Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services Corp. (INAP)

Q4 2009 Earnings Call

March 2, 2010 5:00 pm ET

Executives

Andrew McBath - Director, IR

Eric Cooney - President and CEO

George Kilguss - CFO

Analysts

Jonathan Atkin – RBC Capital Markets

Steven Salberta – Boenning & Scattergood

Colby Synnesael – Kafuman Bros.

Jonathan Schildkraut – Jefferies & Co.

Shane Larkin – Thomas Weisel Partners

Sri Anantha - Oppenheimer

Presentation

Operator

Welcome to the Internap fourth quarter and full-year 2009 earnings conference call. Now for opening remarks and introductions I would like to turn the call over to Mr. Andrew McBath, Director of Investor Relations. Please go ahead.

Andrew McBath

Good afternoon and thank you for listening in today. I am joined by Eric Cooney, our President and Chief Executive Officer; and George Kilguss, our Chief Financial Officer. Following our prepared remarks we will open up the call for your questions.

Before I get started I want to point out we will be referencing slides that correspond with our conference call this afternoon. The slides are available on our online presentation stream 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 today 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 performance, expected results of focusing on company controlled data centers, business strategy and prospects including growth in our segments and expected results from the rebuilding of our sales organization, the timing of bringing new data center space online and expectations regarding the resulting sales, performance of new products and services and our ability to deliver long-term stockholder value, expectations regarding levels of revenues, revenue growth, mix and churn.

In addition to reviewing full-year and fourth 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 measures.

Now, let me turn the call to Eric Cooney.

Eric Cooney

Thanks, Drew and good afternoon everyone. We appreciate you taking the time to listen to our fourth quarter and full-year 2009 financial results presentation. As we typically do I will go through a brief summary of our results and discuss the key themes for the quarter. Then I will ask our Chief Financial Officer, George Kilguss, to detail our financial results before I come back with a summary followed by your questions.

Over the past several months we have described our initiatives to drive long-term profitable growth and pointed you to early signs of progress. The clearest sign last quarter was an upward tick in segment margin after two years of sequential decline. We saw that improvement continue into the fourth quarter as you can see from the margin trend on the chart on slide three. Segment margin increased for the second consecutive quarter and reached the highest level since the second quarter of 2008.

Moreover the margin improvement wasn’t limited to a single line of business. Both IP and data center services helped to drive the quarter-over-quarter and year-over-year expansion in segment margin. Revenue totaled $63.5 million this quarter, down slightly both sequentially and year-over-year primarily due to lower IP services revenue which I will discuss further in a moment.

Moving onto slide four we are also encouraged by the continued trend of profitable growth as adjusted EBITDA and adjusted EBITDA margins moved higher in the fourth quarter. Our segment margin increases along with operational cost controls have helped underpin our third consecutive quarter of profitable growth. As you can see in slide five our data center services revenues have trended up over the past year helping to offset declines in IP services.

We have added 16,000 net sellable square feet of data center space since the fourth quarter of 2008. This combined with consistent demand and stable pricing has enabled us to grow this segment 10% compared with the same quarter last year. As we detailed for you during our third quarter earnings call we are executing the strategy for profitable growth in the data center segment which is two primary elements. The first element is a focus on investment and expansion of our company controlled data centers. The second element is the proactive churn of select, less profitable partner data center revenue.

The impact of this strategy is evident in the data center segment’s fourth quarter results. You see total data center revenue declining sequentially by 1% to $33.2 million in the fourth quarter of 2009 as the reduction in our partner data center revenue exceeded the increase in our company controlled data center revenue during the quarter. However, you will also see that both the data center segment profit of $10.1 million and the segment margin of 30.5% increased significantly from the third quarter of 2009. We have not delivered a higher data center segment margin since the fourth quarter of 2007. The bottom line is even with the slight decline in data center revenue we delivered significantly higher levels of segment profitability and margin in the quarter.

In IP services revenue totaled $30.4 million in the fourth quarter, down 11% compared with the same quarter last year. Traffic growth remains healthy, up 6% sequentially and segment margins were up well this quarter but we have yet to deliver top line growth in this segment. The initiatives we began implementing in the second and third quarter to execute a turnaround of the IP segment continue and we are optimistic these efforts will drive the unit to profitable growth. IP segment margin expanded both on a year-over-year basis and sequentially as we have successfully negotiated carrier cost reductions and maintained pricing discipline.

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