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Rackspace Hosting, Inc. (NYSE:RAX)

May 02, 2013 9:30 am ET

Executives

Graham M. Weston - Chairman, Member of Real Estate & Finance Committee and Member of Service & Strategy Committee

Alan Schoenbaum - Senior Vice President and General Counsel

A. Lanham Napier - Chief Executive and Executive Director

Graham M. Weston

Good morning. Good morning, everyone. Welcome to our shareholders' meeting. If you'll take your seats, we'll get started.

Good morning. I'm Graham Weston. I'm the Chairman of Rackspace, and I want to welcome you to the Rackspace Annual Shareholders' Meeting today. Presenting at the meeting will be our CEO, Lanham Napier, and several of our directors. Several of our directors are here as well today. If you're -- the directors here, would you raise your hand, please? I hope that you'll take a moment to say hello to them after the meeting.

Also present today are John Recker and his colleagues from our audit firm, KPMG. Would you raise your hands, KPMG folks? Welcome. Lots of you. Welcome. They do a lot of work for us year-round. They do a lot of work for you year-round, I should say. Also, Alan Schoenbaum will be -- Alan Schoenbaum is our General Counsel. He will be acting as the secretary of the meeting. Kathy O'Kane representing our -- American Stock Transfer, which is our transfer agent, has been appointed to act as Inspector of Elections.

I'll now turn over the meeting to Alan Schoenbaum for the business part of the meeting, after which we'll have a management presentation by Lanham Napier, our CEO. Welcome.

Alan Schoenbaum

Thank you, Graham. First, I would like to tell a couple of stories. Just kidding. I'm not going to do that.

I'd like to confirm that the notice of this meeting was duly given. A copy of the notice and the affidavit of mailing will be incorporated into the minutes. All stockholders of record at the close of business on March 8, 2013, are entitled to vote. So if you aren't a stockholder of record March 8, you've got to leave right now.

Proxies, existence of a quorum. We do have a quorum. We've determined that the holders of 138,007,315 shares are entitled to vote at this meeting. Our Inspector of Elections tells me that at least 129,620,524 shares are represented in person or by proxy. That's approximately 94%, which is a really, really great result. Because holders of a majority of the shares entitled to vote at this meeting are present, this meeting is duly convened.

So today's meeting will cover 2 proposals. They've been described in detail in our proxy statement. And for those that haven't read the proxy statement, I'll summarize for you. The first proposal is the election of 3 directors. The board recommends the election of Lanham Napier, who is our CEO; George Still, who is a independent outside director; and Michael Sam Gilliland, we all call him Sam, as a Class II directors, each with a 3-year term. And the second proposal is to ratify KPMG as our auditors.

So we're going to vote now. Where are the voting machines? Do you know where those are? The polls are now open. If you need a ballot, please raise your hand. Anyone need a ballot? Ballot over here? Are these punch card ballots? No? Do we have computer -- no. It's just paper ballots? Don't draw on the margins. If you've already voted by proxy, you do not need to vote today unless you want to change your vote, which you have the legal right to do.

[Voting]

So we're going to watch a couple of videos now while people vote and whatnot. Anybody want to watch a video and have me kind of shut up for a while? Okay. Let's roll the video.

[Presentation]

Alan Schoenbaum

That's one of my favorite all-time Rackspace videos. It's a day in the life of Rackspace.

So now that the voting -- hopefully, everyone that needed to vote -- how many were there that needed to vote? Like 3 people? We're going to collect the ballots and any proxies that stockholders of record would like to submit at this time. If you've already voted by proxy, you don't need to vote today unless you'd like to change your vote. So everyone -- has everyone submitted their ballots? It's all done? Great.

So let's give a moment to count those. Okay. That's enough time. So we now have all the ballots and proxies, and since all those desiring to vote by ballot have done so, I hereby declare the polls closed. The ballots and proxies will be held in the possession of Inspector of Elections, and we're going to count them.

So while the votes are counted, would you like to watch another video maybe? What do you think? Yes? Okay. Let's watch another video about Rackspace, Service Leader in the Cloud.

[Presentation]

Alan Schoenbaum

So to kind of just explain the way the voting works, most people vote by proxy either by -- over the Internet or telephone or they mail it in, and we received approximately 94% of those ballots ahead of time. So that makes the voting go pretty quickly here, and that kind of explains why we kind of are able to count so fast and let you know that -- the results.

