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InterNAP Network Services Corporation (NASDAQ:INAP)

Q3 2010 Earnings Call

November 4, 2010 5:00 p.m. ET

Executives

Andrew McBath – Director, IR

Eric Cooney – President and CEO

George Kilguss – CFO

Analysts

Srinivas Anantha – Oppenheimer & Co.

Aron Honig – Brigantine Advisors

Michael Bowen – Guggenheim Securities

Jonathan Atkin – RBC Capital Markets

Erik Suppiger – Signal Hill Group, LLC

Mark Kelleher – Brigantine & Company

Colby Synesael – Cowen and Company

Rod Ratliff – SunTrust Robinson

Operator

Good day ladies and gentlemen, and welcome to your InterNAP third quarter 2010 earnings conference call. (Operator Instructions)

And now, I would like to introduce your host for today, Andrew McBath, Director of Investor Relations for InterNAP Network Services.

Andrew McBath

Thanks John. Good afternoon, and thank you for listening in today. I’m joined by Eric Cooney, our President and Chief Executive Officer, and George Kilguss, our Chief Financial Officer.

Following the prepared remarks, we’ll open up the call for your questions. I want to point out that we will be referencing slides that correspond with our conference call this afternoon. These slides are available in online presentation stream in the presentation section of InterNAP ’s investor service 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 services site.

Today’s call contains forward-looking statements. These statements include statements regarding our business strategy and prospects, including expected results from focusing on company-controlled data centers, and completing our program of proactive churn, our expectations related to bookings, and the results our customers can achieve by using our services, our belief that our turnaround strategy will deliver long-term profitable growth, including top line growth in IP services, and expected levels of adjusted EBITDA for fiscal year 2010, the timing of rollout of services, and deployment of new data center space.

So because these statements are not guarantees of future performance, and involve risk and uncertainties, they are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors are discussed 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 third quarter results, we will also discuss recent developments.

Now, let me turn the call over to Eric Cooney.

Eric Cooney

Thank you Drew. We appreciate everyone joining us for our call this afternoon.

I’ll start my comments on slide three, and begin by saying that we are very pleased to see the return to revenue growth this quarter in our data center services business.

As you can see from the chart, overall segment margins are up substantially when compared with the same period last year as we made solid progress reconstituting our data center business, and addressing costs in our IP services business.

Since the third quarter of 2009, we have proactively turned out approximately $4 million in low margin or loss making data center services revenue at the specific partner co-location sites. We are reassured in our strategy to return the company long-term profitable growth given the year-over-year growth in both segment profits and adjusted EBITDA despite the lower total revenue.

Further, we are confident in the strength of the underlying business as a solid platform for InterNAP to build upon and deliver future profitable growth.

With another quarter of solid adjusted EBITDA in the third quarter, we are on track to generate the highest level of adjusted EBITDA in the company’s history for fiscal year 2010. Year-to-date improved segment profit coupled with continued operating cost control has delivered more than 50% growth in adjusted EBITDA compared to the first three quarters in 2009.

Looking on to slide four, I’ll walk through the sequential revenue change. IP services declined sequentially by approximately 2%. The combination of solid IP bookings growth and stabilized IP churn levels provide confidence in our ability to return IP services to top line gross.

Proactive data center turned for the quarter was $0.4 million. And organic growth in core data center facilities totaled $0.8 million.

We saw particular strength in our manage hosting services in the quarter as our recent service enhancements to servers and storage, data protection and backup, and virtualization resonated with a number of new enterprise hosting customers.

Now I’ll cover segment results on slide five. The two charts on this slide give you a sense for revenue and margin trends in both business units. The high-level message for data center services is that we returned to top line growth in the third quarter selling through the proactive churn. Data center segment margins were up strongly from a year ago, and were down compared with the second quarter driven by facility power cost increases in the hotter summer months.

Margins in our IP services segment have remained stable for a number of quarters as we have been able to streamline service delivery, and effectively renegotiate contracts with our backbone service providers.

IP revenue also continues to show signs of stabilization. The year-over-year decline was at its lowest level in two years. And the sequential decrease remained modest at approximately $600,000.

Moreover, booking in this segment continued to improve at the initiatives to rebuild and expand the sales force, deploy targeted marketing programs and sales tools, and bring to market compelling new products begin to show results.

Accelerated IP or XIP is one of these services. As we’ve described to you in the past, XIP is a natural complement to our performance IP service. In combination, InterNAP ’s MIRO and XIP solutions reduce file and application download times by as much as fourfold. With such a substantial improvement in true put, we can help our customers increase revenue conversion rates, and avoid capital outlays. The strong return on investment message is helping our sales organization cultivate their role as an advisor to the customer rather than just a transactional middleman.

