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

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Nov 06, 2009
INTERNAP NETWORK SERVICES CORPORATION (INAP, Financial) filed Quarterly Report for the period ended 2009-09-30.

InterNAP Network Services Corp is a provider of high performance Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of their service points have their data optimally routed to and from destinations on the Internet using their overlay network which analyzes the traffic situation on the multiplicity of networks that comprise the Internet and delivers mission-critical information and communications faster and more reliably. Internap Network Services Corporation has a market cap of $161.3 million; its shares were traded at around $3.18 with and P/S ratio of 0.6.

Highlight of Business Operations:

We include the impairment charge of $4.1 million for acquired developed CDN advertising technology in “Direct costs of amortization of acquired technologies” in the accompanying statements of operations. The change in estimates of remaining useful lives for certain of our intangible assets related to acquired CDN customer relationships, trade names and non-compete agreements resulted in an increase to our net loss of $1.1 million and $1.6 million, or $0.02 and $0.03 per share, for the three and nine months ended September 30, 2009, respectively. The impairment charges and changes in estimated remaining useful lives of CDN intangible assets did not impact our cash balances or result in violation of any covenants of our debt instruments. We continue to believe that our remaining intangible assets are not impaired.

Total revenues were $64.4 million for the three months ended September 30, 2009, a decrease of $1.0 million, or 1.5%, compared to $65.4 million for the three months ended September 30, 2008. Data center services revenues were $33.5 million and IP services revenues were $30.9 million for the three months ended September 30, 2009. For the three months ended September 30, 2009, data center services revenues increased $3.6 million, or 12%, while IP services revenues decreased $4.6 million, or 13% compared to the same period in 2008. The decrease in IP services revenues was driven by a decline in IP pricing for new and renewing customers and the loss of older customers who paid higher effective prices, partially offset by an increase in overall traffic.

Our financial position and liquidity remain strong. We ended the quarter with more than $67.8 million in cash and cash equivalents and $23.3 million in debt obligations, including $3.3 million for capital leases. Net cash flows provided by operations were $27.2 million. Quarterly days sales outstanding at September 30, 2009 were 34 days, down from 40 days at December 31, 2008.

IP Services. Revenues for IP services decreased $4.6 million, or 13%, to $30.9 million for the three months ended September 30, 2009, compared to $35.5 million for the same period in 2008. Revenues for IP services decreased $10.6 million, or 10%, to $95.2 million for the nine months ended September 30, 2009, compared to $105.8 million for the same period in 2008. The decrease in IP services revenues was driven by a decline in IP pricing for new and renewing customers and the loss of older customers who were paying higher effective prices, partially offset by an increase in overall traffic. There have been ongoing industry-wide pricing declines over the last several years and this trend continued during the three and nine months ended September 30, 2009. Despite price declines, we continue to experience increasing volume in our traditional IP services. IP traffic increased on average approximately 26% from the three months ended September 30, 2008 to the three months ended September 30, 2009 calculated based on a sum of the months in the respective periods. The increase in IP traffic resulted from our customers using more applications, as well as the nature of applications consuming greater amounts of bandwidth. We believe we remain well-positioned to benefit from an increasing reliance on the Internet as the medium for business applications, media distribution, communication and entertainment. IP services revenues also included FCP product and other hardware sales of $0.5 million and $1.1 million for the three months ended September 30, 2009 and 2008, respectively, and $0.8 million and $1.9 million for the nine months ended September 30, 2009 and 2008, respectively. This revenue data for FCP products does not include FCP-related services or subscription revenue.

Direct costs of IP network, sales and services, exclusive of depreciation and amortization, decreased $0.6 million, or 5%, to $12.0 million for the three months ended September 30, 2009, compared to $12.7 million for the same period in 2008. The related direct costs decreased $2.0 million, or 5%, to $36.8 million for the nine months ended September 30, 2009, compared to $38.8 million for the same period in 2008. Direct costs of IP network, sales and services were 39% and 36% of IP service revenues for the three months ended September 30, 2009 and 2008, respectively, and 39% and 37% for the nine months ended September 30, 2009 and 2008, respectively. IP services segment profit decreased $4.0 million to $18.8 million for the three months ended September 30, 2009 from $22.8 million for the same period in 2008, and decreased $8.6 million to $58.3 million for the nine months ended September 30, 2009 from $66.9 million for the same period in 2008. The increase in direct costs as a percentage of revenues and the decrease in segment profit were primarily due to lower revenue from ongoing pricing pressure as noted above. 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. During the three and nine months ended September 30, 2009, we continued to renegotiate our agreements with our major network service providers, which included cancellation and consolidation of certain contracts that, in the aggregate, resulted in both lower minimum commitments and bandwidth rates. 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.

Data Center Services. Revenues for data center services increased $3.6 million, or 12%, to $33.5 million for the three months ended September 30, 2009, compared to $29.9 million for the same period in 2008. Data center services revenues increased $13.5 million, or 16%, to $97.5 million for the nine months ended September 30, 2009 from $84.0 million for the same period in 2008. During the nine months ended September 30, 2009,

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