So we have been informed, based on what came in before the meeting started today as -- and by proxies and what has been counted today, that all the members of the board that were up for nomination have been duly elected. So congratulations to our board members for their reelection. And KPMG has been ratified as our auditor once again. Thank you, KPMG.

So I will now turn it over to our Chairman, Graham Weston.

Graham M. Weston

So the official part of our meeting has now finalized. So the shareholders' meeting is really a part of the formality of being a public company and is -- that is the -- we have to elect our auditors each year. We have to elect the directors each year. And most of the election is -- actually happens electronically, as Alan said. So we've now -- that completes the formal part of today's presentation. And now, Lanham Napier, our CEO, is going to speak a bit about Rackspace and our future.

And before I step down, I want to invite anyone who'd like to take a tour of our headquarters, please assemble near the wall over here afterwards and we would love to give you a tour. For those of you who've been to previous shareholder meetings, you'll notice this facility is brand new. There's quite a bit that's happened just in the last year. So I hope you'll take advantage of that opportunity.

Thank you again for coming. And here's Lanham Napier. Please.

A. Lanham Napier

Good morning. Thanks for coming. So what I'm going to do in this presentation this morning is really talk about last year. So we are sitting here in May of 2013. We have an earnings call that takes place next week. So we're in a -- what's called a closed window in the company's from an information point of view. So I really need to focus the remarks on everything 2012. All right? So we get to relive last year together a little bit longer. After I get through these slides, there's just a handful of them, we'll have time for some Q&A. And so feel free to launch any scud-ness on my way. Anything you want me to answer, I will answer for you.

This is our Safe Harbor statement legal disclosure language. It basically says I'm going to do my best to present everything accurately here. And if I don't, Schoenbaum, our General Counsel, will have words with me.

Let's talk a little bit about the quick facts around Rackspace. Yes, we were founded in 1998 here in a dorm room in San Antonio, Texas over at Trinity University. So the founders met at Trinity University when they were students. And really, it was Trinity that brought the right people together to make Rackspace happen. Those folks bumped into Graham Weston and Morris Miller who provided some of the early capital and early investment in the company. And then here -- 14 years later, here we are inside of what used to be Windsor Park Mall in Windcrest, Texas.

And so during this time period, we've grown to be a global company. San Antonio, Texas is still what we would call our central offices. Our largest office is here. There are about 3,000 people that work in this building. Across the company, we're about 5,000 people. Everybody who works at Rackspace, we call a Racker. I mean, this is a -- we've basically branded our culture, which is something we're really proud of as a company.

And when you look at our operations, we have a global footprint. We operate in North America, in places like Austin and Dallas, Chicago, D.C., San Francisco, Atlanta, Blacksburg, a few examples. We operate in Europe, primarily Western Europe, in Amsterdam, as well as London. We operate in Australia. We have a new office and data center in Sydney. We operate in Hong Kong. So our company has expanded rapidly over the years. This growth has been all through organic growth. It's really been one customer at a time as we've grown the business, and we're now a global company.

Then interesting part about this is that we are actually what we would consider to be operating at web scale. What I mean by that is there are a handful of companies on the planet that truly are changing how the Internet operates and operating at a level of scale and mass inside that environment that is big, companies like Amazon, companies like Google, companies like Microsoft and a company like Rackspace. We are one of those handful of companies that truly is operating the Internet and improving the Internet's performance and operating at a scale that other companies can really only dream about achieving.

I'm proud to say that last year, we achieved $1.3 billion in revenue growth. We also saw our profits increase, and we have a pretty strict discipline around how we price opportunities for customers and how we run the business, which has led to this continuous growth in our profits.

Now some of the things we accomplished. When I talk about operating at web scale for example, we're running over 90,000 physical servers. We then slice these servers up and combine them into pools of computing, which means we run many multiples of that in terms of virtual servers and virtual instances. We now serve more than 200,000 customers. I mean, we are a service company. We're one part technology and one part service. We're trying to build one of the world's greatest service companies, and we're delivering this service called Fanatical Support now to more than 200,000 companies on a global basis. So we truly are leaving our fingerprints and making a dent in the universe.

Something we are really proud of, which was -- we touched on in the videos, is OpenStack. We were -- we are the founder of OpenStack, along with NASA. OpenStack is basically an incredible gift that Rackspace gave to the technology world, in that we took the software that runs our cloud and open sourced it. Right now, in the marketplace, we are seeing the emergence of a new software development model with open source. It started with Linux. Linux basically became an open-source operating system for web servers. You're seeing it now with OpenStack for running cloud computing, for basically running the guts of the Internet.

