Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services (INAP)

Q1 2011 Earnings Call

April 28, 2011 5:00 pm ET

Executives

J. Cooney - Chief Executive Officer, President and Director

George Kilguss - Chief Financial Officer, Principal Accounting Officer and Vice President

Andrew McBath - Director of Investor Relations

Analysts

Colby Synesael - Cowen and Company, LLC

Gray Powell - Wells Fargo Securities, LLC

Donna Jaegers - D.A. Davidson & Co.

Mark Kelleher - Dougherty & Company LLC

Jonathan Atkin - RBC Capital Markets, LLC

Erik Suppiger - Signal Hill

Clayton Moran - The Benchmark Company, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Internap Network Services First Quarter 2011 Earnings Conference Call. [Operator Instructions] Now I would like to turn the conference over to your host, Mr. Drew McBath.

Andrew McBath

Thanks, Matthew. 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.

We will reference slides in our conference call today. These slides are available in the presentation section of Internap's Investor Services website. Non-GAAP reconciliations in 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, including our expectations regarding future financial performance, including profitability and achievement of top line growth in both business segments, our expectations that first quarter 2011 is the last quarter in which we will be impacted by completed proactive churn program, industry growth rates, expected results from our strategy to invest in sales, marketing, engineering and operations staff, our business strategy including expected results from investing in company-controlled data centers which we expect to result in future growth, and our expectations regarding new markets, the timing for bringing new data centers online and our belief that we can accelerate selling into new company-controlled data center space.

Because these statements are not guarantees of future performance and involve risks and uncertainties, important factors could cause our actual results to differ materially from those in the forward-looking statements. We discussed these factors in our filings with the Securities and Exchange Commission. We undertake no obligation to amend, update or clarify these statements. In addition to reviewing first quarter 2011 results, we will also discuss recent developments.

Now let me turn the call over to Eric Cooney.

J. Cooney

Thank you, Drew, and good afternoon, everyone. Thank you for joining us for our first quarter 2011 financial results presentation.

I'll start off with a summary of our first quarter results and then George will detail our quarterly financial results and operating metrics. I will then conclude with a high-level summary, and we will open the call for your questions.

We've summarized revenue and segment profitability results in the period on Slide 3. Revenue decreased $4 million year-over-year and $0.6 million compared with the fourth quarter of 2010. The year-over-year and sequential declines were primarily driven by our initiative to exit low-margin and negative-margin contracts in select partner data centers. As I will detail in a moment, this program was completed in the fourth quarter of 2010, and the final revenue impact was evident in first quarter results. We expect that first quarter 2011 is the last quarter in which revenue is impacted by the now successfully completed proactive data center churn program.

Our segment profit and segment margin continues to improve steadily. Segment profit improved $0.9 million sequentially and $1.1 million over the same quarter last year. The combination of higher absolute segment profit on a smaller revenue base has significantly benefited our segment margin over the past year. Segment margin improved 490 basis points year-over-year. Sequentially, segment margin increased 200 basis points. Beyond the immediate benefit of higher segment profitability, the implication for future sales of company services into this significantly higher segment profit margin bodes well for the company's long-term profitable growth.

On Slide 4, we've detailed the basis for the sequential decline in revenue. Of the $0.6 million quarter-over-quarter decrease, $0.4 million came from IP services. Based on bookings and churn trends, we continue to expect the IP segment to show sequential revenue growth in the second quarter of 2011. As we described last quarter, we completed our data center profitability program at the end of fourth quarter 2010. $0.8 million of the quarter-over-quarter revenue decline was attributable to this program and the associated exit of low-margin contracts.

While we exited the contracts during the fourth quarter, the full revenue impact was not evident until the first quarter of 2011. We do not expect this flow-through effect to impact our future sequential quarterly comparisons in the Data Center Services segment. Beyond this proactive data center churn impact, the remaining Data Center Services revenue increased $0.6 million compared with the fourth quarter.

We were particularly pleased with the first quarter revenue growth rates in both our company-controlled Data Center and Managed Hosting businesses. We feel these businesses are delivering revenue growth at or above market rates, which we believe are in the 15% to 20% range.

Moving on to Slide 5. We generated $9.2 million in adjusted EBITDA in the quarter. Adjusted EBITDA decreased $0.7 million year-over-year and $1.1 million, sequentially. Improvements in segment profit were offset by higher operating costs in the quarter relative to both comparable quarters. Sequentially, operating costs increased by $2 million as we added more than 20 new staff in sales, marketing, engineering and operations while also incurring costs associated with our annual sales kickoff meeting and certain targeted marketing initiatives. We believe these investments are appropriate and are expected to support future top line growth.

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