Internap Reports Continued Adjusted EBITDA Margin Expansion and Positive Levered Free Cash Flow

- Revenue of $78.3 million, down 7% versus the third quarter of 2014

- Data center services revenue of $58.6 million, down 5% year-over-year

- Segment margin(1) of 57.0%, up 90 basis points versus the third quarter of 2014

- Adjusted EBITDA(2) of $19.8 million unchanged year-over-year

- Adjusted EBITDA margin(2) of 25.2%, up 190 basis points year-over-year

- Levered free cash flow(3) of $2.2 million

Nov 05, 2015, 16:03 ET from Internap Corporation

ATLANTA, Nov. 5, 2015 /PRNewswire/ -- Internap Corporation (NASDAQ: INAP), a provider of high-performance Internet infrastructure services, today announced financial results for the third quarter of 2015. 

"Our company-wide growth initiatives are beginning to yield encouraging results. We gained positive operating momentum throughout the third quarter of 2015 with bookings increasing each month during the quarter and September bookings reaching the highest level in six months. Additionally, customer churn is improving while channel partner productivity is increasing," said Michael Ruffolo, President and Chief Executive Officer of Internap. "We believe our third quarter 2015 results provide a solid foundation to accelerate top-line revenue growth and expand margins. With a disciplined approach to capital allocation, we are encouraged in our ability to generate positive levered free cash flow. We remain confident that our compelling performance-based value proposition should drive long-term profitable growth for the business."

 

Third Quarter 2015 Financial Summary

(In thousands)

YoY

QoQ

3Q 2015

3Q 2014

2Q 2015

Growth

Growth

Revenues:

Data center services

$     58,622

$     61,640

$      59,422

-5%

-1%

IP services

19,696

$     23,027

$      21,010

-14%

-6%

Total Revenues

$     78,318

$     84,667

$      80,432

-7%

-3%

Operating Expenses

$     87,503

$     87,702

$      86,270

0%

1%

GAAP Net Loss

$   (14,197)

$      (9,377)

$    (12,534)

-51%

-13%

Normalized Net Loss2

$     (9,990)

$   (7,543)

$ (10,290)

-32%

3%

Segment Profit1

$    44,637

$   47,519

$   47,454

-6%

-6%

Segment Profit Margin

57.0%

56.1%

59.0%

90 BPS

-200 BPS

Adjusted EBITDA

$    19,752

$   19,714

$   19,109

0%

3%

Adjusted EBITDA Margin

25.2%

23.3%

23.8%

190 BPS

140 BPS

 

Revenue

  • Revenue totaled $78.3 million in the third quarter, a decrease of 7% year-over-year and 3% sequentially. The year-over-year decrease was due to the loss of revenue related to customer attrition following our migration out of the New York metro data center into our Secaucus facility, the decrease in partner colocation revenue and lower IP revenue, partially offset by organic growth in core data center services revenue. Sequentially, revenue declined in data center services and IP services.
  • Data center services revenue totaled $58.6 million in the third quarter, a decrease of 5% year-over-year and 1% sequentially. The year-over-year decrease was primarily due to the loss of revenue from the New York metro data center migration. The sequential decrease was primarily attributable to previously-disclosed hosting churn experienced late in the second quarter of 2015, partially offset by organic growth in core revenues. Partner colocation revenue declined due to our strategy to focus on selling into our company-controlled data centers.
  • IP services revenue totaled $19.7 million in the third quarter, a decrease of 14% year-over-year and 6% sequentially. Both decreases were driven by a decline in IP pricing for new and renewing customers and the loss of legacy contracts.

Net Loss

  • GAAP net loss was $(14.2) million, or $(0.27) per share, compared with $(9.4) million, or $(0.18) per share, in the third quarter of 2014 and $(12.5) million, or $(0.24) per share, in the second quarter of 2015.
  • Normalized net loss was $(10.0) million, or $(0.19) per share, compared with normalized net loss of $(7.5) million, or $(0.15) per share, in the third quarter of 2014, and normalized net loss of $(10.3) million, or $(0.20) per share, in the second quarter of 2015.