A few months ago, we announced that we had selectively deployed XIP to three of our IP points of presence; two in North America, and one in the UK. Our confidence in the value of this offering has led us to kick off a worldwide rollout of XIP, which is expected to be complete by the end of the first quarter of 2011.

Turning to slide six, you can see that solid bookings growth underpins our confidence in our initiatives to drive top line growth. Total bookings in the quarter were up 41% compared with the same period last year. This improvement was not confined to one business unit as both IP and data center services delivered significant bookings growth both year-over-year and sequentially.

Each productive sales rep defined as quota bearing account executives that have been with the company for at least three months generated 22% higher bookings this quarter than in the third quarter of 2009.

Revenue churn levels are relatively modest even including our proactive data center churn program, an indication of the health and satisfaction of the existing revenue base.

As we’ve done over the past few quarters, I want to provide you an update on our data center profitability program on slide seven.

As a reminder, in third quarter of 2009, we communicated that we would proactively churn out approximately $5 million of low margin or loss making revenue generated at partner data centers while increasing our focus on an investment in Internet control data center facilities. We expected this proactive churn program to increase partner site gross margins from approximately 5% to approximately 20% by the fourth quarter of 2010.

By the end of the third quarter of 2010, we had proactively churned more than $4 million, increased segment profit by $2 million, and reduced the number of partner facilities where we have data center customers from 40 in the third quarter of 2009 to 28 this quarter. With fewer partner facilities, more investment in company-controlled data centers, and a straightforward compensation plan, we’re focusing our sales organization on selling InterNAP services and simplifying our business. This program is on track for a successful completion in the fourth quarter.

Moving to slide eight, a Gartner survey of CIO’s ranked enhancing availability, service level, and quality initiatives as first among strategic data center outsourcing initiatives. InterNAP services are positioned front and center to address this increasing demand for outsourced IT infrastructure with superior performance, availability, and support.

Each of InterNAP ’s services, IP, co-location, CDN, and manage hosting leverage our premium infrastructure as a key element of our competitive differentiation. Aggressive investment in these premium data center assets is therefore a foundational component of our plan to drive long-term profitable growth.

Our expansions in Santa Clara, Seattle, Houston, and Boston as well as the $80 million credit facility we announced today are a reflection of our intention to continue these strategic investments.

The timeline of our InterNAP operated data center footprint is depicted on slide nine. Through July of this year, we have added approximately 30,000 net sellable square feet in Silicon Valley, Seattle, Houston, and Boston. With the announcement today of a further 7,000 square foot expansion in Boston, our second quarter 2011 company controlled footprint will be 35% greater than our footprint at the end of the first quarter of 2010.

Beyond the clear financial benefit InterNAP derives from selling into our own company-controlled data center facilities, we are also able to insure we provide all of our customers with optimal performance availability and support.

Now let me turn the presentation over to George to take you through some financial and operational metrics of the business, and I’ll come back to offer our summary for the quarter.

George Kilguss

Thank you Eric, and thanks everyone for joining us today.

I’ll begin my comments on slide ten. Total revenue in the quarter was $60.3 million, a decrease of 6% compared with the prior year, and essentially flat sequentially. While the IP services segment was down both sequentially and year over-year, we saw our data center unit return to sequential growth in 3Q despite proactive churns in the quarter.

Both total segment profit and total segment margin improved measurably over 3Q, 2009 due to the progress we’ve made changing the cost structure in our data services center segment. By streamlining costs and eliminated approximately $4 million in marginal quarterly run rate revenue in data center services, we’ve seen a year-over-year increase in total segment profit of 3%, and an improvement in segment margin of 440 basis points. Sequentially, total segment profit and margin decreased primarily due to higher seasonal power costs in our data center segment.

Data center services revenue totaled $31.5 million in the third quarter, or 52% of total revenue. Data center services segment margin rose year-over-year by 820 basis points, but was down sequentially due to the higher seasonal power costs.

To put things into perspective, third quarter center, third quarter data center segment margins reached its second highest point in the history of the company with its highest level to date recorded last quarter.

IP services revenue was down sequentially in year-over-year to $28.8 million, but margin in this segment remained solid at 61.2% for the third quarter.

