INTERNAP NETWORK SERVICES CORPORATION Reports Operating Results (10-Q)

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May 06, 2010
INTERNAP NETWORK SERVICES CORPORATION (INAP, Financial) filed Quarterly Report for the period ended 2010-03-31.

Internap Network Services Corporation has a market cap of $304.7 million; its shares were traded at around $5.98 with and P/S ratio of 1.2. INAP is in the portfolios of George Soros of Soros Fund Management LLC, Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

Total revenues were $63.4 million for the three months ended March 31, 2010, a decrease of $0.5 million, or 1.0%, compared to $63.9 million for the three months ended March 31, 2009. Data center services revenues were $33.7 million and IP services revenues were $29.6 million for the three months ended March 31, 2010. For the three months ended March 31, 2010, data center services revenues increased $2.0 million, or 6%, while IP services revenues decreased $2.6 million, or 8%, compared to the same period in 2009. The increase in data center services revenues was driven by the higher revenue per square foot generated in our data centers. The decrease in IP services revenues was driven by a decline in IP pricing for new and renewing customers and the loss of legacy contracts at higher effective prices, partially offset by an increase in overall traffic.

At March 31, 2010, we had more than $81.1 million in cash and cash equivalents and $39.9 million in debt obligations, which included $19.9 million in capital leases and $20.0 million in revolving credit facility. Net cash flows provided by operations were $8.3 million for the three months ended March 31, 2010.

Direct costs of data center services, exclusive of depreciation and amortization, decreased $0.3 million, or 1%, to $23.0 million for the three months ended March 31, 2010, compared to $23.3 million for the same period in 2009. Direct costs of data center services as a percentage of corresponding revenues decreased to 68% for the three months ended March 31, 2010 from 73% for the same period in 2009. Data center services contributed $10.7 million of segment profit for the three months ended March 31, 2010, an increase of $2.3 million from $8.4 million for the same period in 2009. The decrease in total direct costs of data center services was primarily due to our ongoing efforts to proactively churn certain less profitable customer contracts in partner data centers.

Direct costs of IP network, sales and services, exclusive of depreciation and amortization, decreased $1.4, million, or 11%, to $11.0 million for the three months ended March 31, 2010 compared to $12.4 million for the same period in 2009, primarily due to the renegotiation of NSP costs. Connectivity costs vary based upon customer traffic and other demand-based pricing variables. Costs for IP services are subject to ongoing negotiations for pricing and minimum commitments. As our IP traffic continues to grow, we expect to realize lower bandwidth rates and more opportunities to proactively manage network costs, such as utilization and traffic optimization among network service providers. Direct costs of IP network, sales and services were 37% and 38% of IP services revenue for the three months ended March 31, 2010 and 2009, respectively. IP services segment profit decreased $1.2 million to $18.6 million for the three months ended March 31, 2010, from $19.8 million for the same period in 2009.

Cash-based compensation and benefits decreased $2.1 million to $12.7 million for the three months ended March 31, 2010 from $14.8 million for the same period in 2009. The decrease for the three months ended March 31, 2010 was primarily attributable to a benefit of $0.9 million as the result of reduced employee headcount, a benefit of $0.9 million related to the transition of our chief executive officer in the three months ended March 31, 2009 plus a benefit of $0.4 million related to the reversal of a bonus accrual for the year ended December 31, 2009, which was offset by an increase in the bonus accrual of $0.6 million during the three months ended March 31, 2010. Additionally, during the three months ended March 31, 2010, we recorded a credit of $0.5 million related to the Georgia Headquarters Tax Credit, or HQC. The HQC was an incentive to relocate corporate headquarters to and increase associated employment within Georgia. We recorded the HQC when approved by the Georgia Department of Revenue and were required to apply the credit against our payroll tax liability.

Direct Costs of Customer Support. Direct costs of customer support increased 21% to $5.3 million for the three months ended March 31, 2010 from $4.4 million for the same period in 2009. The increase of $0.9 million was primarily due to a $0.4 million increase in compensation, of which $0.3 million was related to the transfer of employees from the sales and marketing function to the customer support function as described below, a $0.2 million increase in employee benefits and a $0.3 million increase in outside professional services.

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