Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services Corp. (INAP)

Q3 2009 Earnings Call

November 5, 2009 17:00 p.m. ET

Executives

Andrew McBath - Director, IR

Eric Cooney - President and CEO

George Kilguss - CFO

Analysts

Erik Suppiger - Signal Hill

Sri Anantha - Oppenheimer

Presentation

Operator

Thanks so much for holding everyone. Welcome to the Internap's third quarter 2009 earnings conference call. Just a quick reminder. Today's call is being recorded. Now at this time, I'll hand you over to our host Mr. Andrew McBath, Director of Investor Relations. Please go ahead, sir.

Andrew McBath

Thanks, [Bill]. Thanks everyone for listening into Internap's third quarter earnings conference call today. I am joined by Eric Cooney, our President and Chief Executive Officer; and George Kilguss, our Chief Financial Officer. Following prepared remarks this afternoon by Eric and George 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.

Slides are available on the online presentation stream in the presentation section of Internap's Investor Services website. Non-GAAP reconciliations and our supplemental data sheet, which includes additional operating and financial metrics for your use, are available under the quarterly results tab of our site.

Let me remind everyone today, that the 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, including the expected effects of focusing on company controlled data centers or reducing partner data center providers as well as churning loss making and/or low margin partner collocation revenue.

Customer growth churned in satisfaction, business strategy and prospects including expectations for growth in our business segments and expected results from the rebuilding of our sales organization and the enhancement of our marketing function. Timetable for the rollout of new products and additional data center space as well as attribute to each. Expectations regarding levels of revenue and revenue growth, including data center supply and demand, profitability cost and cost savings, expenses in margins, capital expenditures and liquidity.

Because these forward-looking statements are not guarantees of future performance, involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in 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 third quarter results, we will also discuss recent developments. Any non-GAAP financial measures discussed in this call will be reconciled to the most directly comparable GAAP financial measure.

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

Eric Cooney

Thanks, Drew and good afternoon everyone. First of all, thank you for taking the time to listen to our third quarter 2009 financial results presentation. I'll start the discussion with a brief summary of our results and cover the key themes for the quarter in the near term. Then I'll ask our Chief Financial Officer, George Kilguss to provide you with the detailed analysis of our third quarter financial results and then we'll summarize and open up the call for your questions.

So beginning on slide three, you can see the revenue in the quarter totaled $64.4 million. The Data center services segment grew sequentially in year-over-year due to both an increase in occupied square footage and an increase in average revenue per square foot. The revenue gains in the Data center services segment were offset by declining IP services revenue both sequentially and compared with the prior year.

The more positive sign is that segment margin was 43.3%, slightly higher than the second quarter and this represents the first sequential increase in segment margin in two years. This increase in segment margin was driven by a 200 basis point improvement in Data center services margin, quarter-to-quarter and stable IP services segment margin.

Moving on to slide four, we see further positive progress as opposed to adjusted EBITDA and adjusted EBITDA margin also demonstrated sequential improvement. Adjusted EBITDA totaled $7.6 million or 11.9% of revenue. Our work to control operating cost and a focus on the factors driving segment margins benefited our results this quarter.

Moving on to slide five, our focus on our segment results. The Data center services segment continues to demonstrate steady growth. Revenue in this business unit increased 12% year-over-year in the third quarter as expansions in our company controlled facilities and increased occupancy benefited the top line. Stable space, power, and connectivity pricing also supported revenue per square foot metrics in the third quarter.

Going forward, we will continue to execute our data center strategy to focus on growth and company control data centers, while we proactively reduce our partner data center providers to a small number of mutually beneficial relationships.

Clearly, the turnaround of the IP services business has yet to deliver financial results as we see the fourth consecutive quarter of declining revenue with $30.9 million in revenue for the third quarter of 2009. We continue to see solid traffic growth up 9.6% sequentially, but price erosion and weak bookings have driven the revenue decline. We've been able to maintain stable IP segment margins by reducing carrier costs, but we need to address the top line.

So, moving on to Slide six, I'd like to provide visibility to some of the steps we are taking as we execute the strategy to turn around in the IP services business. As we have previously stated, we see substantial growth opportunities for Internap in the IP services business both from participation in market growth as well as opportunities to gain market share. So, we believe the opportunity is there, it is up to us to execute.

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