Segment Profit and Adjusted EBITDA

  • Segment profit totaled $44.6 million in the third quarter, a 6% decrease year-over-year and quarter-over-quarter. Segment margin was 57.0%, an increase of 90 basis points year-over-year and a decrease of 200 basis points sequentially.
  • Data center services segment profit totaled $33.5 million in the third quarter, a 1% decrease compared with the third quarter of 2014 and a 4% decrease from the second quarter of 2015. Data center services segment margin was 57.2% in the third quarter, up 220 basis points year-over-year and down 180 basis points sequentially. An increasing proportion of higher-margin services, specifically colocation sold in company-controlled data centers, hosting and cloud services drove data center services segment profit and margin higher compared with the third quarter of 2014. Higher seasonal power costs resulted in a decrease in data center services segment profit and margin compared with the second quarter of 2015.
  • IP services segment profit totaled $11.1 million in the third quarter, an 18% decrease compared with the third quarter of 2014 and a 10% decrease from the second quarter of 2015. IP services segment margin was 56.5% in the third quarter, down 250 basis points year-over-year and 240 basis points sequentially. Lower IP transit revenue and the loss of legacy contracts drove the decrease in segment profit and segment margin.
  • Adjusted EBITDA totaled $19.8 million in the third quarter, flat compared with the third quarter of 2014 and a 3% increase from the second quarter of 2015. Adjusted EBITDA margin was 25.2% in the third quarter, up 190 basis points year-over-year and 140 basis points sequentially. Lower cash operating expense4 positively impacted adjusted EBITDA and adjusted EBITDA margin. Benefits included a decrease in sales and marketing costs primarily related to the removal of redundancies in connection with the phase-out of the iWeb trade name and other marketing program efficiencies. General and administrative costs decreased primarily due to lower cash-based compensation.

Balance Sheet and Cash Flow Statement

  • Cash and cash equivalents totaled $18.3 million at September 30, 2015. Total debt was $376.3 million, net of discount, at the end of the quarter, including $57.5 million in capital lease obligations.
  • Cash generated from operations for the three months ended September 30, 2015 was $10.8 million. Capital expenditures over the same period were $10.9 million and cash interest expense was $6.7 million, resulting in $2.2 million of levered free cash flow.

Business Outlook

We are reaffirming the following guidance for full-year 2015:

  • Revenue                           $320 million - $325 million
  • Adjusted EBITDA              $80 million - $85 million
  • Capital Expenditures         $60 million - $70 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

  • Internap announced the general availability of AgileSERVER 2.0, the next generation of its bare-metal Infrastructure-as-a-Service (IaaS) offering. A high-performance IaaS option, AgileSERVER 2.0 features significant hardware, networking and management advancements designed to meet the needs of enterprises and devops teams deploying mission-critical applications and big-data workloads on OpenStack.
  • Internap announced an alliance with Akamai to provide customers with Internap's performance-optimized cloud, data center and network services combined with Akamai's cloud security and data center protection services.
  • Internap's New York Metro data center was recently awarded Leadership in Energy and Environmental Design (LEED) Platinum certification by the U.S. Green Building Council. This facility has also achieved ENERGY STAR certification, a program run by the U.S. Environmental Protection Agency (EPA) to identify ways in which energy efficiency can be measured, documented and implemented in data centers.
  • We had 11,021 customers at September 30, 2015.

 

  1. Segment margin and segment profit are non-GAAP financial measures which we define in an attachment to this press release entitled "Non-GAAP (Adjusted) Financial Measures." Reconciliations between GAAP and non-GAAP information related to segment profit and segment margin are contained in the table entitled "Segment Profit and Segment Margin" in the attachment.
  2. Adjusted EBITDA, adjusted EBITDA margin and normalized net loss are non-GAAP financial measures which we define in an attachment to this press release entitled "Non-GAAP (Adjusted) Financial Measures." Reconciliations between GAAP information and non-GAAP information related to adjusted EBITDA and normalized net loss are contained in the tables entitled "Reconciliation of Loss from Operations to Adjusted EBITDA," and "Reconciliation of Net Loss and Basic and Diluted Net Loss Per Share to Normalized Net Loss and Basic and Diluted Normalized Net Loss Per Share" in the attachment.
  3. Levered free cash flow is a non-GAAP measure which we define in an attachment to this press release entitled "Non-GAAP (Adjusted) Financial Measures." Reconciliations between GAAP and non-GAAP information related to levered free cash flow is contained in the table entitled "Levered Free Cash Flow" in the attachment.
  4. Cash operating expense is a non-GAAP measure which we define in an attachment to this press release entitled "Non-GAAP (Adjusted) Financial Measures." Reconciliations between GAAP and non-GAAP information related to cash operating expense is contained in the table entitled "Cash Operating Expense" in the attachment.

