Internap Network Services (INAP)

Q1 2012 Earnings Call

April 26, 2012 5:00 pm ET


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


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

Colby Synesael - Cowen and Company, LLC, Research Division

Mark Kelleher - Dougherty & Company LLC, Research Division

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Rodney W. Ratliff - Capstone Investments, Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division



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Good day, ladies and gentlemen. Welcome to the Internap First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference over to your host. Mr. Drew McBath, you may begin.

Andrew McBath

Thanks, Mimi. Good afternoon, and thank you for joining us 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 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, including expectations regarding future performance and long-term profitable growth, belief in our business strategy, including benefits to be achieved from investing in our company-controlled co-location, hosting and cloud services; timing for bringing new data centers online; 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 level of capital expenditures; cash operating expense and cash flow; and expected levels of churn.

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 first quarter 2012 results, we will also discuss recent developments.

Now let me turn the call over to Eric Cooney.

J. Eric Cooney

Thank you, Drew, and good afternoon, everyone. We appreciate you joining us for our first quarter 2012 earnings presentation.

I'll start with a brief recap of our results beginning on Slide 3.

Revenue growth continued into the first quarter, increasing 13% year-over-year and 7% over the fourth quarter 2011. In line with our company's strategic direction, the data center services business, including company-controlled data centers, managed hosting and cloud services, continues as the engine for growth of the company. With the completion of the Voxel acquisition on December 30, we have consolidated the Voxel revenue and segment profit with Internap's data center services revenue and segment profit for the first quarter of 2012.

Segment profit and segment margin were very strong in the quarter, improving on a year-over-year basis by 18% and 240 basis points, respectively. These improvements were attributable to both solid organic growth in the Internap data center services business unit, as well as acquisition-driven growth resulting from the addition of Voxel.

On Slide 4, we're highlighting the sources of change in revenue from the fourth quarter 2011 to first quarter 2012. The data center services business unit, including company-controlled co-location, hosting cloud services, and now, Voxel, are clearly the engine for top line company growth. In total, with data center services unit contributed $4.6 million of incremental revenue, offset slightly by a sequential decline in IP services revenue of $0.4 million in the first quarter.

As you recall, we previously disclosed that Voxel was expected to generate approximately $3.5 million in revenue for the fourth quarter 2011, and was expected to grow 25% annually. Voxel is performing well as part of the Internap team and remains on track with this revenue growth profile.

We delivered another quarter of solid adjusted EBITDA, as you can see on Slide 5. Adjusted EBITDA totaled $12.2 million or 18.3% of revenue. This represented a 3% sequential decline, but an increase of 33% over the first quarter of 2011. Similar to prior years, the sequential adjusted EBITDA decline was driven by higher cash operating expenses during the first fiscal quarter, including certain wage and payroll tax cost which reset in January.

The strong 33% year-over-year improvement in adjusted EBITDA was primarily driven by organic growth in Internap's data center services revenue and associated improvements in data center services segment profitability, with a modest positive impact from the addition of Voxel for the first quarter.

I'll cover segment results on Slide 6.

Data center revenue for the quarter totaled $39.9 million, an increase of 13% sequentially and 27% year-over-year. Segment profit in data center services was up 46% year-over-year and 25% sequentially to $19 million. While the majority of the year-over-year growth in data center services revenue and segment profitability was organic, the addition of Voxel, along with its expected 25% annual revenue growth rate, bodes well for the future of long-term profitable growth in this segment.

IP services revenue decreased modestly quarter-over-quarter and year-over-year to $27.1 million, while IP segment margin was 62.4%, a decrease of 210 basis points compared with the fourth quarter of 2011. As we've mentioned before, IP services generates strong cash flow for the business and serves as a key element of competitive differentiation for the data center services business. As enterprises become increasingly reliant on the Internet for their basic productivity applications, we see the need for high-performance, high-availability connectivity to their hosted IP environments as a central differentiator for Internap's offering. The combination of our route-optimized IP, application acceleration and content delivery technologies and expertise uniquely positions Internap in the field of IT infrastructure suppliers.

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