013				2013				2013				2014				2014
Net revenue		$	375,847			$	388,636			$	408,103			$	421,047			$	441,112
Costs and expenses:
Cost of revenue		117,658				127,404				133,821				140,417				145,051
Research and development		23,216				23,773				24,849				25,192				29,711
Sales and marketing		52,269				50,869				55,465				57,359				60,480
General and administrative		72,840				78,075				79,128				71,150				81,424
Depreciation and amortization		74,460				80,753				87,683				87,805				90,559
Total costs and expenses		340,443				360,874				380,946				381,923				407,225
Income from operations		35,404				27,762				27,157				39,124				33,887
Other income (expense):
Interest expense		(833		)		(689		)		(656		)		(495		)		(529		)
Interest and other income (expense)		(303		)		440				405				265				171
Total other income (expense)		(1,136		)		(249		)		(251		)		(230		)		(358		)
Income before income taxes		34,268				27,513				26,906				38,894				33,529
Income taxes		11,901				11,202				6,108				13,448				11,078
Net income		$	22,367			$	16,311			$	20,798			$	25,446			$	22,451
		Three Months Ended
		June 30,				September 30,				December 31,				March 31,				June 30,
(Percent of net revenue)		2013				2013				2013				2014				2014
Net revenue		100.0		%		100.0		%		100.0		%		100.0		%		100.0		%
Costs and expenses:
Cost of revenue		31.3		%		32.8		%		32.8		%		33.3		%		32.9		%
Research and development		6.2		%		6.1		%		6.1		%		6.0		%		6.7		%
Sales and marketing		13.9		%		13.1		%		13.6		%		13.6		%		13.7		%
General and administrative		19.4		%		20.1		%		19.4		%		16.9		%		18.5		%
Depreciation and amortization		19.8		%		20.8		%		21.5		%		20.9		%		20.5		%
Total costs and expenses		90.6		%		92.9		%		93.3		%		90.7		%		92.3		%
Income from operations		9.4		%		7.1		%		6.7		%		9.3		%		7.7		%
Other income (expense):
Interest expense		(0.2		)%		(0.2		)%		(0.2		)%		(0.1		)%		(0.1		)%
Interest and other income (expense)		(0.1		)%		0.1		%		0.1		%		0.1		%		0.0		%
Total other income (expense)		(0.3		)%		(0.1		)%		(0.1		)%		(0.1		)%		(0.1		)%
Income before income taxes		9.1		%		7.1		%		6.6		%		9.2		%		7.6		%
Income taxes		3.2		%		2.9		%		1.5		%		3.2		%		2.5		%
Net income		6.0		%		4.2		%		5.1		%		6.0		%		5.1		%
Due to rounding, totals may not equal the sum of the line items in the table above.

(1) Non-GAAP Financial Measures

Adjusted EBITDA (Non-GAAP financial measure)

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

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

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

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

		Three Months Ended
		June 30,				September 30,				December 31,				March 31,				June 30,
(Dollars in thousands)		2013				2013				2013				2014				2014
Net revenue		$	375,847			$	388,636			$	408,103			$	421,047			$	441,112
Income from operations		$	35,404			$	27,762			$	27,157			$	39,124			$	33,887
Net income		$	22,367			$	16,311			$	20,798			$	25,446			$	22,451
Plus: Income taxes		11,901				11,202				6,108				13,448				11,078
Plus: Total other (income) expense		1,136				249				251				230				358
Plus: Depreciation and amortization		74,460				80,753				87,683				87,805				90,559
Plus: Share-based compensation expense		13,315				16,959				17,188				12,732				17,265
Adjusted EBITDA		$	123,179			$	125,474			$	132,028			$	139,661			$	141,711
Operating income margin		9.4		%		7.1		%		6.7		%		9.3		%		7.7		%
Adjusted EBITDA margin		32.8		%		32.3		%		32.4		%		33.2		%		32.1		%

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

We define Return on Capital (ROC) as follows:

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

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

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

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

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

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

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

		Three Months Ended
		June 30,				September 30,				December 31,				March 31,				June 30,
(Dollars in thousands)		2013				2013				2013				2014				2014
Income from operations		$	35,404			$	27,762			$	27,157			$	39,124			$	33,887
Effective tax rate		34.7		%		40.7		%		22.7		%		34.6		%		33.0		%
Net operating profit after tax (NOPAT)		$	23,119			$	16,463			$	20,992			$	25,587			$	22,704
Net income		$	22,367			$	16,311			$	20,798			$	25,446			$	22,451
Total assets at period end		$	1,377,928			$	1,451,769			$	1,491,797			$	1,566,949			$	1,647,975
Less: Excess cash		(217,950		)		(223,359		)		(210,761		)		(263,309		)		(287,411		)
Less: Accounts payable and accrued expenses, accrued compensation and benefits, and income and other taxes payable		(178,552		)		(213,268		)		(195,894		)		(224,423		)		(231,563		)
Less: Deferred revenue (current and non-current)		(22,636		)		(22,211		)		(26,530		)		(24,485		)		(23,248		)
Less: Other non-current liabilities, deferred income taxes, deferred rent, and finance lease obligations for assets under construction		(154,409		)		(155,003		)		(149,043		)		(164,703		)		(180,220		)
Capital base		$	804,381			$	837,928			$	909,569			$	890,029			$	925,533
Average total assets		$	1,363,139			$	1,414,849			$	1,471,783			$	1,529,373			$	1,607,462
Average capital base		$	777,030			$	821,155			$	873,749			$	899,799			$	907,781
Return on assets (annualized)		6.6		%		4.6		%		5.7		%		6.7		%		5.6		%
Return on capital (annualized)		11.9		%		8.0		%		9.6		%		11.4		%		10.0		%

Adjusted Free Cash Flow (Non-GAAP financial measure)

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

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

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

		Three Months Ended								Six Months Ended
(In thousands)		June 30, 2013				June 30, 2014				June 30, 2013				June 30, 2014
Adjusted EBITDA		$	123,179			$	141,711			$	248,286			$	281,372
Non-cash deferred rent		1,519				2,113				5,484				4,369
Total capital expenditures		(106,525		)		(112,393		)		(231,924		)		(213,087		)
Cash payments for interest, net		(775		)		(520		)		(1,826		)		(952		)
Cash payments for income taxes, net		(5,911		)		(4,576		)		(9,750		)		(5,462		)
Adjusted free cash flow		$	11,487			$	26,335			$	10,270			$	66,240