Conference Call Information:

Internap's third quarter 2015 conference call will be held today at 5:00 p.m. ET. Listeners may connect to a webcast of the call, which will include accompanying presentation slides, on the investor relations section of Internap's web site at http://ir.internap.com/events.cfm. The call can be also 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, November 5, 2015 at 8:00 p.m. ET through Wednesday, November 11, 2015 at 855-859-2056 using replay code 61666043.  International callers can listen to the archived event at 404-537-3406 with the same code.

About Internap

Internap is the high-performance Internet infrastructure provider that powers the applications shaping the way we live, work and play. Our hybrid infrastructure delivers performance without compromise – blending virtual and bare-metal cloud, hosting and colocation services across a global network of data centers, optimized from the application to the end user and backed by rock-solid customer support and a 100% uptime guarantee. Since 1996, the most innovative companies have relied on Internap to make their applications faster and more scalable. For more information, visit www.internap.com.

Forward-Looking Statements

This press release contains forward-looking statements. These forward-looking statements include statements related to our ability to accelerate top-line growth, expand margins, generate positive levered free cash flow and drive long-term profitable growth and our expectations for full-year 2015 revenue, adjusted EBITDA and capital expenditures. Our ability to accelerate top-line growth, expand margins, generate positive levered free cash flow and drive long-term profitable growth and our expectations for full-year 2015 revenue, adjusted EBITDA and capital expenditures are based on certain assumptions, including anticipated new product launches, our ability to execute on our business strategy, leveraging of multiple routes to market, expanded brand awareness for high-performance Internet infrastructure services and customer churn levels. These assumptions may prove to be inaccurate in the future. Because such forward-looking 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 our ability to execute on our business strategy and drive growth; the robustness of the IT infrastructure services market; 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 and existing data center space; the actual performance of our IT infrastructure services; 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.

 

Press Contact:

Investor Contact:

Mariah Torpey

Michael Nelson

(781) 418-2404

(404) 302-9700

internap@daviesmurphy.com

ir@internap.com

 

INTERNAP CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

2015

2014

2015

2014

Revenues:

   Data center services

$              58,622

$                   61,640

$            177,142

$                 181,318

   Internet protocol (IP) services

19,696

23,027

62,394

69,378

       Total revenues

78,318

84,667

239,536

250,696

Operating costs and expenses:

   Direct costs of sales and services, exclusive of depreciation and amortization, shown below:

         Data center services

25,111

27,716

73,711

80,170

         IP services

8,570

9,432

26,295

29,300

   Direct costs of customer support

9,173

9,114

27,381

27,594

   Direct costs of amortization of acquired and developed technologies

816

1,524

2,557

4,535

   Sales and marketing

8,305

8,858

28,347

28,938

   General and administrative

10,793

11,611

34,295

34,471

   Depreciation and amortization

23,815

19,391

64,847

54,773

   Exit activities, restructuring and impairments

920

56

1,245

3,001

Total operating costs and expenses

87,503

87,702

258,678

262,782

Loss from operations

(9,185)

(3,035)

(19,142)

(12,086)

Non-operating expenses:

   Interest expense

6,923

6,699

20,613

19,996

   Other, net

(288)

(149)

(763)

335

Total non-operating expenses 

6,635

6,550

19,850

20,331

Loss before income taxes and equity in (earnings) of equity-method investment

(15,820)

(9,585)

(38,992)

(32,417)

Benefit for income taxes

(1,612)

(128)

(1,723)

(982)

Equity in (earnings) of equity-method investment, net of taxes

(11)

(80)

(96)

(198)

Net loss

$            (14,197)

$                   (9,377)

$            (37,173)

$                 (31,237)

Basic and diluted net loss per share

$                (0.27)

$                     (0.18)

$                (0.72)

$                     (0.61)

Weighted average shares outstanding used in computing net loss per share:

    Basic and diluted

51,699

51,063

51,763

51,180

 

 

INTERNAP CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                                   (In thousands, except par value amounts)

September 30,

December 31,

2015

2014

ASSETS

Current assets:

Cash and cash equivalents

$               18,312

$               20,084

Accounts receivable, net of allowance for doubtful accounts of $1,830 and $2,121, respectively

