Internap Reports Third Quarter 2011 Financial Results

ATLANTA, Oct. 27, 2011 /PRNewswire/ -- Internap Network Services Corporation (NASDAQ: INAP), a leading provider of IT Infrastructure services, today announced financial results for the third quarter of 2011.  

"We are pleased with Internap's solid financial results for the third quarter of 2011.  Continued strong operational performance drove improvement across the business this quarter as demonstrated by:  accelerated revenue growth, higher profitability and increased data center occupancy," said Eric Cooney, President and Chief Executive Officer of Internap.  "Further, we are pleased to see confirmation of our strategic shift to an IT Infrastructure services provider as our company-controlled data center and managed hosting revenue continues to grow at or above market rates.  With our on-going data center footprint expansion and the launch of our enterprise cloud services solution, Internap is now unmatched in terms of our IT services platform flexibility and performance."

Revenue

• Third quarter revenue totaled $62.0 million compared with $60.3 million in the third quarter of 2010 and $60.4 million in the second quarter of 2011. Revenue from Data center services increased year-over-year and sequentially.  IP services revenue decreased compared with the third quarter of 2010 and was flat sequentially.
• Data center services revenue increased 8 percent year-over-year and 5 percent sequentially to $34.1 million. Both the year-over-year and the sequential increases in this segment were driven by increased sales of colocation in company-controlled datacenters and accelerating growth in hosting services.
• IP services revenue in the third quarter totaled $27.9 million – a decrease of 3 percent year-over-year and flat compared with the second quarter of 2011.  Per unit price decreases, partly offset by traffic growth, drove the year-over-year decrease in IP services revenue.  

Net (Loss) Income

• GAAP net loss was $(1.8) million, or $(0.04) per share, compared with GAAP net loss of $(1.7) million, or $(0.03) per share, in the third quarter of 2010 and $(2.6) million, or $(0.05) per share, in the second quarter of 2011.  
• Normalized net loss in the third quarter, which excludes the impact of stock-based compensation expense and items that management considers non-recurring, was $(0.6) million, or $(0.01) per share.  Normalized net loss was $(0.5) million, or $(0.01) per share, in the third quarter of 2010, and $(0.3) million, or $(0.01) per share, in the second quarter of 2011.

Segment Profit and Adjusted EBITDA

• Segment profit totaled $31.2 million in the third quarter, an increase of 9 percent year-over-year and a 5 percent sequentially.  Third quarter 2011 segment margin was 50.4 percent, an increase of 270 basis points year over year and 100 basis points sequentially.

• Segment profit in Data center services totaled $13.6 million, or 40.0 percent of Data center services revenue in the third quarter of 2011.  IP services segment profit for the quarter was $17.6 million, or 63.1 percent of IP services revenue. Increased colocation revenue generated at company-controlled data centers and higher managed hosting revenue benefited Data center services segment profit relative to both the third quarter of 2010 and the second quarter of 2011.  Data center services segment margin increased 470 basis points year-over-year and 80 basis points sequentially to 40.0 percent.  Network efficiency programs and lower ISP vendor costs allowed IP services segment profit to remain flat compared with the third quarter of 2010 and drove a 3 percent improvement sequentially.  Lower network costs were the primary contributors to the 190 basis point improvement in IP services segment margins compared with both the third quarter of 2010 and the second quarter of 2011.

• Third quarter 2011 adjusted EBITDA totaled $11.3 million, a 23 percent increase over the third quarter of 2010 and a 10 percent increase over the second quarter of 2011.  Adjusted EBITDA margin was 18.2 percent in the third quarter of 2011, up 300 basis points year-over-year and 120 basis points sequentially.  The year-over-year increase in adjusted EBITDA was attributable to increased segment profit in our Data center services segment.  The sequential Adjusted EBITDA improvement was driven by segment profit increases in both Data center services and IP services.

Balance Sheet and Cash Flow Statement

• Cash and cash equivalents totaled $34.3 million at September 30, 2011. Total debt was $55.9 million, net of discount, at the end of the quarter, including $37.3 million in capital lease obligations.
• Cash generated from operations for the nine months ended September 30, 2011 was $27.0 million. Capital expenditures over the same period were $50.9 million.

Recent Operational Highlights

Historical trends of key financial and operational metrics can be found in a supplementary data schedule on Internap's website at http://ir.internap.com/results.cfm.

• We had 2,737 customers under contract at the end of the third quarter 2011.

