Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services (INAP)

Q4 2011 Earnings Call

February 23, 2012 5:00 pm ET

Executives

Andrew McBath - Director of Investor Relations

J. Eric Cooney - Chief Executive Officer, President and Director

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

Analysts

Clayton F. Moran - The Benchmark Company, LLC, Research Division

Mark Kelleher - Dougherty & Company LLC, Research Division

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Internap Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Drew McBath, Director of Investor Relations. Sir, you may begin.

Andrew McBath

Thanks, Mary. 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 reconciliation 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 expectations regarding our future performance and long-term profitable growth including returns on capital. Our belief and our business strategy, including the benefits to be achieved from investing in our higher-margin company-controlled co-location and managed hosting businesses; timing for bringing new data centers online and installing customers; expectations regarding the progress, timing and ultimate success of integrating Voxel into our business, including its impact on our financials and launch of new offerings; expectations regarding levels of capital expenditures and expected levels of future churn.

Because these statements are not guarantees of future performance and involves risks and uncertainties, important factors could cause our actual results to differ materially from those in the forward-looking statements. We discuss 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 the fourth quarter and full year 2011 results, we will also discuss recent developments.

Now let me turn the call over to Eric Cooney.

J. Eric Cooney

Thanks, Drew, and good afternoon, everyone. We are very pleased to be here this afternoon to present our fourth quarter and full year 2011 financial results.

I'll start the discussion with the summary of our results before George takes you through our financial results in detail. From there, I'll briefly wrap up our prepared remarks, and then we'll take your questions.

Beginning on Slide 3, you will see we delivered total revenue for the quarter of $62.8 million, representing our third consecutive quarter of sequential revenue growth and an improvement of 5% over fourth quarter 2010. Solid growth in the data center services business, including the company-controlled co-location and managed hosting product lines, underpins the fourth quarter results. The successful strategic shift to company-controlled co-location and increasing emphasis on our cloud/hosting business also continues to have a positive impact on the company's operating leverage. Segment profit and segment margin reached record levels for the second consecutive quarter. In fact, both measures in the fourth quarter and all of 2011 were the highest they've been since Internap's founding in 1996. An increasing proportion of our data center services revenue is generated within our own facilities, which has helped drive both margin gains and absolute profit increases.

In the fourth quarter, segment profit was $32.9 million, an increase of 12% year-over-year and 5% quarter-over-quarter. Segment margin was 52.4%, an increase of more than 330 basis points compared with the prior year's period and 200 basis points sequentially.

On Slide 4, you can see a similar positive trend in our adjusted EBITDA results. As with segment profit, adjusted EBITDA reached its highest point in the history of the company for both the fourth quarter and the full year 2011. Fourth quarter adjusted EBITDA was $12.6 million, up 23% year-over-year and 12% sequentially. Adjusted EBITDA margin increased 300 basis points over the fourth quarter of 2010 and 190 basis points quarter-over-quarter. The improvement in fourth quarter adjusted EBITDA was driven entirely by increased segment profit. Fourth quarter cash operating expense increased 6% year-over-year in the quarter to $20.3 million, in line with the 6% or 25% increase in headcount we experienced over the same period. We are certainly pleased with this 3-year trend of profitable growth as further validation for the strategic plan.

Turning to Slide 5. Fourth quarter data center services revenue increased to $35.3 million. Year-over-year, data center services revenue increased 11% compared with the fourth quarter of 2010 and 4% sequentially, as managed hosting and core co-location showed solid growth. We continued our focus on improving the profitability of the data center services unit and seeing those efforts reflected in the results. The reduced emphasis on partner data centers and the investment in sales of our company-controlled co-location facilities, as well as sales of hosting and cloud solutions, all contribute to the 24% increase in data center segment profit and 445-basis-point increase in segment margin as compared with fourth quarter of 2010.

IP services revenue declined modestly in the fourth quarter and approximately 4% on a year-over-year basis. A combination of market price declines along with a couple of substantial contract renewals during the fourth quarter offset continued traffic growth. Despite the moderate decline in IP revenue this quarter, segment profit and segment margins in this business unit increased sequentially and year-over-year to 64.5%, as the ongoing efforts to consolidate network footprint and negotiate IP transit costs continue to yield cost reductions.

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