Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services Corporation (INAP)

Q2 2010 Earnings Conference Call

August 4, 2010 5:00 PM ET

Executives

Andrew McBath – Director, IR

Eric Cooney – President and CEO

George Kilguss – CFO

Analysts

Srinivas Anantha – Oppenheimer & Co.

Aron Honig – Brigantine Advisors

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Internap’s Second Quarter 2010 Earnings Conference Call. (Operator instructions)

For opening remarks and introductions, I would now like to turn the call over to your host today, Drew McBath, Director of Investor Relations. Please begin.

Andrew McBath

Thank you. Good afternoon and thank you for listening in today. I’m joined by Eric Cooney, our President and Chief Executive Officer; and George Kilguss, our Chief Financial Officer. Following 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 statements include statements regarding our business strategy and prospects, including expected results from focusing on company controlled data centers, and the timing of proactive churn, our expectations related to opportunity pipeline, bookings and traffic growth, our belief that our turnaround strategy for our business segments will deliver long-term profitable growth, our ability to negotiate favorable bandwidth agreements with NSP vendors, expectations of future financial performance including levels of revenue, revenue growth and mixed, 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 undertake no obligation to amend, update or clarify these statements.

In addition to reviewing the second quarter results, we will also discuss recent developments.

Let me now turn the call over to Eric Cooney.

Eric Cooney

Thank you, Drew, and good afternoon, everyone. We appreciate you joining us for our second quarter 2010 financial results presentation.

I’ll start the discussion with a brief summary of our results cover the key themes for the quarter and the near-term. From there, our Chief Financial Officer, George Kilguss, will provide with a more detailed analysis of the quarter’s financial results. Finally, we’ll summarize and open up call for any questions.

Beginning on slide three, revenue in the quarter totaled 60.5 million, a decrease of 2.8 million sequentially. The majority of the revenue decline was attributable to our program to eliminated low margin contracts at partner data centers.

Segment margin improved for the fourth consecutive quarter and improved 210 basis points on a sequential basis. Our de-emphasis on the sale of third party products and refocus on the sale of Internap solutions has helped drive the increase in overall segment profitability. Despite the sequential reduction in revenue, segment profit was flat at 29.3 million in the second quarter. This improved operational leverage will provide significant profitability benefits as the company focuses on delivering future top line growth.

On slide four, you can see the components of the sequential change in revenue. At a high level excluding our proactive churn of low margin data center contracts, revenue was essentially flat quarter over quarter. Modest growth in higher margin data centers was offset by a 1% sequential decline in IT services revenue during the quarter.

Turning to slide five, we delivered another quarter of progress in improving both EBITDA and EBITDA margin. EBITDA for the second quarter was 9.9 million up 46.5% year-over-year and flat sequentially, despite the addition of more than 20 heads in the sales marketing and engineering. Second quarter adjusted EBITDA margin improved sequentially for the fifth consecutive quarter.

During the second quarter, we secured a prior year’s tax credit from the state of Georgia. The benefit this quarter lowered our cash operating expense by 1.1 million. George will provide more detail on this benefit later in our comments.

On slide six, we’ll take a closer look at the Data center services business unit. In line with our projection during the first quarter of 2010 results, we proactively churned customer contracts representing 2.7 million during the second quarter. These proactive data centers churn more than offset revenue growth in higher margin data center facilities.

It’s notable that while Data center services revenue has been flat to down since the second quarter of 2009, we have grown Data center services segment profit and segment margins steadily over the same period.

Data center segment margin was up 1,100 basis points and 490 basis points sequentially to 36.6%, the highest Data center segment margin in the history of the company.

You will recall that our strategy to deliver profitable growth in Data center services hinges on two elements. First, churning low margin contracts at select partner Data centers and second investing in and growing company controlled Data center facilities.

Turning to slide seven, our IP services segment revenue continued to decrease in the second quarter. Price erosion out pays traffic growth in the quarter, which drove the IT services revenue decline. As we’ve described in the past, we’ve employed a number of programs to restore top line growth in IT including the rebuilding and expansion of our sales force, the development of demonstration and ROI tool, targeted marketing programs and new IP program launches.

Read the rest of this transcript for free on seekingalpha.com