Cash operating expense decreased 3% year over year to $19.6 million despite an increase in head count. Lower G&A expense more than offset higher sales, and marketing, and direct costs of customer support reflecting a shift of resources from the back office to the front office that I’ll detail in a few minutes. Sequentially, cash OpEx increased due to the absence of a head quarter tax credit, which reduced payroll costs last quarter.

Adjusted EBITDA increased 20% year-over-year to 9.1 million, or 15.2% of revenue. Quarter-over-quarter, adjusted EBITDA declined 8%. Putting aside the second quarter tax credit, sequential EBITDA rose 4%. We’ve continued to drive profitability at the same time that we have overhauled and strengthened our revenue base. And we are focused on driving top line growth to support future EBITDA expansions.

Our GAAP net loss was $1.7 million in the quarter, an improvement over the third quarter of 2009, and a slight decrease relative to the second quarter of 2010 as our provision for income taxes rose sequentially.

On slide 11, I summarize our balance sheet and cash flow for the quarter. Our cash and cash equivalents were $68 million at the end of the quarter, relatively flat when compared with the same quarter last year. Sequentially, our cash balance climbed as we used around $16 million of cash on hand sequentially, but were up year-over-year by $17 million as we capitalized leases for our new Seattle and Silicon Valley properties.

CapEx was higher than adjust EBITDA this quarter by 6 million as we built out our company controlled footprint in Silicon Valley, Seattle, and Houston. Year to date, we invested 43 million of capital across the business with approximately 80% deployed to our data center segment.

We continue to be very efficient in converting our receivables to cash. This quarter, day sales outstanding was 30 days.

As we’ve described over the past several quarters, our turnaround initiatives include strengthening our data service center revenue base, reinvigorating our sales and marketing programs, and deploying new services. Beyond these revenue and segment margin impacting programs, we’re streamlining and automating our operations, and shifting head count from the back office to customer-facing functions.

On slide 12, you can see that our back office head count has decreased by 24% since the fourth quarter of 2008. By contrast, customer support personnel who include on-site facility technicians, service delivery staff, and knock engineers have increased by 20%. Over the same timeframe, total head count decreased by 6%. This shift has increased our ability to effectively respond to our customers and monitor our infrastructure. Said differently, we have significantly enhanced our company’s key differentiators, performance, availability, and support. Our year-to-date availability of both company controlled data centers and our IP network has been greater than five 9s.

For context, we see competitors advertising free nines of reliability. At first glance, the difference between five 9s and three 9s may seem trivial, but it can have enormous consequences. Those two fewer nines can mean almost 43 minutes of additional data time every month, a level unacceptable to most enterprises relying on their IT infrastructure.

Turning to slide 13, I’ll cover our net sellable and customer occupied square footage for the quarter. We added 26,500 net sellable square feet of company controlled footprint in the third quarter in our Santa Clara, Seattle, and Houston facilities. In the third quarter, we essentially placed lower margin partner center data square footage churn with higher margin company controlled occupancy. We exited 2,000 net sellable square feet of partner facilities. And added 2,000 net sellable square feet in company controlled locations. We continue to invest in premium InterNAP data center footprint.

As Eric mentioned, we are adding 7,000 net sellable square feet in our Boston facility to meet customer demand. This data center has power substation on the property, which will enable us to provision high dense power solutions. At ten kilowatts per cabinet, this Boston facility will be one of the most robust sites in the region. We expect this particular expansion to be operational and ready for installs early in the second quarter of 2011.

Slide 14 describes in more detail the new credit facility we announced this afternoon. The facility totals $80 million. And is comprised of a $40 million revolver, a $20 million term loan, which we took down at closing, and a $20 million delayed draw term loan available for funding over the next 24 months. Taken together, these loans represent $45 million of incremental borrowing capacity over our previous $35 million line of credit. We plan to use the funds to expand our company controlled data centers footprint among other strategic growth initiatives. In addition to the enhanced flexibility the facility provides, we will increase capacity and less restrictive covenants. It allows us to lower our cost of capital by [inaudible] increasing financial leverage. Our cost of funds is live or plus 325 basis points with a no floor allowing us to benefit should interest rates continue to decline.

I think the sellable terms of this agreement speak to the progress that we’ve made over the past year and a half as well as our strategy to profitably grow our business in the coming years.

With that summary of our financial results complete, I’ll hand the call back to Eric to give you his final thoughts before we take your questions.

Eric Cooney

Thanks George.

On slide 15, I’ll end with our summary for the quarter. We continue to execute on the strategy we laid out for you about 18 months ago. And are encouraged by the results delivered to date.

