Internap Network Services (INAP)

Q4 2010 Earnings Call

February 24, 2011 5:00 pm ET


J. Cooney - Chief Executive Officer, President and Director

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

Andrew McBath - Director of Investor Relations


Colby Synesael - Cowen and Company, LLC

Donna Jaegers - D.A. Davidson & Co.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

Erik Suppiger - Signal Hill



Good day, ladies and gentlemen, and welcome to the Internap Fourth Quarter 2010 and Full Year Earnings Conference Call. [Operator Instructions] At this time, I would now like to turn the conference over to your host, Mr. Andrew McBath, Director of Investor Relations.

Andrew McBath

Thanks, Jim. 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 will open up the call for your questions.

I want to point out that we'll be referencing slides that correspond with our conference call this afternoon. These slides are available in the online presentation stream in the Presentation section, Internap's investor services website.

Non-GAAP reconciliations 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 sites.

Today's call contains forward-looking statements. These statements include statements regarding our belief that our turnaround strategy will deliver long-term, profitable growth including top line growth in IP services; our belief that services we are developing and have developed will drive incremental revenue and further reduce churn; our business strategy, including expected results from investing in company-controlled data centers the completion of our proactive churn program; our expectations regarding new markets; the timing for bringing new data centers online and in the long-term demand in the markets we have entered; our expectations as to level of capital expenditures.

As these statements are not guarantees of future performance and involve risks 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 our fourth quarter and full year 2010 results, we will also discuss recent developments.

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

J. Cooney

Thank you, Drew. And good afternoon, everyone. Thank you for listening to our fourth quarter and full year 2010 financial results presentation. I'll provide an overview and touch on the highlights of our fourth quarter and 2010 results before our Chief Financial Officer, George Kilguss, takes you through our financial results in detail. I'll then come back to conclude our prepared remarks with some key takeaways before we open up the call for your questions.

Slide 3 provides a snapshot of our fourth quarter financial results. In the fourth quarter, total revenue declined sequentially as modest growth in Data Center Services only partially offset a decline in the IP Services segment. On a year-over-year basis, total revenue declined $3.5 million with the majority of the decline being driven by our program to proactively churn low margin customer contracts within our Data Center business.

We continued to show strong improvement in company profitability. Fourth quarter segment profit and margin increased both year-over-year and sequentially. The successful execution of our Data Center Services strategy is largely underpinning these improvements in profitability, specifically the proactive churn program and the increasing proportion of our Data Center Services revenue that is generated from company-controlled facilities are both key elements of our profitable growth strategy.

Fourth quarter adjusted EBITDA increased 14% compared with the prior year and 12% sequentially to $10.3 million. Adjusted EBITDA showed substantial benefit from increased segment profit, as well as tight internal cost controls. Cash operating expense decreased 5% year-over-year in the quarter to $19.2 million despite a 6% increase in headcount over the same period.

On Slide 4, you can see quarterly revenue and segment margin trends in our two reporting units. Fourth quarter Data Center Services revenue increased for the second consecutive quarter to $31.7 million. On a year-over-year basis, Data Center Services revenue decreased $1.4 million as proactive churn outpaced underlying growth in our core Data Center Services.

Compared with the fourth quarter of 2009, Data Center segment profit rose 21% and margin increased 800 basis points. At the end of the fourth quarter, we had successfully exited the last contract associated with our proactive churn program. This initiative has had a significant benefit on our overall profitability. The strategic benefit is clear when we consider that Data Center segment profit has increased 34% or $3.1 million from the third quarter of 2009 through the fourth quarter of 2010 even though Data Center revenue has declined by $1.8 million.

While IP Services revenue declined in the fourth quarter, we remain confident in the long-term ability to drive top line growth from this business unit based on underlying metrics, including traffic, bookings and churn. We also continue to develop and deploy services that will drive incremental revenue and further reduce churn. IP Services segment margins remain healthy in the low 60 percentages. And we expect this to continue.

In the next several slides, we will provide some highlights for our full year 2010 results. Slide 5 provides a brief summary of our 2010 income statement metrics. Despite a 5% reduction in overall revenue, total segment profit increased 3% year-over-year and segment margin increased 360 basis points to 47.8%. This is particularly noteworthy when we consider that all of the profit improvement came from our Data Center Services business.

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