When we launched OpenStack just a few years ago, it was literally a handful of us. I was at the summit a couple of weeks ago up in Portland, Oregon. There were 3,000 people there. There are 165 companies actively supporting it. It is moving at lightning speed and is literally going to change how humanity consumes computing. And our little company here in San Antonio, Texas started that thing. So it's something -- if you get a chance to expose yourself to it, I promise you, you will feel an enormous sense of pride when you interact with the people in the community and the thing -- feel the power of the movement that we've created here. It's really compelling to be a part of them. We think that movement, as it grows in power and capability, creates interesting business opportunities for our company, for the investment we've made together here at Rackspace.

And when you look at one of our other businesses, email, we run a number of mail accounts. We're one of the largest email providers in the world, and we now have 3 million paid email customers across our portfolio. Something we're also very proud of is being recognized as a leader by outside analysts. So Gartner Inc. has a study every year they do called the Magic Quadrant, where it basically ranks our industry, and we've been ranked again as a leader in the Magic Quadrant. And if you look at the axes, I think we're in first place. Okay, it's little. You have to break the magnifying glass out there to get it exactly right, but I think we're in first place. All right? So we've been recognized as a leader again by Gartner. We've had similar recognition by Forrester Research.

And what -- the reason this is so important is that when customers are making decisions, particularly enterprise customers, they go to third parties for validation. We have 200,000 customer references that are powerful, the customers we're serving. It turns out many new prospects want to talk to existing customers, as well as get third-party validation from these research houses. So the recognition we get from Gartner and Forrester and others really matters in terms of under -- building our brand and building our reputation in the marketplace.

Another thing we're proud of is not only building a business the right way that has great business results, but making a dent in the universe as well, and we start with the communities around our offices. So you see here in this slide the thousands of volunteer hours we had last year as a company, much of it focused on the cluster around this building that you're sitting in today, as well as around our Hyde Park Hayes building in London. I mean, we'd really take to heart and care deeply about the communities in which we operate, and we're trying to make the world a better place. And this is one part about building a good business and creating jobs, and there's another part about giving back and volunteering our talents in the community around us.

And then to wrap off the noteworthy achievements from last year on this slide, I would say the recognition we've received as being a best place to work. Okay? We were recognized in the U.S. by Fortune Magazine as the #34 best place to work in the country. Look, 34 is my favorite number being from Texas with Earl Campbell and Hakeem Olajuwon and Nolan Ryan, stuff like that. So I would be happy to stay at #34. That's very impressive. But the U.K. was even better, we were ranked #7. And I got to tell you, there's nothing better than being 007 in the U.K., right, with respect to workplace.

And the reason this is so critical, this isn't to pat ourselves in the back about having cool rankings, like it or not, our company is in a talent war, I mean, a talent war. When you watched the videos of Rackers and those pictures, I mean, those people are incredibly talented and talented people today with the technology skills we're after, who want to work in a place where they're appreciated and feel like they can do good work. We have a saying around here, if you're doing the tour, that it's about being a valued member on a winning team and with an inspiring mission. And that's what we're trying to create here in our workplace.

So these recognitions -- the recognition about being a best place to work makes a difference. When we're recruiting, it's something that our prospects go and look at. I mean, it's a pretty easy thing to consider. I mean, do you want to work at a place where people are happy doing cool things, or do you want to work at a place where people are grumpy and unhappy? I mean, how do you want to spend your time on this planet? Okay? And so we want to be in that first category, and we think the recognition we have around our culture actually creates a business advantage. Right? It enables us to pull talent into San Antonio and Austin and San Francisco and our other offices in a way that we wouldn't be able to do if we didn't have this type of culture.

Last year, of all the accomplishments we had, I think this one we are probably the most proud of. This list of products, which I'll spare you the technical details around, basically represent the arrival and launch of a new platform, the arrival and launch of our OpenStack cloud. So we founded OpenStack a few years ago. It took a couple of years to get the technology to the point where we could have an operating global platform at scale, running on top of OpenStack. And last year, this company marched in a marine-like cadence to launch these products every 30 days and get them out the door. And it is something we're really, really proud of ourselves.