22,007

19,606

Deferred tax asset

676

633

Prepaid expenses and other assets

10,994

12,276

Total current assets

51,989

52,599

Property and equipment, net

330,603

342,145

Investment in joint venture 

2,733

2,622

Intangible assets, net

38,463

52,545

Goodwill

130,313

130,313

Deposits and other assets

10,790

9,923

Deferred tax asset

164

1,637

Total assets

$             565,055

$             591,784

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$               18,047

$               30,589

Accrued liabilities

11,981

13,120

Deferred revenues

6,696

7,345

Capital lease obligations

8,218

7,366

Term loan, less discount of $1,523 and $1,463, respectively

1,477

1,537

Exit activities and restructuring liability

2,140

1,809

Other current liabilities

2,232

1,590

Total current liabilities

50,791

63,356

Deferred revenues

4,613

3,544

Capital lease obligations

49,291

52,686

Revolving credit facility

31,000

10,000

Term loan, less discount of $5,396 and $6,543 respectively

286,354

287,457

Exit activities and restructuring liability

1,756

2,701

Deferred rent

9,296

10,583

Deferred tax liability

3,610

7,293

Other long-term liabilities

4,668

3,828

Total liabilities

441,379

441,448

Commitments and contingencies

Stockholders' equity:

Preferred stock, $0.001 par value; 20,000 shares authorized; no shares issued 

or outstanding

-

-

Common stock, $0.001 par value; 120,000 shares authorized; 56,036 and 54,410 shares

outstanding, respectively

56

54

Additional paid-in capital

1,274,834

1,262,402

Treasury stock, at cost; 768 and 621 shares, respectively

(6,014)

(4,683)

Accumulated deficit

(1,142,687)

(1,105,514)

Accumulated items of other comprehensive loss

(2,513)

(1,923)

Total stockholders' equity

123,676

150,336

Total liabilities and stockholders' equity

$             565,055

$             591,784

 

 

INTERNAP CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

2015

2014

2015

2014

Cash Flows from Operating Activities:

Net loss

$            (14,197)

$                    (9,377)

$            (37,173)

$               (31,237)

Adjustments to reconcile net loss to net cash provided by operating activities:

   Depreciation and amortization

24,631

20,915

67,404

59,308

   Impairment of property and equipment

232

-

232

537

   Amortization of debt discount and issuance costs

508

763

1,498

1,441

   Stock-based compensation expense, net of capitalized amount

2,435

1,778

6,200

5,675

   Equity in (earnings) of equity-method investment

(11)

(80)

(96)

(198)

   Provision for doubtful accounts

316

634

922

811

   Non-cash change in capital lease obligations

(527)

(440)

(1,167)

(87)

   Non-cash change in exit activities and restructuring liability

864

145

1,400

2,996

   Non-cash change in deferred rent

(499)

(646)

(1,287)

(2,028)

   Deferred taxes

(2,024)

(92)

(2,181)

(1,226)

   Other, net

212

(293)

230

197

Changes in operating assets and liabilities:

-

   Accounts receivable

(1,812)

(2,011)

(3,459)

3,198

   Prepaid expenses, deposits and other assets

1,797

111

836

(3,080)

   Accounts payable

414

614

(7,748)

(2,585)

   Accrued and other liabilities

(308)

1,991

(1,862)

4,795

   Deferred revenues

(529)

(1,229)

624

99

   Exit activities and restructuring liability

(673)

(756)

(2,014)

(2,296)

   Other liabilities

(1)

(97)

34

(90)

Net cash flows provided by operating activities

10,828

11,930

22,393

36,230

Cash Flows from Investing Activities:

Purchases of property and equipment

(10,610)

(14,051)

(41,299)

(51,312)

Additions to acquired and developed technology

(310)

(704)

(1,120)

(2,004)

Proceeds from sale-leaseback transactions

-

2,603

-

2,603

Acquisition, net of cash received

-

-

-

74

Net cash flows used in investing activities

(10,920)

(12,152)

(42,419)

(50,639)

Cash Flows from Financing Activities:

Proceeds from credit agreements

4,000

-

21,000

5,000

Principal payments on credit agreements

(750)

(750)

(2,250)

(2,250)

Return of deposit collateral on credit agreement

-

308

-

6,461

Payments on capital lease obligations

(2,001)

(1,469)

(5,718)

(4,212)