Over the past year and a half, we have invested in premium internet controlled data centers, invested in incremental engineering sales, and support personnel, and deployed new IP, CDN, and manage hosting product offerings to address and create customer demand.

We will continue these targeted investments. And we maintain the conviction to execute our strategy, which should result in a record year of adjusted EBITDA profitability for full year 2010.

The return to top line growth in data center services, the expansion of our company controlled data center footprint, the proactive churn program, and stable IP services segment margins are all supporting profitable growth for the business.

As we look into the fourth quarter, our track record of consistent bookings growth across both IP and data center services underpins our confidence that we will finish 2010 strongly positioned for further profitable growth in 2011.

Now we’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Gray Fal [ph] from Wells Fargo Securities. Gray, please go ahead.

Gray Fal [ph] – Wells Fargo Securities

Okay, thanks. Thanks for taking the questions. I just have a few. So the improvement in data center revenue growth is happening a little bit faster than what we expected. Can you talk about how much is driven by demand for your legacy facilities versus the facilities that you opened during Q3?

Eric Cooney

Well, I would say from our perspective, the demand, or at least the results you’re seeing this far is largely being driven by markets in which we already had existing data centers. And I phrase it that way because most of the expansions we undertook and most that we opened in Q3 were in markets like Seattle and Houston where we already had existing data center. So the only new market for InterNAP was the Santa Clara, Silicon Valley market and obviously that’s a brand new facility we just opened and just having, I’ll say a modest impact on the results you see in Q3.

Gray Fal [ph] – Wells Fargo Securities

Okay. And how should we think about that phasing in over the next couple of quarters?

Eric Cooney

Certainly the expectations from our standpoint is that InterNAP should be able to deliver at or above market growth in our company-controlled data center business. And that expands all of our – at this point, six markets or nine company-controlled data centers.

Gray Fal [ph] – Wells Fargo Securities

Got it. That’s very helpful. And then give that most co-location customers take some form of IP services, how should we think about the potential benefit to IT revenue as you start to fill out new co-location space?

Eric Cooney

Well, you are correct that the vast majority of Internet company-controlled data center customers also purchase their IP from InterNAP. So certainly there’s an ancillary benefit to the IP business as we sell through our company-controlled data centers.

Gray Fal [ph] – Wells Fargo Securities

Okay, great. And then last question, just from the checks that we’ve done, it sounds like you’re getting good traction on your XIT weather acceleration product. What kind of impact did that have longer term on the IP business particularly as you launched that product worldwide, early next year.

Eric Cooney

I think at least the way we are viewing that product is not so much as an incremental revenue source if you will, but rather as an incremental competitive differentiator for InterNAP’s IP offering.

So again, I think it just positions us to better differentiate our IP service and we really don’t, or shouldn’t look at it as a standalone incremental revenue source.

Gray Fal [ph] – Wells Fargo Securities

Okay, great. Well, thank you very much.

Eric Cooney

Sure.

Operator

And we’re talking our next coming from Srinivas Anantha from Oppenheimer. Please go ahead.

Srinivas Anantha – Oppenheimer & Co.

Yeah, good day. Thank you. Hey, Eric, now with the majority of [inaudible] that you guys have been proactively doing is largely behind, should one expect revenue growth, or the revenues to continue to grow going forward, or – I’m just trying to get an idea as far the, you know, the revenue growth is concerned going forward.

Eric Cooney

Well, we don’t provide explicit revenue guidance, as you know.

Srinivas Anantha – Oppenheimer & Co.

No, I understand, Eric, but all things considered, if you’re looking at it now with the law suit behind is there anything that we should expect that will make revenue not to grow going forward?

Eric Cooney

So I think from our perspective, the only thing to point out is the data center revenue that we expect in our challenging ourselves to grow as I mentioned to Greg, at or above market rates, is of course, in InterNAP’s company-controlled data centers. When you’re building your models, keep in mind that the data center revenue that we report, even once we finish the proactive churn, still have a very significant component of partner revenue that we are obviously not endeavoring to grow. That’s the lower-margin business. Perhaps not low enough to – for us to make the decision for us to proactively turn it, but we’re definitely not seeking more of that type of revenue.

Srinivas Anantha – Oppenheimer & Co.

And how would the IP services revenue, you know, it seems to kind of stabilize, but it’s still declining. Should we expect this trend, or how is your focus on the activity?

Eric Cooney

We’re not in the IP services business expecting that that is going to be a business in decline and we’re encouraged at this point based on the booking trends that we’ve seen, and the – let’s say stabilization or stable revenue churn that we see in that IP service business.

