Prospectus Summary
PROSPECTUS SUMMARY This summary highlights certain information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should carefully read the entire prospectus, including the section entitled “Risk Factors” and our financial statements and related notes, before you decide whether to invest in our common stock. If you invest in our common stock, you are assuming a high degree of risk. See the section entitled “Risk Factors.” References to “we,” “our,” “our company,” “us,” “the company,” “Rackspace Hosting,” or “Rackspace” refer to Rackspace, Inc. and its consolidated subsidiaries. Unless otherwise indicated, industry data are derived from publicly available sources, which we have not independently verified.Rackspace Hosting
Overview
Rackspace Hosting is the world’s leader in hosting. We deliver websites, web-based IT systems, and computing as a service. Our rapid growth is the result of our commitment to serving our customers, known as Fanatical Support®, and our exclusive focus on hosting. Our financial success is the result of responsible financial management and our disciplined, just-in-time approach to capital investment. During 2007, we had net revenue of $362.0 million. As of December 31, 2007, we served over 29,000 business customers of all sizes with more than 36,000 servers, over 700,000 business email accounts, and more than 32,000 cloud hosting domains. To deliver on our Fanatical Support Promise to our customers, we have created a culture that encourages passionate, engaged employees who we call “Rackers.” In 2008, Fortune magazine ranked Rackspace Hosting #32 on its list of “100 Best Companies to Work For.”
Hosting providers offer services to support websites, web-based IT systems, and computing. The equipment required (servers, routers, switches, firewalls, load balancers, cabinets, software, wiring, etc.) to deliver services is typically purchased and managed by the hosting provider. As a result, hosting providers reduce customers’ initial capital investment and ongoing operating costs. Hosting also reduces the complexity of deploying and managing IT systems and computing, and changes the way companies purchase these products and services. Rackspace offers a full suite of hosting services, including dedicated hosting, managed hosting, and email hosting, as well as emerging services such as platform hosting and cloud hosting.
Tier1Research estimates the worldwide hosting market to be $12.3 billion in 2007, with projected annual growth of 26% from 2007 to $24.4 billion in 2010. This revenue comes from three major categories – managed hosting, dedicated hosting, and shared hosting. In 2007, Rackspace Hosting was the world’s largest hosting provider by revenue, based on Tier1Research data for these categories.
Historically, our business has generated high revenue growth and has grown significantly faster than the overall hosting market. Over the past five years our net revenue has grown from $56.6 million in 2003 to $362.0 million in 2007, representing an annual growth rate of 59.0%. We have also been able to generate strong profitability. During that same five year period, our net income grew from $208,000 to $17.8 million. See the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our results of operations.
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We are focused on two key principles. First, to be recognized as one of the world’s great service companies. Second, to generate economic returns that exceed our cost of capital. This approach has allowed us to profitably grow to our current size with only $39.6 million in equity capital raised to date. These key principles form the foundation of our business model, which includes the following elements:
Industry Background
The ability to operate online has become increasingly important to businesses. Advances in technology, network infrastructure, and availability of broadband access, have enabled more robust and frequent access to web-based computing capabilities. These capabilities have become the tools business users expect to be available to them anywhere, at any time. These trends have required business owners to invest more in their IT systems and the people who manage them in order to remain competitive. Businesses are also frustrated with the rising level of IT budgets and are searching for new ways to lower costs and support their users’ growing demands.
Hosting has emerged as the answer for businesses to address these factors. As the Internet has evolved, businesses have continued to migrate more and more of their IT systems and computing resources to hosting companies that support their growing needs.
Alternatives to Managing IT Systems and Computing
Businesses are rethinking how they manage their computing needs. In the past, the only alternative to managing IT systems internally was to outsource them. Hosting has emerged as an attractive alternative, one that is tailored to serve a much broader market at lower cost and without high initial capital investment.
Do-it-Yourself: Do-it-yourself is an approach to managing IT systems where a business retains complete ownership and responsibility for maintenance and support. Companies may choose to house their IT systems in their own facilities or may use a colocation vendor for data center space and network access.
Outsourcing: Businesses may also choose to outsource their IT systems and computing operations. Outsourcers typically provide an end-to-end, custom solution for their customers. The outsourcer also assumes responsibility for management of a customer’s IT systems, computing operations, and employees.
