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Rackspace Hosting Inc (NYSE:RAX)
Operating Income
$276 Mil (TTM As of Sep. 2016)

Rackspace Hosting Inc's operating income for the three months ended in Sep. 2016 was $70 Mil. Its operating income for the trailing twelve months (TTM) ended in Sep. 2016 was $276 Mil.

Operating margin is calculated as operating income divided by its revenue. Rackspace Hosting Inc's operating income for the three months ended in Sep. 2016 was $70 Mil. Rackspace Hosting Inc's revenue for the three months ended in Sep. 2016 was $516 Mil. Therefore, Rackspace Hosting Inc's operating margin for the quarter that ended in Sep. 2016 was 13.60%.

Warning Sign:

Rackspace Hosting Inc operating margin has been in 5-year decline. The average rate of decline per year is -3.8%.

Rackspace Hosting Inc's 5-Year average Growth Rate for operating margin was -3.80% per year.

Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt’s definition. Rackspace Hosting Inc's annualized return on capital for the quarter that ended in Sep. 2016 was 17.37%. Rackspace Hosting Inc's annualized return on capital (Joel Greenblatt’s) for the quarter that ended in Sep. 2016 was 26.60%.


Definition

Operating income, is the profit a company earned through operations. All expenses, including cash expenses such as cost of goods sold (COGS), research & development, wages, and non-cash expenses, such as depreciation, depletion and amortization, have been deducted from the sales.

Rackspace Hosting Inc's Operating Income for the fiscal year that ended in Dec. 2014 is calculated as

Operating Income(A: Dec. 2014 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=1794.357-582.334-559.604
-Research & Development-Depreciation, Depletion & Amortization-Others
-117.006-371.884-1.13686837722E-13
=164

Rackspace Hosting Inc's Operating Income for the quarter that ended in Sep. 2016 is calculated as

Operating Income(Q: Sep. 2016 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=516.2-183.9-149.2
-Research & Development-Depreciation, Depletion & Amortization-Others (1)
-24.5-100.9--12.5
=70

Operating Income(Q: Sep. 2016 )
=EBITDA-Depreciation, Depletion & Amortization-Others (2)
=171.1-100.9--1.42108547152E-14
=70

Rackspace Hosting Inc Operating Income for the trailing twelve months (TTM) ended in Sep. 2016 was 59.9 (Dec. 2015 ) + 81.2 (Mar. 2016 ) + 64.3 (Jun. 2016 ) + 70.2 (Sep. 2016 ) = $276 Mil.

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.


Explanation

1. Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt’s definition.

Rackspace Hosting Inc's annualized Return on Capital (ROC) for the quarter that ended in Sep. 2016 is calculated as:

Return on Capital (ROC)(Q: Sep. 2016 )
=NOPAT/Average Invested Capital
=Oper. Inc.*(1-Tax Rate)/( (Invested Capital (Q: Jun. 2016 ) + Invested Capital (Q: Sep. 2016 ))/2)
=280.8 * ( 1 - 35.67% )/( (1059.8 + 1019.9)/2)
=180.63864/1039.85
=17.37 %

where

Invested Capital(Q: Jun. 2016 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=646.1 + 0.5 + 957.5 - 544.3
=1059.8

Invested Capital(Q: Sep. 2016 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=644.3 + 0.3 + 1007.4 - 632.1
=1019.9

Note: The Operating Income data used here is four times the quarterly (Sep. 2016) operating income data.

2. Joel Greenblatt’s definition of Return on Capital:

Rackspace Hosting Inc's annualized Return on Capital (Joel Greenblatt’s) for the quarter that ended in Sep. 2016 is calculated as:

ROC (Joel Greenblatt’s)(Q: Sep. 2016 )
=EBIT/Average of (Net fixed Assets + Net Working Capital)
=EBIT/Average of (Net PPE+Net Working Capital)
     Q: Jun. 2016  Q: Sep. 2016
=EBIT/( ( (Net PPE + Net Working Capital) + (Net PPE + Net Working Capital) )/2 )
=280.8/( ( (1071.6 + max(-19.4, 0)) + (1031.7 + max(7.8, 0)) )/2 )
=280.8/( ( 1071.6 + 1039.5 )/2 )
=280.8/1055.55
=26.60 %

where Working Capital is:

Working Capital(Q: Jun. 2016 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(168.6 + 0 + 59.7) - (219.1 + 28.6 + -7.1054273576E-15)
=-19.4

Working Capital(Q: Sep. 2016 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(166 + 0 + 66.2) - (181.2 + 43.2 + -1.42108547152E-14)
=7.8

When net working capital is negative, 0 is used.

Note: The Earnings Before Interest and Taxes (EBIT) data used here is four times the quarterly (Sep. 2016) EBIT data.

3. Operating Income is also linked to Operating Margin:

Rackspace Hosting Inc's Operating Margin for the quarter that ended in Sep. 2016 is calculated as:

Operating Margin=Operating Income (Q: Sep. 2016 )/Total Revenue (Q: Sep. 2016 )
=70.2/516.2
=13.60 %

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

4. Please click Growth Rate Calculation Example (GuruFocus) to see how GuruFocus calculates Wal-Mart Stores Inc (WMT)'s revenue growth rate. You can apply the same method to get the operating income growth rate using operating income per share data.


Be Aware

Compared with a company’s EBITDA margin, Operating Margin can be manipulated by adjusting the rate of depreciation, depletion and amortization (DDA).

If a company is facing competition, its Operating Margin may decline. Often the Operating Margin declines well before the company’s revenue or even profit decline. Therefore, Operating Margin is a very important indicator of whether the company is facing problems.

For instance, by 2012, Nokia (NOK)’s problems were well known and its stock had lost more than 90% of its market value since 2007. But Nokia’s Operating Margin had already been in decline since 2002, although its earnings per share were still rising. Investors who paid attention to Operating Margin would have avoided this huge loss. The same can be said for Research-in-Motion (RIMM).

Therefore, Operating Margin is a very important screening filter for GuruFocus. GuruFocus’s Buffett-Munger screener requires that the profit margin is either consistent or expanding. The Model Portfolio of the Buffett-Munger screener has outperformed the market every year since inception in 2009.


Related Terms

Revenue, Cost of Goods Sold, Selling, General, & Admin. Expense, Research & Development, Gross Profit, EBITDA, Depreciation, Depletion and Amortization, Return on Capital, Return on Capital (Joel Greenblatt’s), Earnings Yield, Operating Margin, EBIT, Growth Rate Calculation Example (GuruFocus)


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

Rackspace Hosting Inc Annual Data

Dec06Dec07Dec08Dec09Dec10Dec11Dec12Dec13Dec14Dec15
Operating Income 3131405580123173133164200

Rackspace Hosting Inc Quarterly Data

Jun14Sep14Dec14Mar15Jun15Sep15Dec15Mar16Jun16Sep16
Operating Income 34415043425560816470
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