Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services Corporation (INAP)

Q2 2009 Earnings Call

August 05, 2009; 5:00 pm ET

Executives

Eric Cooney - President & Chief Executive Officer

George Kilguss - Chief Financial Officer

Andrew McBath - Director of Investor Relations

Analysts

Jonathan Atkins - RBC Capital Markets

Andrew Conner - Kaufman Brothers

Sri Anantha - Oppenheimer & Co.

Donna Jaegers - D.A. Davidson

Dave Raut - Jefferies & Co.

Presentation

Operator

Good day everyone, and welcome to the Internap second quarter 2009 earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I’d now like to turn the call over to Mr. Andrew McBath, Director of Investor Relations. Please go ahead, sir.

Andrew McBath

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 by Eric and George we will open up the call for your questions.

Before I go through the caution after it language concerning forward-looking statements I want to point out we’ll be referencing slides that correspond with our conference call this afternoon. These slides can be viewed in the online presentation stream, which can be accessed in the presentation section of Internap’s Investor Services website.

Non-GAAP reconciliations and our supplemental data sheet, which includes additional operational and financial metrics for your use, are available under the Quarterly Results section of our site. Let me remind everyone that today’s call contains forward-looking statements within the meaning of the Private Securities litigation for form act of 1995.

These statements include statements regarding future financial position and performance, customer growth and satisfaction, business strategy and prospects including our expectations for our business segments, timetable for rollout of new products, expectations regarding levels of growth including data center supply and demand, costs and cost savings, expenses and margins, capital expenditures and financing needs.

Because these forward-looking statements are not guarantees of future performance and involve risks 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 the second quarter results, we will also discuss recent developments. Any non-GAAP financial measure discussed during this call will be reconciled to the most directly comparable GAAP financial measure.

Now, I’ll turn the call over to Eric Cooney.

Eric Cooney

Thank you, Drew and good afternoon everyone. I’m pleased to be here today to provide an update on our progress as we execute our strategic plan for the company. First of all I’ll walk through a summary of our second quarter 2009 results followed by an update on our strategy and certain key actions we expect will impact both mid and long term profitable growth.

Our Chief Financial Officer, George Kilguss, will describe our financial results in detail. I’ll then provide a financial summary and we’ll open up for questions. So, beginning on slide three, you can see that we delivered revenue of $64 million in the quarter, which represents slight growth of 3% compared with the second quarter of 2008.

Quarter-over-quarter, revenue was up 1%. Total segment gross profit was $28 million and adjusted EBITDA totaled $7 million or 10.5% of revenue for the quarter. EBITDA improved on both a year-over-year basis and compared with the prior quarter. This improvement in profitability was driven by slightly higher revenue and the significantly reduced operating expense level.

Moving on to slide four, I want to point out that we’ve now consolidated our segment reporting to two segments, data center services and IP services. During the quarter we made the decision is segregate our CDN services segment and consolidate these financials within the IP and data center services segments.

Specifically we’ve allocated the managed server portion of our CDN segment to the data center segment and we’ve allocated the remaining CDN segment businesses to our IP services segment. This revised segment reporting is reflective of Internap’s new management structure, the integration of our CDN assets within our IP network and the integration of our support for the CDN assets.

Further, this dual-segment reporting provides appropriate focus on the business segments driving near term profitable growth. We provided a schedule reconciling the previous segment reporting structure to this new segment reporting structure for the most recent six quarters on the Investor Relations section of our website.

You will also see that we incurred a $56 million non-cash charge to goodwill and other intangible assets in the quarter. When we made the decision to consolidate our CDN segment this triggered a requirement to perform an impairment test for these assets, which then resulted in this impairment charge.

George will provide further details on this in a few minutes, but this $56 million charge was the primary contributor to the large net loss for the quarter. As you can see in slide five, our data center services segment drove the second quarter top line increase. Data center services revenue increased 17% over the second quarter of 2008. Our data center expansions and increased occupancy along with stable pricing benefited revenue growth and offset significant churn from a couple of large customers during the quarter.

In IP services, revenue declined 7% year-over-year and was flat sequentially reflecting soft pricing and a challenging economic climate. Traffic levels, however, continued to show significant growth rising 27% compared to the prior years quarter. As we stated during last quarters results, we’re focused on driving profitable growth for our business and as such, we are actively redirecting our sales activities to pursue opportunities with improved profitability.

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