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Internap Network Services' CEO Discusses Q1 2011 Results - Earnings Call Transcript

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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