Now, it’s, you know, if I were on your side of the call, I’d be asking the question well, okay when does that happen, or rather why haven’t we seen IP revenue growth yet. And I think the best answer to that question is, while yes we have been steadily increasing our IP bookings, I think the thing to keep in mind is the relative underwater position we were coming from booking relative to churn.

So it’s only been just recently that actually the bookings growth we’ve delivered in IP services has actually exceeded the churn level. That’s perhaps the best explanation in terms of why we are where we are. But also hopefully a good explanation from our standpoint to expect ultimately to be able to deliver topline growth in the IP services business.

Srinivas Anantha – Oppenheimer & Co.

One last question, you know, looking at the new data center related expansions, should we continue to expect that your CapEx requirements going forward are giving you focus on company controlled data centers will continue to be high going forward?

Eric Cooney

I guess it depends on what you mean by high. We’ll give explicit 2011 CapEx guidance as part of first quarter, or rather fourth quarter 2010 results presentation during the first quarter of 2011. But relative to the CapEx guidance that we’ve given for 2010, you may recall we guided 65 to 75 million of CapEx of which $10 million was expected to be maintenance CapEx where first of all sticking with that as our guidance for fiscal year 2010 and relative to that number, I think it’s reasonable to assume that we will increase our CapEx expenditure for 2011.

Srinivas Anantha – Oppenheimer & Co.

Great. Thanks so much.

Operator

Okay, thank you. And we’ll take our next question coming from Michael Bowen from Guggenheim Securities. Michael, please go ahead.

Michael Bowen – Guggenheim Securities

Thank you very much for taking my questions. So a couple question here, with regards to the reduced partner facilities, I believe you said you went from 40 to 28. I’m sorry if I missed, this but can you give us any idea on timing of further reductions of those facilities and either square footage or revenue impact on those reductions.

And then also with regards to the $80 million credit facility announce today, do you have that earmarked for any particular projects or you know, just – I was hoping you could shed some light on that as well. Thanks.

Eric Cooney

So for your first question on the proactive churn program, in terms of timing, we’ll be complete with all of the proactive churn of low-margin partner revenue during the fourth quarter. So during this quarter. What we’ve articulated, there’s actually a slide in the presentation, Slide 7, that shows you the financials around that and what we’ve suggested is when we rolled the program out in third quarter of ’09, the partner revenue was approximately 17 million and we’re – we suggested that that partner revenue will be approximately 12 million in quarterly revenue as of the end of fourth quarter of 2010. So that hopefully answers your question on timing as well as revenue levels.

In terms of the $80 million credit facility and any specific or targeted data center investments, suffice it to say that we are quite actively looking at specific site expansions and specific market expansions for InterNAP, primarily North American data center expansions. We are not yet ready to announce any specific sites or markets, but yeah, certainly in – we have that in mind as we rose – or secured that $80 million credit facility.

Michael Bowen – Guggenheim Securities

So for the partner revenue, do I read this correctly that going forward it will stay at approximately around 12 million a quarter with that type of margin that you have outlined on Slide 7?

Eric Cooney

The only caveat to that would be on the one hand, let’s call it natural churn rates of partner revenue. And on the other hand, we’ve not said we would never take down or secure incremental partner data center revenue, but we will only do that in the context of a much larger element of other InterNAP products and services, most obviously IP or CBN.

So it’s possible that that revenue stream may change moderately one direction or the other, but I think for basic planning purposes, that’s a reasonable assumption to make.

Michael Bowen – Guggenheim Securities

Okay, great. And last question if I may, the bookings per sales rep showed a nice improvement year over year. Do you have – I'm not seeing here on Slide 6, do you have anything that shows that sequentially? And if you could just talk a little bit about that as well. Thank you.

Eric Cooney

We don’t actually have it broken out sequentially, but you know, I would say as with the bookings trends, it’s been a pretty consistent upward trend in both sales reps productivity as well as total bookings.

Michael Bowen – Guggenheim Securities

Is that mainly just due to experience levels of the reps as they come online, or any particular trends you’re seeing?

Eric Cooney

Well, there’s actually a number of factors; really a bit over a year, almost a year and half ago we essentially undertook to completely rebuild the sales organization and that starts with the people, processes we put in place for screening, recruitment as well as training programs, as well as a new commission program, as well as new sales tools. So it’s really – I would suggest a combination of a number of changes as we’ve essentially entirely rebuild the sale organization over the past 12 to 18 months.

Michael Bowen – Guggenheim Securities

All right. Thank you very much.

