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Internap Network Services (NASDAQ:INAP)

Q4 2010 Earnings Call

February 24, 2011 5:00 pm ET

Executives

J. Cooney - Chief Executive Officer, President and Director

George Kilguss - Chief Financial Officer, Principal Accounting Officer and Vice President

Andrew McBath - Director of Investor Relations

Analysts

Colby Synesael - Cowen and Company, LLC

Donna Jaegers - D.A. Davidson & Co.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

Erik Suppiger - Signal Hill

Operator

Good day, ladies and gentlemen, and welcome to the Internap Fourth Quarter 2010 and Full Year Earnings Conference Call. [Operator Instructions] At this time, I would now like to turn the conference over to your host, Mr. Andrew McBath, Director of Investor Relations.

Andrew McBath

Thanks, Jim. 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 will open up the call for your questions.

I want to point out that we'll be referencing slides that correspond with our conference call this afternoon. These slides are available in the online presentation stream in the Presentation section, Internap's investor services website.

Non-GAAP reconciliations in our supplemental data sheet, which includes additional operational and financial metrics are available under the Financial Information Quarterly Results section of our investor services sites.

Today's call contains forward-looking statements. These statements include statements regarding our belief that our turnaround strategy will deliver long-term, profitable growth including top line growth in IP services; our belief that services we are developing and have developed will drive incremental revenue and further reduce churn; our business strategy, including expected results from investing in company-controlled data centers the completion of our proactive churn program; our expectations regarding new markets; the timing for bringing new data centers online and in the long-term demand in the markets we have entered; our expectations as to level of capital expenditures.

As these statements are not guarantees of future performance and involve risks 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 our fourth quarter and full year 2010 results, we will also discuss recent developments.

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

J. Cooney

Thank you, Drew. And good afternoon, everyone. Thank you for listening to our fourth quarter and full year 2010 financial results presentation. I'll provide an overview and touch on the highlights of our fourth quarter and 2010 results before our Chief Financial Officer, George Kilguss, takes you through our financial results in detail. I'll then come back to conclude our prepared remarks with some key takeaways before we open up the call for your questions.

Slide 3 provides a snapshot of our fourth quarter financial results. In the fourth quarter, total revenue declined sequentially as modest growth in Data Center Services only partially offset a decline in the IP Services segment. On a year-over-year basis, total revenue declined $3.5 million with the majority of the decline being driven by our program to proactively churn low margin customer contracts within our Data Center business.

We continued to show strong improvement in company profitability. Fourth quarter segment profit and margin increased both year-over-year and sequentially. The successful execution of our Data Center Services strategy is largely underpinning these improvements in profitability, specifically the proactive churn program and the increasing proportion of our Data Center Services revenue that is generated from company-controlled facilities are both key elements of our profitable growth strategy.

Fourth quarter adjusted EBITDA increased 14% compared with the prior year and 12% sequentially to $10.3 million. Adjusted EBITDA showed substantial benefit from increased segment profit, as well as tight internal cost controls. Cash operating expense decreased 5% year-over-year in the quarter to $19.2 million despite a 6% increase in headcount over the same period.

On Slide 4, you can see quarterly revenue and segment margin trends in our two reporting units. Fourth quarter Data Center Services revenue increased for the second consecutive quarter to $31.7 million. On a year-over-year basis, Data Center Services revenue decreased $1.4 million as proactive churn outpaced underlying growth in our core Data Center Services.

Compared with the fourth quarter of 2009, Data Center segment profit rose 21% and margin increased 800 basis points. At the end of the fourth quarter, we had successfully exited the last contract associated with our proactive churn program. This initiative has had a significant benefit on our overall profitability. The strategic benefit is clear when we consider that Data Center segment profit has increased 34% or $3.1 million from the third quarter of 2009 through the fourth quarter of 2010 even though Data Center revenue has declined by $1.8 million.

While IP Services revenue declined in the fourth quarter, we remain confident in the long-term ability to drive top line growth from this business unit based on underlying metrics, including traffic, bookings and churn. We also continue to develop and deploy services that will drive incremental revenue and further reduce churn. IP Services segment margins remain healthy in the low 60 percentages. And we expect this to continue.

