InterNAP Network Services Corporation ( INAP)

Q3 2010 Earnings Call

November 4, 2010 5:00 p.m. ET


Andrew McBath – Director, IR

Eric Cooney – President and CEO

George Kilguss – CFO


Srinivas Anantha – Oppenheimer & Co.

Aron Honig – Brigantine Advisors

Michael Bowen – Guggenheim Securities

Jonathan Atkin – RBC Capital Markets

Erik Suppiger – Signal Hill Group, LLC

Mark Kelleher – Brigantine & Company

Colby Synesael – Cowen and Company

Rod Ratliff – SunTrust Robinson



Good day ladies and gentlemen, and welcome to your InterNAP third quarter 2010 earnings conference call. (Operator Instructions)

And now, I would like to introduce your host for today, Andrew McBath, Director of Investor Relations for InterNAP Network Services.

Andrew McBath

Thanks John. 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 the prepared remarks, we’ll open up the call for your questions. I want to point out that we will be referencing slides that correspond with our conference call this afternoon. These slides are available in online presentation stream in the presentation section of InterNAP ’s investor service 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. These statements include statements regarding our business strategy and prospects, including expected results from focusing on company-controlled data centers, and completing our program of proactive churn, our expectations related to bookings, and the results our customers can achieve by using our services, our belief that our turnaround strategy will deliver long-term profitable growth, including top line growth in IP services, and expected levels of adjusted EBITDA for fiscal year 2010, the timing of rollout of services, and deployment of new data center space.

So because these statements are not guarantees of future performance, and involve risk and uncertainties, they are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors are discussed 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 results, we will also discuss recent developments.

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

Eric Cooney

Thank you Drew. We appreciate everyone joining us for our call this afternoon.

I’ll start my comments on slide three, and begin by saying that we are very pleased to see the return to revenue growth this quarter in our data center services business.

As you can see from the chart, overall segment margins are up substantially when compared with the same period last year as we made solid progress reconstituting our data center business, and addressing costs in our IP services business.

Since the third quarter of 2009, we have proactively turned out approximately $4 million in low margin or loss making data center services revenue at the specific partner co-location sites. We are reassured in our strategy to return the company long-term profitable growth given the year-over-year growth in both segment profits and adjusted EBITDA despite the lower total revenue.

Further, we are confident in the strength of the underlying business as a solid platform for InterNAP to build upon and deliver future profitable growth.

With another quarter of solid adjusted EBITDA in the third quarter, we are on track to generate the highest level of adjusted EBITDA in the company’s history for fiscal year 2010. Year-to-date improved segment profit coupled with continued operating cost control has delivered more than 50% growth in adjusted EBITDA compared to the first three quarters in 2009.

Looking on to slide four, I’ll walk through the sequential revenue change. IP services declined sequentially by approximately 2%. The combination of solid IP bookings growth and stabilized IP churn levels provide confidence in our ability to return IP services to top line gross.

Proactive data center turned for the quarter was $0.4 million. And organic growth in core data center facilities totaled $0.8 million.

We saw particular strength in our manage hosting services in the quarter as our recent service enhancements to servers and storage, data protection and backup, and virtualization resonated with a number of new enterprise hosting customers.

Now I’ll cover segment results on slide five. The two charts on this slide give you a sense for revenue and margin trends in both business units. The high-level message for data center services is that we returned to top line growth in the third quarter selling through the proactive churn. Data center segment margins were up strongly from a year ago, and were down compared with the second quarter driven by facility power cost increases in the hotter summer months.

Margins in our IP services segment have remained stable for a number of quarters as we have been able to streamline service delivery, and effectively renegotiate contracts with our backbone service providers.

IP revenue also continues to show signs of stabilization. The year-over-year decline was at its lowest level in two years. And the sequential decrease remained modest at approximately $600,000.

Moreover, booking in this segment continued to improve at the initiatives to rebuild and expand the sales force, deploy targeted marketing programs and sales tools, and bring to market compelling new products begin to show results.

Accelerated IP or XIP is one of these services. As we’ve described to you in the past, XIP is a natural complement to our performance IP service. In combination, InterNAP ’s MIRO and XIP solutions reduce file and application download times by as much as fourfold. With such a substantial improvement in true put, we can help our customers increase revenue conversion rates, and avoid capital outlays. The strong return on investment message is helping our sales organization cultivate their role as an advisor to the customer rather than just a transactional middleman.

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