Proceeds from exercise of stock options

1,517

95

6,005

973

Acquisition of common stock for income tax withholdings

(464)

(59)

(1,332)

(744)

Other, net

(74)

(46)

869

(135)

Net cash flows provided by (used in) financing activities

2,228

(1,921)

18,574

5,093

Effect of exchange rates on cash and cash equivalents

(236)

(227)

(320)

(209)

Net increase (decrease) in cash and cash equivalents

1,900

(2,370)

(1,772)

(9,525)

Cash and cash equivalents at beginning of period

16,412

27,863

20,084

35,018

Cash and cash equivalents at end of period

$              18,312

$                    25,493

$              18,312

$                25,493

 

 

INTERNAP CORPORATION NON-GAAP (ADJUSTED) FINANCIAL MEASURES

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 and adjusted EBITDA margin, normalized net loss, normalized diluted shares outstanding, segment profit and segment margin and cash operating expense. The most directly comparable GAAP equivalent to adjusted EBITDA and normalized net 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 (gain) on disposals of property and equipment, exit activities, restructuring and impairments, stock-based compensation, acquisition costs and strategic alternatives and related costs.
  • Adjusted EBITDA margin is adjusted EBITDA as a percentage of revenues.
  • Normalized net loss is net loss plus exit activities, restructuring and impairments, stock-based compensation, acquisition costs and strategic alternatives and related costs.
  • 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 loss per share is normalized net loss divided by basic and normalized diluted shares outstanding.
  • Segment profit is segment revenues less direct costs of 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 and developed technologies or any other depreciation or amortization associated with direct costs.
  • Segment margin is segment profit as a percentage of segment revenues.
  • Levered free cash flow is adjusted EBITDA less capital expenditures, net of equipment sale-leaseback transactions and cash paid for interest.
  • Cash operating expense is GAAP operating expense less direct cost of sales and services, depreciation and amortization, loss (gain) on disposals of property and equipment, exit activities, restructuring and impairments, stock-based compensation, acquisition costs and strategic alternatives and related costs.

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 our 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.

We believe 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 our 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.

INTERNAP CORPORATION NON-GAAP (ADJUSTED) FINANCIAL MEASURES (Continued)

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 loss and normalized net loss per share, excluding the effect of exit activities, restructuring and impairments, stock-based compensation and acquisition costs 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 and 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.

INTERNAP CORPORATION NON-GAAP (ADJUSTED) FINANCIAL MEASURES (Continued)

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.

RECONCILIATION OF LOSS FROM OPERATIONS TO ADJUSTED EBITDA

A reconciliation of loss from operations, the most directly comparable GAAP measure, to adjusted EBITDA for each of the periods indicated is as follows (in thousands):    

Three Months Ended

September 30, 2015

June 30, 2015

September 30, 2014

Loss from operations (GAAP)

$                       (9,185)

$                       (5,838)

$                       (3,035)

Depreciation and amortization, including amortization of acquired and

  developed technologies

24,631

22,566

20,915

Loss on disposal of property and equipment, net

99

137

-

Exit activities, restructuring and impairments

920

59

56

Stock-based compensation 

2,435

2,185

1,778

Strategic alternatives and related costs

852

-

-

Adjusted EBITDA (non-GAAP)

$                      19,752

$                      19,109

$                      19,714

 

RECONCILIATION OF NET LOSS AND BASIC AND DILUTED NET LOSS PER SHARE TO NORMALIZED NET LOSS AND BASIC AND DILUTED NORMALIZED NET LOSS PER SHARE

Reconciliations of (1) net loss, the most directly comparable GAAP measure, to normalized net loss, (2) diluted shares outstanding used in per share calculations, the most directly comparable GAAP measure, to normalized diluted shares used in normalized per share outstanding calculations and (3) net loss per share, the most directly comparable GAAP measure, to normalized net loss per share for each of the periods indicated is as follows (in thousands, except per share data):

Three Months Ended

September 30, 2015

June 30, 2015

September 30, 2014

Net loss (GAAP)

$                     (14,197)

$                     (12,534)

$                       (9,377)

Exit activities, restructuring and impairments

920

59

56

Stock-based compensation

2,435

2,185

1,778

Strategic alternatives and related costs

852

-

-

Normalized net loss (non-GAAP) 

(9,990)

(10,290)

(7,543)

Normalized net income allocable to participating securities (non-GAAP) 