This is -- we are running the world's largest OpenStack cloud today. We believe we are positioned to be the #1 hybrid cloud company in the world. This product launch really is what enables that. Without this capable public cloud offering powered by OpenStack, we don't have the ability to be one of the world's largest hybrid cloud companies. And today, we sit here literally we're running the world's largest OpenStack public cloud, and it's because of these products. They're performing just like we wanted them to perform. Customers are happy. So we'll talk a lot more about that here in the future together as it gets out, but we wrapped these up basically last November. So they've only been in the marketplace about 6 months. Okay?

And it wouldn't be a stockholder meeting if I didn't give you some financial data. Okay? So here's the financial data. The good news is when you look at the revenue, we grew the revenue again almost 30%. I think we were 27% last year as we ended the year at $1.3 billion in sales. So you can look back a few years. When we went public, we were a $500-million revenue company. So we've almost tripled it in a few short years that we've been a public company. And when you look at the profit, the profit continued to climb as well. All right? So we're proud of our financial results last year.

Another result that we track, it isn't just a pure growth or profit measures, our return on capital, because ultimately, we think, as stockholders, the returns we generate for you in the stock market will be pretty tightly correlated to the return on capital that we generate over the long term. And we're proud to say that, that was healthy as well. I mean, from the economic value point of view, we were adding value as a company. We're -- we showed a return on capital of almost 16% here at the end of last year, so we've made progress on that. That's a metric that we've talked about in the past that's moving around a bit based on investment opportunities and growth in profits and things, but it is something that we keep our eye on here inside Rackspace. And so that's our financial progress from last year.

If you want to take a quick snapshot at the balance sheet, we've never been so well capitalized. We have almost $300 million of cash in the bank. We have some capital lease obligations that we pay out over time. These are primarily the rents on our data centers, for example. And we've borrowed $3 million of debt, okay, that we have on a credit facility. So when you look at us, we have more cash than debt. So we're fairly well capitalized. We believe we have a strong balance sheet and that we're well positioned to keep building our company and move it forward.

So with that, I am happy to take all of your questions. I think I don't have to be anywhere for 35 minutes. Okay? Yes, sir?

Question-and-Answer Session

Unknown Attendee

Are you able to comment on the Wall Street analysts' portal, the reactions to the earnings reported in February and the resultant 25%, 30% decline in the prices of stock from approximately $70 to $48 change from last night?

A. Lanham Napier

Yes, sure. So the -- just repeat the question so everybody heard it. The question is would I comment on the analysts' -- I'd say, more generally, would I comment on the stock, I guess, market reaction after our last call. Okay? Because the stock has fallen, and this is a stockholder meeting. I have the vast majority of my net worth invested in this company. So when the stock falls that much, it absolutely gets my attention. I think from -- I would summarize it very quickly and basically say relative to expectations in the marketplace, any time there's a reaction like that, it's clear we're disappointed. And I think that's what happened. I think that we're in a long-term game. I don't get to wound up at -- on any short-term movement in our stock price. I mean, I think that what's at stake here for our company is we have a chance -- we are in a middle of a large technology shift. And if we play our hand well and continue to invest and build the company profitably, I think we'll build a company many times larger than it is today. I've been here now 13 years. It's actually my 13th year anniversary yesterday. So we've been through lots of -- yes. Woohoo! Yes. Thank you. In that 13 years, we've been through lots of ups and downs. There were a number of times we almost went out of business when we first got here. I mean, we got down to $3 million of cash in the bank. So I -- in my time here, I've seen it -- we've been on top, we've been on bottom, we've been in between. My prediction for us, not about the stock price but about this company in general, is that anytime we're trying to do something that's never been done before, I think our company will continue to have ups and downs. I mean, it's a long game. So I don't personally get too wound up about any short-term movement. As stockholders, it's absolutely not what we wanted. It doesn't make me happy to see the stock price go down that much. I hear about it here, I hear about it at home, I hear about it at the Little League field, I hear about it at HEB, I hear about it everywhere. Okay? So it doesn't make me happy. It's no fun for me. But also, I think, that's the price of admission to building a great company. I mean, we're going to have to keep our head down and keep building, and it's going to take years to do it.

