Internap Network Services (INAP) Q4 2011 Earnings Call February 23, 2012 5:00 pm ET Executives 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 Analysts Clayton F. Moran - The Benchmark Company, LLC, Research Division Mark Kelleher - Dougherty & Company LLC, Research Division Christopher M. Larsen - Piper Jaffray Companies, Research Division Colby Synesael - Cowen and Company, LLC, Research Division Gray Powell - Wells Fargo Securities, LLC, Research Division Presentation Operator
Because these statements are not guarantees of future performance and involves 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 fourth quarter and full year 2011 results, we will also discuss recent developments. Now let me turn the call over to Eric Cooney. J. Eric Cooney Thanks, Drew, and good afternoon, everyone. We are very pleased to be here this afternoon to present our fourth quarter and full year 2011 financial results. I'll start the discussion with the summary of our results before George takes you through our financial results in detail. From there, I'll briefly wrap up our prepared remarks, and then we'll take your questions. Beginning on Slide 3, you will see we delivered total revenue for the quarter of $62.8 million, representing our third consecutive quarter of sequential revenue growth and an improvement of 5% over fourth quarter 2010. Solid growth in the data center services business, including the company-controlled colocation and managed hosting product lines, underpins the fourth quarter results. The successful strategic shift to company-controlled collocation and increasing emphasis on our cloud/hosting business also continues to have a positive impact on the company's operating leverage. Segment profit and segment margin reached record levels for the second consecutive quarter. In fact, both measures in the fourth quarter and all of 2011 were the highest they've been since Internap's founding in 1996. An increasing proportion of our data center services revenue is generated within our own facilities, which has helped drive both margin gains and absolute profit increases. In the fourth quarter, segment profit was $32.9 million, an increase of 12% year-over-year and 5% quarter-over-quarter. Segment margin was 52.4%, an increase of more than 330 basis points compared with the prior year period and 200 basis points sequentially.
On Slide 4, you can see a similar positive trend in our adjusted EBITDA results. As with segment profit, adjusted EBITDA reached its highest point in the history of the company for both the fourth quarter and the full year 2011. Fourth quarter adjusted EBITDA was $12.6 million, up 23% year-over-year and 12% sequentially. Adjusted EBITDA margin increased 300 basis points over the fourth quarter of 2010 and 190 basis points quarter-over-quarter. The improvement in fourth quarter adjusted EBITDA was driven entirely by increased segment profit. Fourth quarter cash operating expense increased 6% year-over-year in the quarter to $20.3 million, in line with the 6% or 25% increase in headcount we experienced over the same period. We are certainly pleased with this 3-year trend of profitable growth as further validation for the strategic plan.Turning to Slide 5. Fourth quarter data center services revenue increased to $35.3 million. Year-over-year, data center services revenue increased 11% compared with the fourth quarter of 2010 and 4% sequentially, as managed hosting and core colocation showed solid growth. We continued our focus on improving the profitability of the data center services unit and seeing those efforts reflected in the results. The reduced emphasis on partner data centers and the investment in sales of our company-controlled colocation facilities, as well as sales of hosting and cloud solutions, all contribute to the 24% increase in data center segment profit and 445-basis-point increase in segment margin as compared with fourth quarter of 2010. IP services revenue declined modestly in the fourth quarter and approximately 4% on a year-over-year basis. A combination of market price declines along with a couple of substantial contract renewals during the fourth quarter offset continued traffic growth. Despite the moderate decline in IP revenue this quarter, segment profit and segment margins in this business unit increased sequentially and year-over-year to 64.5%, as the ongoing efforts to consolidate network footprint and negotiate IP transit costs continue to yield cost reductions. Read the rest of this transcript for free on seekingalpha.com