Internap Corporation (INAP)

INAP 
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Internap Network Services Corporation (INAP)

Q1 2010 Earnings Call Transcript

May 6, 2010 5:00 pm ET

Executives

Andrew McBath – Director, IR

Eric Cooney – President and CEO

George Kilguss – CFO

Analysts

Mark Kelleher – Brigantine Advisors

Srinivas Anantha – Oppenheimer & Co.

Keith Hwang – Connective Capital

Jonathan Atkin – RBC Capital Markets

Presentation

Operator

Good day everyone, and welcome to the Internap first quarter 2010 earnings call. Today’s call is being recorded. (Operator instructions)

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

Thanks Marie. Good afternoon and thank you for joining us 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.

I want to point out that we will be referencing slides that correspond with our conference call this afternoon. These 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 operational and financial metrics, are available under the Financial Information – Quarterly Results section of our Investor Services site.

Today’s call contains forward-looking statements. These include statements regarding business strategy and prospects, including expected results from focusing on company controlled data centers, and from our product development efforts and reinvigoration of IP services, timing and cost of bringing new data center space online and expectations regarding the resulting sales, the belief that our turnaround strategy for our business segments will deliver long-term profitable growth, performance of new products and services, expectations of financial performance including levels of revenue, revenue growth, operating costs, capital expenditures, margins, liquidity and churn.

Because these statements are not guarantees of future performance, and involve risks and uncertainties, they are important factors that could cause our actual our 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 take no obligation to amend, update or clarify these statements.

In addition to reviewing the first quarter results, we will also discuss recent developments this afternoon.

Now, let me turn the call over to Eric Cooney.

Eric Cooney

Thank you Drew, and good afternoon everyone. Let me begin by saying that I am pleased with our first-quarter results. We have implemented a strategy to turn around the business, and after a year of focused retooling across the organization, we are now reporting our fourth consecutive quarter of adjusted EBITDA and adjusted EBITDA margin growth. Further, we see steady increases in segment margin underpinned by consistent IT segment margins and improving Data Center segment margins. We will provide more update around our strategic initiatives as we go through the presentation.

However, the bottom line is we recognize there is more work to be done, but are confident that the steps we are taking are positioning the company to deliver long-term home profitable growth.

Let us move on to slide three. You can see that revenue in the quarter declined slightly to $63.4 million compared to $63.5 million in the fourth quarter of 2009. Year-over-year and sequential revenue gains in the Data Center services segment were offset by decreases in IP services. As we have redirected the sales organization to focus on the sale of Internap services, while deemphasizing third-party product sales, we continue to see improvements in segment margin in the quarter.

We generated segment margin of 46.2%, the highest level since the second quarter of 2008. As I will detail in a moment, we have been able to gain good traction in our efforts to eliminate low margin contracts in select partner data centers. This work in combination with several other operational initiatives helped drive segment margins higher in the quarter.

Moving onto slide four, we are pleased with our profit trend over the past year. Compared with the first quarter of 2009, adjusted EBITDA has more than doubled, while adjusted EBITDA margin is up more than 840 basis points year-over-year to 15.6%. This represents the highest levels of profitability in over two years for the company. The upward trend we have seen in segment margin, as well as tight controls on our cash operating expense are clearly supporting the expansion in EBITDA.

We did also benefit in the quarter from a $500,000 Georgia payroll tax benefit, which positively impacted our cash operating expense in the quarter.

We have broken out our segment results for further discussion on slide five. The Data Center services revenue growth in the quarter outpaced our proactive churn, which resulted in modest revenue growth to $33.7 million. We grew revenue in this segment 6% compared with the first quarter of 2009, and 2% sequentially. Pricing stability and an increase in our small but growing managed hosting business helped to increase revenue per square foot, which supported these top line results.

Data Center segment margin rose sequentially for the third consecutive quarter, and was up strongly compared with the first quarter of 2009. In IP Services, revenue declined 8% year-over-year to $29.6 million, as price erosion on existing and new business outpaced new contract revenue. IP segment margins continued to be solid as our initiative to drive network efficiencies and actively renegotiate carrier contracts produced results.

While we haven't yet seen an inflection in IP revenue we are seeing early signs that our initiatives to turn around the top line are showing results. These initiatives include the rebuilding and expansion of the sales organization, deployment of IP sales tools, targeted marketing programs, and new product launches. Early signs of progress in this segment include robust IP traffic growth, increasing 43% compared with the same quarter of last year, including sales opportunity funnel, and segment churn falling to its lowest level in two years. With much left to be done, we're encouraged by the trends in our IP Services segment.

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