Operator

Okay, thank you. We’ll take our next question coming from Jonathan Atkin from RBC Capital Markets.

Jonathan Atkin – RBC Capital Markets

Yes, good afternoon. One question on bookings, I’ve got 40% and I’m assuming that’s more for data center services than for IP. Can you maybe tells us for which segment it’s higher versus lower?

Eric Cooney

We’re not prepared to break out individual segment bookings, but you know, we did say that the segment bookings were up quite significantly in both our IP and our data center segments. So for our perspective, it’s consistent improved performance across the entire product portfolio.

Jonathan Atkin – RBC Capital Markets

And then the – the sites been up in 3Q, any one of those sites kind of become material occupied more than 5% let’s say?

Eric Cooney

The answer is yes, relative to your 5% threshold, but that’s a little bit lower than I thought you were going to suggest for materially. So you know, maybe the best way for us to characterize it is from our standpoint, I think it’s safe to say we’re happy with the progress we’ve seeing across the expansions we’ve and. And you know, as you probably expect, it’s – the confidence that – based on the results we’re seeing in the expansions we’ve done to date, that gives us the security to – or the comfort let’s say to continue expanding fairly aggressively our premier data center assets.

Jonathan Atkin – RBC Capital Markets

Is the future growth in those four sites collectively, is the growth going to come from customer from partner sites, other sites, or is it all going to be organic?

Eric Cooney

No, it’s organic. There’s really relatively little, as you say, movement of co-location customers from partner sites to InterNAP company-controlled sites. So we’re looking at organic growth in those facilities.

Jonathan Atkin – RBC Capital Markets

And would there be any reduction in the number of partner facilities in those markets?

Eric Cooney

Today we announced we have 28 partner facilities and it’s certainly possible that over time those sites may generally trend downward, but we don’t have a specific churn program. We’ll look at them on a case-by-case basis as those contracts come up for renewal.

Jonathan Atkin – RBC Capital Markets

So the incremental 900,000 of revenue, churn that comes from other markets than those four primarily?

Eric Cooney

I’m sorry, Jonathan, I’m not quite –

Jonathan Atkin – RBC Capital Markets

Yeah, this 500,000 of incremental churn, right it’s the 4.2 to get to the 5 million, so of that incremental revenue churn that comes from partner co-lo revenues, most of that is going to come from outside of those four markets?

Eric Cooney

Yes, that’s true.

Jonathan Atkin – RBC Capital Markets

Great. Thanks very much.

Eric Cooney

Thanks, Jon.

Operator

Okay, thank you. And we’ll take our next question coming from Erik Suppiger from Signal Hill. Erik, please go ahead.

Erik Suppiger – Signal Hill Group, LLC

Hi, good afternoon. Just to be clear, you are expecting churn of about 1 million out of this quarter given that you’ve done four so far and you’ve got, and you’ll presumably be at five at the end of the quarter?

Eric Cooney

Yeah. We’ve not changed the guidance as it relates to the proactive churn program.

Erik Suppiger – Signal Hill Group, LLC

Okay. When Equinix and that reported they had had some issues with regards to some of the customers, deal closing with customers with Switch and Data, they also had noted some customers that were churning within Equinix, looking for lower-cost alternatives. Have you seen anything from a pricing perspective or anything that you would have – that might have related to some of the issues that Switch and Data saw?

Eric Cooney

I don’t think I can draw any correlations between Equinix or Switch and Data announcements and the recent results within InterNAP. You mentioned specifically pricing levels and I think from our perspective over the past three to four quarters, I think pricing, it’s certainly a competitive market, but I’ve not seen any dramatic increase or decrease in the competitive pressures. Again, I don’t think there’s a great deal of correlation between their comments and the results that we’ve seen thus far.

Erik Suppiger – Signal Hill Group, LLC

Did you see any customer churn coming to us – to InterNAP?

Eric Cooney

Well, we reported our churn levels for the quarter –

Erik Suppiger – Signal Hill Group, LLC

I mean, did you see any of the customers leaving – coming to InterNAP? Any of the ones that left Equinix joining InterNAP?

Eric Cooney

Off the top of my head, I can’t think of any specific – specific customers where that was the case.

Erik Suppiger – Signal Hill Group, LLC

Okay. And then lastly, can you remind us what your bookings growth would have been last quarter with it at over 40%? How did that compare from the June quarter?

George Kilguss

This is actually the first time we will have been proving bookings growth numbers. What I will tell you is that in sequential terms, Q3 was up quarter over quarter more so than Q2 was. So translation, we’ve recently seen an acceleration of the quarterly bookings growth, if that’s helpful.