• Today, we announced that our comprehensive enterprise cloud services are now generally available.  With four access options that include both feature-rich VMware® platforms as well as a lower cost, open source solution built on OpenStack, Internap's Enterprise Cloud is one of the most flexible, high-performance services available today.

• We also announced today that our public and private cloud services attained VMware vCloud® Powered validation. As part of the VMware partner ecosystem, Internap delivers public and private cloud services that are vCloud Powered, providing enterprise customers with the benefits of VMware virtualization in a completely managed cloud environment.

• Earlier this week, we announced that our CDN Mobile Service, featuring 'publish once –deliver to any device' technology, would be available in the fourth quarter.  This service allows customers to upload a single file which is then dynamically adapted for viewing on multiple target mobile devices including Apple iPhone and iPad, and Android, Silverlight and Flash based devices.

Conference Call Information:

Internap's third quarter 2011 conference call will be held today at 5:00 p.m. EDT. Listeners may connect to a webcast of the call, which will include accompanying presentation slides, on the investor services section of Internap's web site at http://ir.internap.com/events.cfm. The call can be accessed by dialing 866-515-9839. International callers should dial 631-813-4875.  An online archive of the webcast presentation will be available for one month following the call.  An audio-only replay will be accessible from Thursday, October 27, 2011 at 8 p.m. EDT through Wednesday, November 2, 2011 at 855-859-2056 using the replay code 18857640. International callers can listen to the archived event at 404-537-3406 with the same code.

About Internap

Internap provides intelligent IT Infrastructure services that enable our customers to focus on their core business, improve service levels and lower the cost of IT operations. Our enterprise IP, CDN, colocation, managed hosting and cloud solutions are differentiated by unparalleled levels of performance, availability and support. Since 1996, thousands of businesses have entrusted Internap with the delivery and protection of their online applications. Transform your IT infrastructure into a competitive advantage with IT IQ from Internap. For more information, visit http://www.internap.com/, our blog at http://www.internap.com/blog, or follow us on Twitter at http://twitter.com/internap.

Forward-Looking Statements

This press release contains forward-looking statements. These forward-looking statements include statements related to the flexibility of our Enterprise Cloud solution and the availability and features of our CDN Mobile Service. Because such statements are not guarantees of future performance and involve risks and uncertainties, there are important factors that could cause Internap's actual results to differ materially from those in the forward-looking statements. These factors include the actual performance of our IT Infrastructure services; our ability to achieve or sustain profitability; our ability to expand margins and drive higher returns on investment; our ability to complete expansion of company-controlled data centers within the expected timeframe; our ability to sell into new data center space; our ability to maintain current customers and obtain new ones, whether in a cost-effective manner or at all; our ability to correctly forecast capital needs, demand planning and space utilization; our ability to respond successfully to technological change and the resulting competition; the availability of services from Internet network service providers or network service providers providing network access loops and local loops on favorable terms, or at all; failure of third party suppliers to deliver their products and services on favorable terms, or at all; failures in our network operations centers, data centers, network access points or computer systems; our ability to provide or improve Internet infrastructure services to our customers; and our ability to protect our intellectual property, as well as other factors discussed in our filings with the Securities and Exchange Commission. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to update, amend or clarify any forward-looking statement for any reason.

In addition to providing financial measurements based on accounting principles generally accepted in the United States of America ("GAAP"), Internap has historically provided additional financial measures that are not prepared in accordance with GAAP ("non-GAAP"), including adjusted EBITDA, normalized net income (loss), normalized diluted shares outstanding, segment profit and segment margin. The most directly comparable GAAP equivalent to adjusted EBITDA and normalized net income (loss) is loss from operations and net loss, respectively. The most directly comparable GAAP equivalent to normalized diluted shares outstanding is diluted common shares outstanding.

We define non-GAAP measures as follows:

• Adjusted EBITDA is loss from operations plus depreciation and amortization, loss on disposals of property and equipment, impairments and restructuring and stock-based compensation.
• Adjusted EBITDA margin is adjusted EBITDA as a percentage of revenues.
• Normalized net income (loss) is net income (loss) plus impairments and restructuring and stock-based compensation.
• Normalized diluted shares outstanding are diluted shares of common stock outstanding used in GAAP net loss per share calculations, excluding the dilutive effect of stock-based compensation using the treasury stock method.
• Normalized net income (loss) per share is normalized net income (loss) divided by basic and normalized diluted shares outstanding.
• Segment profit is segment revenues less direct costs of network, sales and services, exclusive of depreciation and amortization for the segment, as presented in the notes to our consolidated financial statements. Segment profit does not include direct costs of customer support, direct costs of amortization of acquired technologies or any other depreciation or amortization associated with direct costs.
• Segment margin is segment profit as a percentage of segment revenues.