Unknown Attendee

Well, can you comment specifically on what you or your staff are doing to manage the expectations of analysts that feel that the P/E at 65% plus and your CapEx -- I noticed on the slide here that you're saying the CapEx is about $275 million to $300 million and that what I have gathered from the numerous analysts is that the amount of CapEx that you have to commit to grow the business, to fund all of your initiatives that, that is going to be somewhat of a drag on your ability to increase earnings, like you have in the past, to justify the current multiple. Is that a fair assessment of the analysts?

A. Lanham Napier

Well, I have a feeling you read the analysts' reports more closely than I do. Okay? The truth in the room is I don't spend a lot of time reading it. I'm a lot more obsessed about how we're serving customers, the talent we're getting, how we're doing in the marketplace than I am about what the analysts say. And I'm not trying to be flippant or anything about it. It's just how I'm -- how I operate. I think with respect to getting the data out to the analysts, I think it's our job as a management team and a company to be transparent about what we're doing around our results, the metrics we share. And it's the analyst's job and the market's job to assess those results and figure out what they want to do with it. I have 100% conviction in our path going forward that we have the opportunity to build something wonderful. And I think we can always improve how we -- how transparent we are and how well we share the data and help analysts and investors assess our performance. And I think some investors will believe and some won't. This is the wonderful thing about a market. People that believe will buy, and people that don't will exit. That's okay with me. I mean, I think everyone has to make the right decisions for their circumstances. So in terms of what is our approach to investors and Wall Street? Boy, we absolutely endeavor to be transparent. We believe that if you look at our company and the information we disclose, I think we disclose a lot more data than the average company does. I mean, our key metrics are pretty extensive, and that's about giving people a feel for what we're doing as a company, what the progress looks like and how the cash flows and earnings actually get generated. With respect to CapEx, when we are building out a global footprint, which is what we're doing right now, CapEx matters. So one of the things I had in the slides was a reference to opening a data center in Sydney, for example. When we open a new data center, we spend a lot of that capital upfront to open it. We're buying a bunch of servers, we're buying a bunch of machines, we're putting investment into the network to make all that functioning happen. And that will create swings in CapEx. We've always had that as a company, in that some of our spending is success-based, meaning as we win a customer, we do more CapEx. Other CapEx is actually in front. It's front loaded. And when we open a new facility, when we built out this building that we're sitting in today, for example, some of that comes before the revenue comes. So depending on where we are on our company's growth cycle and investment pattern, these things can hit at different times. Yes, sir?

Unknown Attendee

I actually had 2 questions if I might. The first, you talked about some of your major competitors, Google, Amazon, Microsoft. Could you talk about the comparative strengths and weaknesses of those companies' offerings versus what Rackspace has as a product? And then secondly, I've seen a lot more advertising recently, much of it in consumer publications, somewhat technology oriented. And could you comment on the strategy behind that and what your target is? And are you going after the consumer market, or are you basically looking at the enterprise market?

A. Lanham Napier

You're talking about the advertising from -- our advertising?

Unknown Attendee

Yes, that's correct.

