Internap Network Services Management Discusses Q2 2012 Results - Earnings Call Transcript

Internap Network Services (INAP)

Q2 2012 Earnings Call

July 26, 2012 5:00 pm ET

Executives

Michael Nelson

J. Eric Cooney - Chief Executive Officer, President and Director

John David Maggard - Interim Chief Financial Officer, Vice President and Controller

Analysts

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Internap Networks Services Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes.

I would now turn the conference over to your host for today, Mr. Michael Nelson, Director of Investor Relations. Sir, you may begin.

Michael Nelson

Thank you. Good afternoon, and thank you for joining us today. I'm joined by Eric Cooney, our President and Chief Executive Officer; and John Maggard, our Interim 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 Relations 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 Relations site.

Today's call contains forward-looking statements, including expectations regarding future performance and long-term profitable growth; belief in our business strategy, including the benefits to be achieved from investing in our company-controlled colocation and our agile hosting and custom hosting solutions; timing for bringing new data centers online; expectations regarding the progress, timing and success of integrating Voxel into our business including; and expectations regarding cash flow and our capital flexibility.

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 the second quarter 2012 results, we will also discuss recent developments.

Now let me turn the call over to Eric Cooney.

J. Eric Cooney

Thank you, Michael, and good afternoon, everyone. We are pleased you could join us for our second quarter 2012 earnings presentation. I will was start the discussion with a summary of our results, and then turn the call over to John Maggard, our Interim Chief Financial Officer, to take you through our detailed financial results. From there, I will briefly wrap up our prepared remarks, and then we will open the call to take your questions.

Beginning on Slide 3, you will see we delivered total revenue for the quarter of $68.7 million, representing an increase of 14% year-over-year and 2% over the first quarter of 2012. Total revenue churn improved to 1.2% in the second quarter, representing an improvement of 20 basis points year-over-year and 30 basis points sequentially. These results provide further evidence of the company's ability to execute on our strategy of leveraging our company controlled colocation and hosting services.

Segment profit of $36 million increased 21% year-over-year and was essentially flat sequentially. Segment margin was 52.5%, an increase of 310 basis points year-over-year and decline of 100 basis points quarter-over-quarter as continued growth in higher-margin hosting services were offset by a higher seasonal power cost.

On Slide 4, you see the sources of revenue change in revenue from the first quarter of 2012 to the second quarter of 2012. Our core data center services including company controlled colocation and hosting services remain the engine for top line organic growth, representing over 90% of the sequential revenue increase. Total data center services contributed $1.6 million of incremental revenue while IP services provided an incremental $0.1 million of revenue in the second quarter. Nonrecurring IP equipment sales accounted for roughly $0.5 million of incremental IT revenue quarter-over-quarter.

Turning to Slide 5. Adjusted EBITDA totaled $12.2 million or 17.7% of revenue. This represented a 19% increase year-over-year and was flat sequentially. The year-over-year improvement was predominantly the result of organic revenue and segment profit growth in data center services. Cash operating expenses increased $0.2 million sequentially due to incremental marketing investments in our brand awareness program and integration expenses related to the Voxel acquisition.

On Slide 6, data center services revenue totaled $41.5 million for the quarter, an increase of 28% year-over-year and 4% sequentially. Data center segment profit was up strongly from a year ago rising 48% year-over-year and declining 1% sequentially. The solid year-over-year increase was driven by strength in colocation services from within company controlled facilities, as well as Internap's complex managed hosting services. Again, higher seasonal power costs impacted margin sequentially as the summer heat waves played a significant incremental load on the data center cooling infrastructure.

IT services revenue modestly increased quarter-over-quarter and declined year-over-year to $27.2 million. IP segment margin increased 90 basis points sequentially and increased 210 basis points year-over-year to 63.3%, primarily due to higher nonrecurring IP equipment sales, which offset the decline in IP trends of revenue. The IP services segment continues to deliver solid segment profitability in cash flow, which we leveraged to support the more capital-intensive data center services segment.

On Slide 7, we provide an update on the progress we are making on our data center expansions in Los Angeles and Atlanta. Those locations remain on track to open later in the third quarter of 2012 as we finalize the on-site work. When fully deployed, the Los Angeles facility will add 55,000 incremental net sellable square feet to our company controlled footprint, with Phase I adding 15,000 net sellable square feet. Likewise, our Atlanta facility is nearing completion, and when fully deployed, will add an incremental 31,000 net sellable square feet of premium data center capacity, with Phase I adding roughly 12,000 net sellable square feet.

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