In the next several slides, we will provide some highlights for our full year 2010 results. Slide 5 provides a brief summary of our 2010 income statement metrics. Despite a 5% reduction in overall revenue, total segment profit increased 3% year-over-year and segment margin increased 360 basis points to 47.8%. This is particularly noteworthy when we consider that all of the profit improvement came from our Data Center Services business.

As we implemented our Data Center strategy in the second half of 2009, we began to see consistent growth in incremental Data Center segment profit. Future Data Center profitability gains are expected to be driven by the continued shift of our customers' business to a higher-margin Internap operated data centers.

As described in previous calls, we're also having some success in driving our operating costs while enhancing the value-creating functions of the business namely: engineering and development, customer support and sales and marketing. All of the above strategic initiatives can be seen in our adjusted EBITDA results for 2010, which reached $39.2 million, its highest level in the history of the company and is up 40% versus 2009.

Moving on to Slide 6, we'll provide further details on our execution against our strategy in Data Center Services during 2010. First, you can see we added 30,000 net sellable square feet of premium company-controlled Data Center space across our North American footprint, increasing our company-controlled selling capacity by 26% since the fourth quarter of 2009. Because our data centers formed the foundation for virtually every service we sell, our investment in and control of these facilities is essential for our commitment to provide the best performance, availability and support for the IP infrastructure services we provide our customers.

Second, you can see the revenue impact of our proactive churn program, which negatively impacted 2010 revenue by approximately $11 million, which implies approximately $8 million in underlying Data Center segment revenue growth for 2010. This result is quite significant when you consider that the Data Center segment profitability increased by 27% from $36 million to $45 million despite the decline in revenue attributable to this program.

On Slide 7, we're providing more visibility into the transformation underway within our Data Center Services business, which is increasing our focus on company-controlled data center space. On the left-hand side of the slide, you can see that we have increased our company-controlled net sellable square footage from 52% of total square footage in the fourth quarter of 2009 to 68% in the fourth quarter of 2010.

Similarly, you see on the right-hand side of the slide that the company-controlled revenue has increased from 48% to 53% of Data Center revenue, excluding managed hosting, during the same period.

Moving on to Slide 8, I'd like to provide a brief update on the data center proactive churn program we first communicated in the third quarter of 2009. Our objectives for this program were straightforward. First, to simplify the business. We accomplished this goal by proactively churning approximately $5 million in very low margin, in some cases, loss-making quarterly partner revenue. We exited approximately 31,000 square feet of partner data center capacity and 12 partner facilities in total.

The shift in emphasis to company-controlled footprint was very evident in our fourth quarter 2010 bookings in which 73% of our co-location bookings were booked in company-controlled space, as compared to 41% in the third quarter of 2009. Profitability has also significantly increased as we've implemented this program. Since the third quarter of 2009, Data Center segment profit has increased by $3 million despite a decrease of $1.8 million in revenue.

Finally, margins have improved substantially. Partner segment margins have grown from approximately 5% to more than 20%, and overall Data Center segment margin increased from 27% to more than 38%. Higher profitability, on a lower revenue level, suggest a much stronger platform for our future growth in this segment. In addition to strengthening our existing foundation of Data Center Services, we are systematically enhancing our portfolio high-performance IT infrastructure services.

On Slide 9, we've illustrated a number of recent deployments that we believe will drive incremental growth in our business. These enhancements range from global rollout of accelerated IP to our data center expansions and beta release of our XIPCloud Storage, both of which I'll detail in a moment. The common thread across these services is our focus on features that provide better performance, availability and support.

This afternoon we announced our sixth data center expansion and second new company-controlled markets since the fourth quarter of 2009 as detailed on Slide 10. To put the pace and scale of our expansions into context, almost 40% of our company-controlled data center footprint was deployed within the last three years. We believe the age of our Data Center portfolio, relative to our competitors, positions us well to sell to enterprises demanding higher-power densities and the ability to support significant expansion in our Data Center infrastructure. We're not standing still.