Erik Suppiger – Signal Hill Group, LLC

Do you think that you’ll continue with that 40% rate, or is there some anomaly, was there particularly large deals or maybe some extended durations that caused that?

George Kilguss

We’ve actually had with some variations, a pretty consistent quarter over quarter sequential bookings growth over the past four quarters that’s delivered ultimately the 41% you see. So no, there’re aren’t any large outlying quarters or large deals perhaps, that triggered that. It’s actually been, from our perspective a fairly steady consistent improvement in the quarter bookings performance.

Erik Suppiger – Signal Hill Group, LLC

Very good. Thank you.

Operator

Okay, thank you. And we’ll take our next question coming from Mark Kelleher from Brigantine and Company.

Mark Kelleher – Brigantine & Company

Great. Thanks for taking the question. Most of my questions have been answered but I was just curious as to when do you think that 7,000 square-feet in Boston is going to come on line and how much is it going to cost to bring that online?

Eric Cooney

I’ll take the first question. We’ve suggested early in the second quarter of 2011 for “online” of that next 7,000 square feet in Boston.

Mark Kelleher – Brigantine & Company

And the cost, CapEx to do that?

George Kilguss

And the CapEx would be consistent with our investment profile on a per-square-foot basis, which is anywhere between $12 to $1,500 per square foot. So anywhere between the 8 to $10 million range.

Eric Cooney

And just in terms of maybe a little bit more color, what we’ve seen is that for new facilities, new markets, we tend to the higher end of that CapEx per square foot; i.e. $1,500-end of the spectrum. For expansions like Boston, we tend to lower end of the range George gave you because to a certain extent we’re leveraging CapEx investments or infrastructure investments that we’ve already put into that facility.

Mark Kelleher – Brigantine & Company

And just to double check, it’s organic growth again in that facility that’s driving the growth. There’s a partner facility right next door.

Eric Cooney

Yeah, it is. Yes, it is organic growth in that facility that’s inspiring us to continue our expansions there.

Mark Kelleher – Brigantine & Company

Okay, great. Thanks.

Operator

Thank you. And we’ll take our next question coming from Colby Synesael from Cowen and Company

Colby Synesael – Cowen and Company

Hi. Thanks for taking the questions. You know, as you’ve transitioned your product set and you’ve obviously added a bunch of managed service type solutions in the last few months, I was curious if you could give us an update on what you define as your target customer, whether that’s by vertical or in terms of monthly revenue that you would ideally like to see from each of the customers you’re brining online on a go-forward basis. Then I have another question.

Eric Cooney

In terms of the target customer, actually this answer applies respective of many, it applies across our entire product portfolio. In simple terms, characterize their revenue level of our customers at the low end, maybe as low as $5 million of annual revenue and at the high end probably half a billion dollars of annual revenue tends to be our sweet spot. And in terms of let’s say verticals, the verticals in which InterNAP performs the best are those verticals where our value proposition of performance, availability and support for those IP infrastructure services resonates the best.

So you can pretty quickly think of software business services, many of the cloud or hosting providers, software as a service providers, financial verticals, gaming verticals, technology customers, eCommerce, retail customers, all of those entities for whom IP infrastructure services are business impactful, are our target customers.

Colby Synesael – Cowen and Company

And the revenue per customer, I guess how much they’re spending with you? So if you think of some of the other companies in your space that are probably something like 200 to $500,000 per months and some obviously smaller than that. But just curious, you know, what the average spend of a customer that you’re brining on line these days are?

Eric Cooney

The average revenue for user, Colby, is around $700,000 a month is typically our average that we’ve experienced in the company here.

Colby Synesael – Cowen and Company

Okay. And then the follow up to that has to do with distribution. One, are you starting to look at your sales force and vertically integrating them, or does not make sense to that just yet? And then also, in terms of using third parties or resellers, what’s your involvement with that channel and what’s the opportunity do you think to bring those online? I would think that considering that the whole product suite that you’re now selling, you might be more interested in them than perhaps you were just six months ago?

Eric Cooney

Yes. So in terms of our sales force organization, we’re not vertically or segment integrated. Today we are essentially divided into two components sales force with the skills set and a primary focus on the CDN product portfolio and the majority of our sales force focused on the other products, the IP, the co-location and the managed hosting. To your question of resellers and channels, candidly that’s a clear area of focus for InterNAP as we head into 2011. Historically we’ve not done a lot in terms of our channel partner programs and clearly we see that as an area of upside for us in 2011 for exactly the reason you mentioned.