Hosting: Many businesses today are choosing hosting as an alternative to do-it-yourself and outsourcing. Hosting providers offer services to support IT systems and computing ranging from simple to very complex. The equipment required (servers, routers, switches, firewalls, load balancers, cabinets, software, wiring, etc.) to deliver their services is typically purchased and managed by the hosting providers. This results in reduced upfront and ongoing capital expenditures and operating expenses, as well as reduced complexity of deploying and managing IT systems and computing.
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Benefits of Our Approach
Businesses typically buy our services because we provide them with a level of quality and flexibility that they could not achieve on their own. We believe our historic revenue growth and profitability demonstrate that we are delivering unique value to our customers, as detailed below:
Our Growth Strategy
Our vision is to be recognized as one of the world’s great service companies. Our goal is to expand our leadership position in hosting around the world, and our strategy for accomplishing this goal includes the following key elements:
The Auction Process
We plan to conduct this offering using an auction process to open participation in our initial public offering to all investors, both individual and institutional. We believe allowing open participation in this offering through a technology-enabled auction process aligns with our corporate culture and business mission. The auction process differs from methods that have been traditionally used in most other
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underwritten initial public offerings in the U.S. In particular, we and our underwriters plan to conduct an auction open to prospective purchasers to determine the initial public offering price and the allocation of shares in the offering. To participate in the auction, investors will submit bids to purchase shares of our common stock through one of our underwriters. An investor may submit bids that specify the number of shares the investor would be interested in purchasing and the price the investor would be willing to pay. We intend to use the auction to determine a clearing price for the offering, which is the highest price at which all of the shares offered (including shares subject to the underwriters’ over-allotment option) may be sold to potential investors. We may set the initial public offering price at the clearing price, though we and our underwriters have discretion to set the initial public offering price below the clearing price. All valid bids to purchase shares at or above the initial public offering price will receive an allocation of shares at the initial public offering price. If the number of shares represented by successful bids exceeds the number of shares we and the selling stockholders are offering, then we will allocate the shares among successful bids on a pro rata basis. See the section entitled “The Auction Process” for a description of how this process will work.
Risks Affecting Us
We are subject to a number of risks of which you should be aware before you decide to buy our common stock. These risks are discussed more fully in the section entitled “Risk Factors” found on page 8. Some of these risks are:
Corporate Information
Rackspace, Inc. was incorporated in Delaware on March 7, 2000. However, our operations began in 1998 as a limited partnership, which became our subsidiary through a corporate reorganization completed on August 21, 2001. Our principal executive offices are located at 9725 Datapoint Drive, San Antonio, Texas 78229. Our telephone number is (210) 312-4000. Our website address is www.rackspace.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.
Rackspace® and Fanatical Support® are registered in the U.S. and several other countries as service marks of our subsidiary, Rackspace US, Inc. Noteworthy® is registered in the U.S. as a service mark of Rackspace US, Inc. MOSSO® is registered in the U.S. as a service mark of our subsidiary, Mosso, LLC. Fanatical and Fanatiguy are unregistered service marks of Rackspace US, Inc. Mailtrust is an unregistered service mark of Mosso, LLC. Net Promoter® is a registered trademark of Bain & Company, Fred Reichheld and Satmetrix Systems, Inc.; NPS is a service mark of Bain & Company, Inc. EVA® is a registered trademark of Stern Stewart & Co. and EVAdimensions. Other trademarks and tradenames appearing in this prospectus 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.
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The Offering
The number of shares of our common stock to be outstanding immediately after this offering is based on 102,343,355 outstanding as of December 31, 2007, after giving effect to the conversion of our preferred stock into shares of common stock, and excludes:
Except as otherwise indicated, all information contained in this prospectus:
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Summary Consolidated Financial Data
The following summary financial data for the fiscal years ended December 31, 2003, 2004, 2005, 2006, and 2007 are derived from our audited financial statements. You should read this data together with our audited financial statements and related notes included elsewhere in this prospectus and the information under the sections entitled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unaudited Pro forma basic and diluted net income per common share has been calculated assuming the conversion of all of our outstanding shares of preferred stock into 1,214,837 shares of common stock.
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The unaudited pro forma balance sheet data reflects the actual balance sheet data as of December 31, 2007, adjusted to give effect to the automatic conversion of our preferred stock into common stock upon completion of this offering. The pro forma as adjusted balance sheet data reflects the pro forma balance sheet data as of December 31, 2007, adjusted for the sale by us of shares of our common stock in this offering at an assumed initial public offering price of $ per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
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