We detail reconciliations of our non-GAAP financial measures to the most directly comparable financial measure in the reconciliations of GAAP to non-GAAP measures below. We believe that presentation of these non-GAAP financial measures provides useful information to investors regarding our results of operations.

We believe that excluding depreciation and amortization and loss on disposals of property and equipment, as well as impairments and restructuring, to calculate adjusted EBITDA provides supplemental information and an alternative presentation that is useful to investors' understanding of Internap's core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that may have little bearing on present or future replacement costs, but also they are based on management estimates of remaining useful lives. Loss on disposals of property and equipment is also based on historical costs of assets that may have little bearing on replacement costs. Impairments and restructuring expenses primarily reflect goodwill impairments and subsequent plan adjustments in sublease income assumptions for certain properties included in our previously disclosed restructuring plans.

Internap believes that impairment and restructuring charges are unique costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a normal component of expenses related to current and ongoing operations.

Similarly, we believe that excluding the effects of stock-based compensation from non-GAAP financial measures provides supplemental information and an alternative presentation useful to investors' understanding of Internap's core operating results and trends. Investors have indicated that they consider financial measures of our results of operations excluding stock-based compensation as important supplemental information useful to their understanding of our historical results and estimating our future results.

We also believe that, in excluding the effects of stock-based compensation, our non-GAAP financial measures provide investors with transparency into what management uses to measure and forecast our results of operations, to compare on a consistent basis our results of operations for the current period to that of prior periods and to compare our results of operations on a more consistent basis against that of other companies, in making financial and operating decisions and to establish certain management compensation.

Stock-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that supplementing GAAP net loss and net loss per share information by providing normalized net income (loss) and normalized net income (loss) per share, excluding the effect of impairments, restructuring and stock-based compensation in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons. We consider normalized diluted shares to be another important indicator of our overall performance because it eliminates the effect of non-cash items.

Adjusted EBITDA is not a measure of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to — not a substitute for — our results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided by operating activities as defined by GAAP. Our statements of cash flows present our cash flow activity in accordance with GAAP. Furthermore, adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.

We believe adjusted EBITDA is used by and is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

• EBITDA is widely used by investors to measure a company's operating performance without regard to items such as interest expense, income taxes, depreciation and amortization, which can vary substantially from company-to-company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and
• investors commonly adjust EBITDA information to eliminate the effect of disposals of property and equipment, impairments, restructuring and stock-based compensation which vary widely from company-to-company and impair comparability.

Our management uses adjusted EBITDA:

• as a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis;
• as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and
• in communications with the board of directors, analysts and investors concerning our financial performance.

Our presentation of segment profit and segment margin excludes direct costs of customer support, depreciation and amortization in order to allow investors to see the business through the eyes of management. Management views direct costs of network, sales and services as generally less controllable, external costs and management regularly monitors the margin of revenues in excess of these direct costs. Similarly, we view the costs of customer support to also be an important component of costs of revenues but believe that the costs of customer support to be more within our control and to some degree discretionary as we can adjust those costs by hiring and terminating employees.

Segment margin is an important metric to our investors and analysts, as we have regularly discussed and disclosed the effects of third party vendors' pricing declines and the corresponding effect on our revenues. The presentation of segment margin highlights the impact of the pricing declines and allows investors and analysts to evaluate our revenue generation performance relative to direct costs of network, sales and services. Conversely, we have much greater latitude in controlling the compensation component of costs of revenues, represented by customer support, and we analyze this component separately from the direct external costs.

We also have excluded depreciation and amortization from segment profit and segment margin because, as noted above, they are based on estimated useful lives of tangible and intangible assets. Further, depreciation and amortization are based on historical costs incurred to build out our deployed network and the historical costs of these assets may not be indicative of current or future capital expenditures.

Although we believe, for the foregoing reasons, that our presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, our non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure of financial performance prepared in accordance with GAAP.

Use of non-GAAP financial measures is subject to inherent limitations because they do not include all the expenses that must be included under GAAP and because they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial measure. Management accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such information to supplement GAAP financial measures. Our non-GAAP financial measures may not be the same non-GAAP measures, and may not be calculated in the same manner, as those used by other companies.

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SOURCE Internap Network Services Corporation

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