Colby Synesael – Cowen and Company

Okay. And then if I could have just a quick follow up. You know, you haven’t provided revenue or EBITDA guidance I think since you’ve come on line Eric, obviously the business is starting to stabilize and it seems like the visibility in terms of what you guys have in front of you is improving as well. What’s keeping you from providing revenue and EBITDA guidance perhaps for 2011?

Eric Cooney

Well, my reasons for not providing guidance, actually don’t really have anything to do with the state of InterNAP’s business or the status of the turnaround. It really has to do with two factors; one, I think I get better quality of coverage from the analysts, at least in my experience. Not, let’s say, telling the answer actually gets us a better quality of coverage with analysts that have a better understanding of our business and develop their own models. And on the other hand, I don’t actually like the incentive that providing guidance tends to give to management teams to perhaps do unnatural things to try and chase a number that they provided to the street. It may or may not be in the best long-term interest of the company.

So really, those are the two reasons we’ve not provided guidance to date and don’t have the intention of providing that in the foreseeable future.

Colby Synesael – Cowen and Company

Great. That’s helpful. Thank you very much.

Eric Cooney

Thanks, Colby.

Operator

Okay, thank you. And we’ll take our final question coming from Rod Ratliff from SunTrust Robinson. Rod, go ahead.

Rod Ratliff – SunTrust Robinson

Thank you very much. Guys, the sale force productivity staff in the slide deck are pretty impressive. Is this a function of anything in particular, meaning the new product demonstration tools or is the new product enhancements, or is it a function of both? Or maybe the higher quality of sales people that you’ve been able to attract?

Eric Cooney

We do believe that it’s a combination of all of the above from – as we said, bringing on the right people, as well as the sales management. You know, I certainly don’t want to take anything away from the sales managers that we brought on broad in the past twelve or 18 months. But of course, you know, sales commission plan, we tore up the old plan and put a new plan in place from October 1 of 2009, that’s clearly having an impact. A range of efficiency tools for the sales force, vocation tools, etcetera, demonstration tools, all geared to enabling the sale team to be more successful. And of course, we think that in whole and in part, those are our contributing to both the bookings growth and the productivity growth.

Rod Ratliff – SunTrust Robinson

To follow onto an earlier question that was kind of-sort of answered and just to needle you a little bit more, if you could talk about what you’re seeing in terms of is it uptake – again, the bookings data is pretty impressive given especially where you brought that company from, Eric, I’d like to have a little bit more granularity if I could get it about the new products as it goes directly to the continued stabilization of the IP services segment and its potential return growth.

Eric Cooney

I think, to be clear, as it relates to XIP, we are seeing a lot of customer interest in XIP. It has a very compelling customer value proposition in terms of XIP’s performance or improvement of the performance of the network. That being said, ZIP also has a fairly long sales cycle because before customers would really buy it, it’s one of those products that they want to try and test out and really get comfortable with the performance gains.

So it would be incorrect to ascribe significant direct contributions from XIP revenues as the strong contributors to the bookings growth or the productivity growth. What you should conclude from the fact that we’re going to ubiquitously deploy those XIP technology across the entire network is the fact that we believe strongly in the technology and believe strongly that it significantly differentiates InterNAP’s IP value proposition. And in the long term, will contribute significantly to both bookings and revenue for the IP services business.

Rod Ratliff – SunTrust Robinson

Thanks for the clarity there. IP services segment margins remain stable. Is this still a function of what I’ve always called the favorable mismatch of services pricing and bandwidth cost?

Eric Cooney

Yes. Essentially, our ability to widen the curve if you will as IP transit market pricing drops, we’re obviously able to negotiate lower costs for our IP services and turn around and resell those IP services with InterNAP site to value proposition or a premium that obviously we’ve been able to maintain in that low 60% range. And that hasn’t changed.

Rod Ratliff – SunTrust Robinson

And one last one if you don’t mind. Traffic growth in percentage terms or whatever terms you’d like to give us?

Eric Cooney

Year over year our IP traffic growth was up pretty healthy numbers, a bit over 20%. It was actually down a couple of percent sequentially. We had some gaming launches over the early summer months that gave us a pretty significant spike in Q2. But the underlying or longer term trend is clearly up into the right.

Rod Ratliff – SunTrust Robinson

Thanks. Appreciate it.

Eric Cooney

All right. Thanks everybody for joining us today. We will talk to you after the call and we’ll also talk to you at the next earnings call for our fourth quarter results. Thank you all.

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