A. Lanham Napier

Okay. Yes, great, great. No, good questions. Okay. So let's start with the competitive set. And you'd mention Google, Amazon, Microsoft, others, so what you have here is you have Google, Microsoft, Amazon, aggregate market capitalization, I don't know, $700 billion, something like that. And then you have Rackspace. So we have David and Goliath here again. We are David in that deal. I don't want there to be any confusion about this. Okay? So we are not going to attack Goliath here head on. Now ultimately, I don't think it's what your competitors do that determine the outcome. I think it's about what we do for our customers. Customers will determine who wins in this marketplace. Okay? That's the great leveler. If we serve customers with Fanatical Support and they love it, we got a business. And if they really love it, they'll tell their friends about it, and we'll have a growing business. And I -- so as much as it can be intimidating to think about how is Rackspace going to compete with the likes of a Google, well, we have our secret sauce, too. I think what those companies have is they have a higher level of scale. So in my prepared remarks, on the slides we talked about, operating at web scale, man, we are the smallest of the web scale guys, the smallest of the web scale companies. The 3 names you mentioned are probably the largest. Right? So that means we have to compete on different competitive factors. Right? I think that our point of difference is the strategy around customer intimacy. Fanatical Support assures customers that they're going to have a great experience. We -- I believe we can outserve every one of those companies. And with OpenStack, I think we can be at parity in terms of the geek capability. Right? I mean, are we going to write more code here than Google does? Probably not as Rackspace. But as the OpenStack movement continues to grow, I think OpenStack will be just as powerful in the cloud as Linux is with operating servers. And the Linux community is a very powerful development community within technology. So I think what we have is a technology bet based on an open environment. And open systems tend to innovate faster, grow faster and reach a higher aggregate level of scale than a closed system. Amazon is a closed company. Google and their cloud is closed. Microsoft is closed. We're open. So there's a cool point of difference already. And then the second point of difference is about we are here to serve. I mean, we're -- we really are a company that's made Fanatical Support a strategy. We differentiate around those customer outcomes. So I believe as long as we do that really well, we got a great future, and it's going to come down to those customers. Today, we only serve 200,000 customers, and there are millions of businesses out there. This gets to your target market question. If you look at our sweet spot today, it really is the mid-market. I mean, it's serving those small and midsized businesses in that list of 200,000 companies. That's our sweet spot. We've been opportunistic with Fortune 1000 companies and felt a little pull that way over the last few years. But if you look at our bread and butter, the place where I think we generate the best results in the world today, it's in the mid-market. I mean, this is where we can knock customers' socks off. They stand by us and love it, and we get email complements and phone calls. I had a customer send me a box of salsa yesterday, sitting on my desk in our company up in Dallas, and they just love what we do for them. So the guy sent me a box of salsa. That's cool because I like to eat. So I think as long as we are focused on that stuff, we'll be just fine. And things may go up and down for a while, but customers determine who wins. And as long -- if we keep our eye on customers more than competitors, we're great. I think if we obsess with competitors, we will lose our way. Customers have to be our guide here because we're David. We're not Goliath in that battle. With respect to the advertising that you mentioned and what we're trying to do in the marketplace is to position ourselves in the marketplace as being the standard bearer around hybrid cloud. And that starts with open-source technologies, it starts with OpenStack. So the advertising you're referencing is talking about how Rackspace open sourced the cloud. It's on a billboard out here on I-35. It's in some airports around the country. It's in some digital content. And the mission and purpose of this really is to let the marketplace know that we created OpenStack. The OpenStack movement is thriving. So the more we are closely affiliated with it, the better technology we can pull out of that and make Fanatical Support more capable for customers. And so that's what's going on with that advertising. We're positioning around the power of OpenStack. We're letting the world know that we created it. And we're building our brand credibility around the fact that we have an open cloud platform and the hybrid cloud capability that we're building is really powerful. Don't have it all done yet, okay, but it's really powerful. We are not targeting customers. Okay? I think that where we place those advertisements was we're trying to reach the right technically oriented eyeballs. Okay? And sometimes, that's in a consumer-oriented tech magazine, appropriate like Wired, for example, which probably everybody in this building loves to read. Right? So we wanted to make sure we run there. We targeted certainly airports like San Jose, which has a big tech following, for example. I mean, when I landed in -- we had Rackers land in JFK, and it's funny how Rackers love to see these advertisements. They send me the pictures and things. So we are trying to reach our audience. We've learned a bunch in this campaign about which regions are better than other regions, how was the message affecting people, and we've seen a spike in our downloads. So it's -- we've enjoyed it. I think it's -- we're proud of what we've done, and I think we'll end up doing more work like this in the future around our hybrid cloud offering. Yes, sir?

Unknown Attendee

If I might ask one follow-up, you talked about customer service. The metric often used is customer retention.

A. Lanham Napier

Yes.

Unknown Attendee

And can you talk about Rackspace customer retention as reflective, I would assume, of customer service?