-

-

-

Normalized net loss available to common stockholders (non-GAAP)

$                       (9,990)

$                     (10,290)

$                       (7,543)

Participating securities (GAAP)

1,305

1,246

1,083

Weighted average shares outstanding used in per share calculation:

Basic and diluted (GAAP)

51,699

51,579

51,063

Add potentially dilutive securities

-

-

-

Less dilutive effect of stock-based compensation under the treasury stock method 

-

-

-

Normalized diluted shares (non-GAAP)

51,699

51,579

51,063

Loss per share (GAAP):

Basic and diluted

$                         (0.27)

$                         (0.24)

$                         (0.18)

Normalized net loss per share (non-GAAP):

Basic and diluted

$                         (0.19)

$                         (0.20)

$                         (0.15)

 

INTERNAP CORPORATION NON-GAAP (ADJUSTED) FINANCIAL MEASURES (Continued)

INTERNAP CORPORATION SEGMENT PROFIT AND SEGMENT MARGIN

Segment profit and segment margin, which does not include direct costs of customer support, direct costs of amortization of acquired and developed technologies or any other depreciation or amortization, for each of the periods indicated is as follows (dollars in thousands):

Three Months Ended

September 30, 2015

June 30, 2015

September 30, 2014

Revenues:

   Data center services:

      Core

$                      48,385

$                      48,711

$                      49,941

      Partner colocation

10,237

10,711

11,699

      Total data center services

58,622

59,422

61,640

   IP services

19,696

21,010

23,027

      Total

78,318

80,432

84,667

Direct cost of sales and services, exclusive of

      depreciation and amortization:

   Data center services:

      Core

17,203

16,371

18,849

      Partner colocation

7,908

7,964

8,867

      Total data center services

25,111

24,335

27,716

   IP services

8,570

8,643

9,432

      Total

33,681

32,978

37,148

Segment Profit:

   Data center services:

      Core

31,182

32,340

31,092

      Partner colocation

2,329

2,747

2,832

      Total data center services

33,511

35,087

33,924

   IP services

11,126

12,367

13,595

      Total

$                      44,637

$                      47,454

$                      47,519

Segment Margin:

   Data center services:

      Core

64.4%

66.4%

62.3%

      Partner colocation

22.8%

25.6%

24.2%

      Total data center services

57.2%

59.0%

55.0%

   IP services

56.5%

58.9%

59.0%

      Total

57.0%

59.0%

56.1%

 

INTERNAP CORPORATION NON-GAAP (ADJUSTED) FINANCIAL MEASURES (Continued)

LEVERED FREE CASH FLOW

Levered free cash flow is a non-GAAP measure and is adjusted EBITDA less capital expenditures, net of equipment sale-leaseback transactions and cash paid for interest (in thousands):

Three Months Ended

September 30, 2015

June 30, 2015

September 30, 2014

Adjusted EBITDA (non-GAAP)

$                        19,752

$                     19,109

$                        19,714

Capital expenditures, net of equipment sale-leaseback transactions

(10,920)

(15,797)

(13,758)

Unlevered free cash flow (non-GAAP)

8,832

3,312

5,956

Cash interest expense

(6,660)

(6,602)

(6,167)

Levered free cash flow (non-GAAP)

$                          2,172

$                      (3,290)

$                           (211)

 

CASH OPERATING EXPENSE

Cash operating expense is a non-GAAP measure and is operating expense defined by GAAP, less direct costs of sales and services, depreciation and amortization, (loss) gain on disposal of property and equipment, exit activities, restructuring and impairments, stock-based compensation, acquisition costs and strategic alternatives and related costs (in thousands):

 

Three Months Ended

September 30, 2015

June 30, 2015

September 30, 2014

Total operating costs and expenses

$                        87,503

$                     86,270

$                        87,702

Direct costs of sales and services, exclusive of depreciation and amortization

(33,681)

(32,978)

(37,148)

Depreciation and amortization, including amortization of acquired and

  developed technologies

(24,631)

(22,566)

(20,915)

Loss on disposal of property and equipment, net

(99)

(137)

-

Exit activities, restructuring and impairments

(920)

(59)

(56)

Stock-based compensation 

(2,435)

(2,185)

(1,778)

Strategic alternatives and related costs

(852)

-

-

Cash operating expense (non-GAAP)

$                        24,885

$                     28,345

$                        27,805

 

 

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SOURCE Internap Corporation



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