Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services Corporation (INAP)

Q1 2009 Earnings Call Transcript

May 7, 2009 5:00 pm ET

Executives

Andrew McBath – Director of IR

Eric Cooney – President and CEO

George Kilguss – CFO

Analysts

Colby Synesael – Kaufman Brothers

Jonathan Schildkraut – Jefferies

Sri Anantha – Oppenheimer

Erik Suppiger – Signal Hill

Shane Larkin – Thomas Weisel Partners

Dave Coleman – RBC Capital Markets

Presentation

Operator

Good day everyone and welcome to the Internap First Quarter 2009 Earnings Call. Today’s call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Mr. Andrew McBath, Director of Investor Relations. Please go ahead, sir.

Andrew McBath

Thank you. Good afternoon and thank you for being with us today. I’m joined by Eric Cooney, our President and Chief Executive Officer; and George Kilguss, our Chief Financial Officer. Following the prepared remarks this afternoon, we will open up the call for your questions.

Before I go through the cautionary language concerning forward-looking statements, I want to point out that we will be referencing slides that correspond with our conference call this afternoon. These slides are available under our Quarterly Results section of the Investor Services page on Internap’s website, along with non-GAAP reconciliations and our supplementary data sheet, which includes additional operational and financial metrics for your use.

Let me remind everyone that today’s call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements regarding future financial position and performance, customer growth, business strategy and prospects, including our belief regarding the prospects for our three business segments, projections regarding levels of growth, costs and costs savings, expenses and margins, capital expenditures and financing needs.

Because these forward-looking statements are not guarantees of future performance and involve risk and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors are discussed in our filings with the Securities and Exchange Commission. We undertake no obligation to update these statements.

In addition to reviewing first quarter results, we will also discuss recent developments. Any non-GAAP financial measures discussed during this call will be reconciled to the most directly comparable GAAP financial measure.

With that, I’ll turn the call over to Mr. Eric Cooney.

Eric Cooney

Thank you, Drew and good afternoon, everyone. Let me start by saying how honored and pleased I am to assume the role of CEO of Internap. I’ve spent the past seven weeks working with staff, partners, meeting with our customers to better understand our business, our challenges and our opportunities. It seems clear to me that this company has some very valuable assets that should enable us to deliver long-term profitable growth for our shareholders.

I decided to come to work for Internap, because I thought I saw a diamond in the rough. And everything I’ve learned in the past seven weeks towards that belief. Today, I will take you through an overview of our financial results, discuss some of my observations on the company thus far, and then discuss our strategy for the business going forward. Then I will hand over to George to provide a more detailed look at our financial results and finally we will open up for your questions.

Moving on to slide three in the presentation, turning to a quick summary of our financial results, Internap posted revenue of $63.9 million during the first quarter of 2009. Revenue by business unit was $30.6 million in datacenter services, $28.6 million in our IP segment and $4.7 million in CDN services. Segment gross profit totaled $28.3 million and adjusted EBITDA was $4.5 million or 7% of revenue for the quarter. Internap generated free cash flow of $1.8 million during the first quarter and ended March with $55.5 million in cash and short-term investments on the balance sheet.

Our datacenter services segment continued to perform well in the first quarter. Despite substantial weakness in the overall economy, we saw a solid demand in co-location and related services. In the first quarter, datacenter services showed strong year-over-year and sequential top line growth. Segment gross margins also trended higher as newly expanded company-controlled datacenter space was occupied. Also in the first quarter, we completed the 40,000 square foot datacenter build out plan announced in June of 2007 with a turn up of our expansions in Boston and New York representing 15,000 and 8,000 square feet respectively.

Our IP and CDN businesses continued to underperform showing year-over-year and sequential declines in revenue and segment gross margins. Overall, we are disappointed with our second consecutive quarter of declining revenue and adjusted EBITDA. We are implementing a number of actions, one of which was the cost reduction plan we announced on March 31st, which we believe will help to reverse these trends. This plan streamlines our back office functions and better aligns cost with revenue.

When completed, we expect this initiative will generate approximately $5 million in annualized savings. As you saw in today’s press release, first quarter results include $900,000 restructuring charge related to this program.

Moving on to slide four, now I believe it could be useful to share just a few of my high-level observations having spent the past seven weeks reviewing Internap’s business. These observations will help provide an understanding for the strategic direction we planned for the company.

First of all, we compete in three markets today, datacenter, IP and content delivery services to the business enterprise customer. These markets represent a significant growth opportunity for Internap driven by a combination of underlying market growth as well as a significant potential if we are able to expand our market share. And as you can see in the slide, the forecasted market growth is approximately 9% per year through 2011.

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