A. Lanham Napier

Yes. Yes. So here, we have some metrics here in the back. Well, you're not going to be able to read that, are you? Okay. But I can read it. Okay? So the way -- we have a couple of metrics when we think about customer retention. The internal metric system -- there are financial metrics often called churn or customer upgrades, that kind of stuff. There's also a business metric we use, which I think is actually every bit or more powerful, called the Net Promoter system. And what the Net Promoter system is about is it's a very simple metric that says how likely are you to recommend Rackspace to a friend or colleague on a 0- to 10-point scale. And basically, what we are shooting for is customers giving us a 9 or 10 on that. And when you look at it, 9 or 10 is called promoters. If you look below that, 5 and below, 6 and below is a detractor. 6, 7, 8 is called -- is basically passives. Okay? So when you look at the segmentation here, most companies do a survey like this, and they do an average. Okay? And they come back and they say, "8.7. Wooh! Our customers love us." And so it's a little counterintuitive to say, "Well, why do you want 10 out of 10?" And what I would say is -- when I go home to my beautiful bride tonight and ask her how much do you love me, I want the 10 out of 10. Okay? I'm not looking for 8.7, even though 8.7 may be good relative to other companies. And the reason we want the 10 out of 10 is we actually want that same emotional spark with our customers, okay, that we want with our friends, that we want with the people that work here. And as we look at our Net Promoter Scores, you take the percentage of promoters, you subtract away the percentage of detractors. Okay? So if I walk out of a -- I was on the road a couple of weeks ago. I stayed at a Hilton. Okay, if I walk out of Hilton, they say, "Hey, Lanham, how'd you like it?," and I give them a 5. Really, I wanted to give them a one, I just didn't have the courage that morning. Okay? And this is how life goes. So what we want to understand across our base, how many of our customers love us, that 9 or 10; how many people really don't like us that much, that 5 and below? And we measure a percentage. Our -- the way we benchmark it, and we do third-party surveys with competitors across the industry, is that when we look at those scores, we're absolutely world class. Hey, we have a world-class connection and engagement with our customers. We use that same metric with Rackers internally. So we have a stream of data, which basically looks at how engaged are customers and how engaged are Rackers. The reason it's important to look at the same stream of data across that is, actually, one feeds another. If we have engaged Rackers volunteering their best to do -- provide Fanatical Support for customers, we'll have customers that love it. So you can watch these scores over time and see how they interact with each other and whether they move in tandem or whether they start to break apart, and we can take corrective action. So that's really how -- that's our first business metric for thinking about customer retention and driving the long-term economic value of customers. After that, you have other financial metrics, which -- you open these metric key pages, which we report every quarter, around the net upgrade rate and the churn rate inside of our customer base. And these metrics are really financial metrics. We measure churn in dollars, not number of customers. We measure upgrades in dollars, not number of customers. Whereas the Net Promoter Score is really a score by customer. Yes, ma'am?

Unknown Attendee

Any plans for dividend payments?

A. Lanham Napier

Any plans for dividend payments? No, ma'am. I think that right now, we're in a phase of our company's development where we should be in a -- we should be a high-growth company and investing for future growth for a long time. So my own personal financial thinking would be that, basically, when we feel like we are through the mass of growth opportunities and we have a high level of free cash flow, that would be a time to consider making dividend payments to stockholders. I don't think we'll be there anytime soon. This cloud computing movement is just beginning. It's baseball season, so I'd say it's game one of a 7-game series kind of thing. And so if anything, we need to increase our investment levels and not pay dividends at the moment. Yes, sir?

Unknown Attendee

One last question. Could you comment on the academy that Rackspace just initiated and reflect back on the comment -- I'm not sure who made the comment about the talent -- my word, the talent war and the difficulty of attracting and retaining the kind of talent you need?

A. Lanham Napier

Yes, good question. All right. So this talent war, it's a tricky thing, and culture is a massive asset to pull people to us. So that's hunting. And when we recruit people, we've gone hunting to pull them to us. But humanity didn't feed itself by hunting. We feed ourselves by farming. And so the Open Cloud Academy is about farming. It's about developing the talent in the community, giving them an opportunity to nurture that talent and build the skills they need to be employed here. Okay? And some of them may come here, others may go start their own companies. If they start their own companies, we hope they are our customers. All right? And basically, what we're trying to do here is give the local community talent the access and opportunity to build its skills, to be part of the cloud computing world, to be part of our hybrid cloud offering. And so it's really -- that is a longer-term, nurturing, cultivating, farming talent perspective. And so we think it's the right thing to do for the community. We also think it's the right thing to do for our business. And in the long run, I would say creating programs like that will provide talent at scale in a way that recruiting people to join us never will. Yes, it's just a longer gestation period, in that getting people through that curriculum and building those skills takes a long time versus we can start a search tomorrow for a Python developer and 90 days later, find a Python developer. Okay? It's just those come one at a time, where I think a cloud academy really ought to generate cohorts at a time. So our belief in this is it's part of our long-term talent strategy to develop more of the talent as opposed to having to recruit at all. Anything else?

Okay. Well, thank you for your time. I appreciate the questions. You gave me some good-pointed ones, all right, so thank you for that. We will continue to work hard for you. All right? I appreciate your support.

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Source: Rackspace Hosting, Inc. - Shareholder/Analyst Call

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