Internap Network Services Corporation (INAP)

INAP 
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Internap Network Services (INAP)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Michael Nelson

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

Kevin Mark Dotts - Chief Financial Officer

Analysts

Mark Kelleher - Dougherty & Company LLC, Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

Christopher M. Larsen - Piper Jaffray Companies, Research Division

James T. Dobson - The Benchmark Company, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Internap Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host for today, Mr. Michael Nelson, Director of Investor Relations. Sir, you may begin.

Michael Nelson

Good afternoon, and thank you for joining us today. I'm joined by Eric Cooney, our Chief Executive Officer; and Kevin Dotts, our Chief Financial Officer. Following prepared remarks, we will open up the call for your questions.

The slides we reference in the call are available on our website, in the Presentations section on the Investor Relations page. 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 Relations page.

Today's call contains forward-looking statements, including expectations regarding future performance and the drivers for long-term profitable growth; belief in our business strategy, including the benefits we expect to achieve from investing in company-controlled colocation, hosting and cloud services; timing for bringing new data centers online, demand within those markets and expectations regarding capacity; expectations regarding cash flow, levels of capital expenditures and our capital deployment and flexibility. 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 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 third quarter 2012 results, we will also discuss recent developments.

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

J. Eric Cooney

Thank you, Michael, and good afternoon, everyone. We're pleased you could join us for our third quarter 2012 earnings presentation. I will start the discussion with a summary of our results and then turn the call over to Kevin Dotts, our Chief Financial Officer, to take you through our detailed financial results. From there, I will briefly wrap up our prepared remarks, and then we will open up the call to take your questions.

So moving on to Slide 3. You will see we delivered total revenue for the quarter of $68.1 million, representing an increase of 10% year-over-year and a decline of 1% over the second quarter of 2012.

Consistent with our company's strategic plan, we continue to deliver growth from our core data center services business, including company-controlled data centers, hosting and cloud services. We see the proportion of our revenue mix represented by our data center services business continuing to increase.

However, the data center services growth was offset by a revenue decline in our IP services business, which we'll come back to on the next slide.

Segment profit of $34.6 million increased 11% year-over-year and declined 4% sequentially. Segment margin was 50.7%, an increase of 30 basis points year-over-year and a decline of 180 basis points quarter-over-quarter.

The primary driver for the sequential reduction in segment profit and margin was the lower IP revenue, but was also influenced by higher seasonal power costs during the third quarter.

On Slide 4, you can see the sources of change in revenue from the second quarter to the third quarter of 2012. Our core data center services, including company-controlled colocation, hosting and cloud services, remain the engine for top line company growth. As compared to the second quarter, lower non-recurring IP equipment sales and softening IP transit sales resulted in a decline in IP services revenue.

In total, the data center services unit contributed $0.6 million of incremental revenue, offset by a sequential decline in IP services revenue of $1.2 million in the third quarter.

Turning to Slide 5. We delivered a solid quarter of adjusted EBITDA, which totaled $12.5 million or 18.3% of revenue. This represented an 11% year-over-year increase and 2% increase sequentially. The year-over-year improvement was predominantly the result of revenue and segment profit growth in data center services and operating leverage in the business model.

Cash operating expenses declined $1.8 million sequentially, due to a combination of both ongoing operational improvements and the elimination of certain non-recurring expenses incurred in the second quarter, such as recruiting fees.

Moving on to Slide 6. Data center services revenue totaled $42.1 million for the quarter, an increase of 24% year-over-year and 2% sequentially. Data center segment profit was up strongly from a year ago, rising 36% year-over-year and declining 1% sequentially. The solid year-over-year increase was driven by the improved product mix shift away from partner data centers and increasingly from company-controlled data centers, as well as hosting and cloud services revenue.

Higher seasonal power costs impacted margin sequentially as we experienced a particularly hot summer, which placed a significant incremental load on the data center cooling infrastructure.

IP services revenue decreased year-over-year and sequentially to $26 million. IP segment margin decreased 190 basis points sequentially to 61.4%, primarily due to lower non-recurring IP equipment sales.

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