By the first quarter of 2012, we expect to have new premium data center facility in our seventh market of Dallas, Texas. Our Dallas facility will add approximately 55,000 net sellable square feet to our company-controlled footprint. We believe the long-term demand for premium data center in the Dallas market, combined with our existing presence and local market knowledge, position us for success in this new company-controlled market.

In keeping with our commitment to build a highly reliable, performance-centric data centers, we are designing the site to N+1 redundancy standards for power, cooling and connectivity to accommodate power densities in excess of 200 watts per square foot and to adhere to SAS 70 Type II audit procedures. Our data centers increasingly serve as a platform for our small but rapidly growing Managed Hosting business. Our Managed Hosting Services allow enterprises to take advantage of fully managed IT infrastructure with high-performance connectivity, global availability and premium support. To give a flavor of the types of customers we are targeting and winning with our Managed Hosting Services, we've summarized a few key engagements on Slide 11.

We have recently secured several key managed hosting contracts with total annual contract value of approximately $1.7 million. The customers come from targeted industry segments including Defense & Aerospace, Retail and Financial Services, all of whom leverage Internap's performance availability and support to strategic benefit in their business model. As you can see from the chart, managed hosting revenue growth has accelerated as we've added resources, expanded our product offering and increased the emphasis within our sales and marketing organization. We are pleased with the 35% revenue growth over the last year and are investing to continue to drive aggressive growth into 2011.

Turning to Slide 12. On January 18, we announced the beta launch of our XIPCloud Storage service. This service is a natural extension of our existing co-location connectivity and managed hosting services. XIPCloud Storage broadens the portfolio of outsourced IT services we provide to our enterprise customers. Like our other services, XIPCloud leverages the performance, availability and support benefits of our MIRO IP networking services. In addition, XIPCloud is built on the open source platform OpenStack, which we believe will give us significant advantages in the areas of innovation, scalability and cost.

Now let me turn things over to George to take you through some additional financial and operational results.

George Kilguss

Thank you Eric, and good afternoon, everyone. I'll start on Slide 13 by taking you through our full year and fourth quarter income statement results.

For the year ended December 31, 2010, Internap's revenues totaled $244 million, down approximately 5% from 2009 levels. Annual segment profit, however, increased more than 3% to $117 million in 2010. Total segment margin for the year was 48%, an increase of 360 basis points over 2009. Similar to our full year results, fourth quarter revenue declined compared with prior years, but segment profit and margin increased measurably. Increases in segment profitability were driven by our revenue mix, initiatives in our Data Center Services segment.

Cash and operating expense for the full year decreased 9%. In the fourth quarter of 2010, cash OpEx declined 5% year-over-year and 2% sequentially. The year-over-year decreases are primarily attributable to efficiencies achieved in our general and administrative functions.

Direct cost of customer support and sales and marketing costs increased over full year and over the fourth quarter of 2009 due to our increased investment in customer-facing operations. The takeaway in terms of operating expense is that we've done a good job of streamlining and reconfiguring our back office to enable front office growth. Our work to automate and modernize administrative functions will continue throughout 2011.

Improved segment profit and lower operating expenses have driven our profitability higher. Annual adjusted EBITDA is up 40% compared with 2009 to $39.2 million. Fourth quarter adjusted EBITDA increased to $10.3 million or 14% year-over-year and 12% over the third quarter of 2010.

GAAP net loss for the year totaled $3.6 million, down from a net loss of $69.7 million in 2009. Both 2010 and 2009 included non-cash charges of $1.4 million and $54.7 million, respectively, related to restructuring and asset impairments.

Normalized net income, which excludes the impact of non-cash stock compensation, impairments and restructuring, was $2.4 million in 2010, an increase of almost $8 million over the normalized lost we incurred in 2009. Our cash flow and balance sheet summaries are shown on Slide 14.

In 2010, capital expenditures exceeded adjusted EBITDA by approximately $23 million. The majority of the 2010 capital spend of $62 million went to our Data Center infrastructure, allowing us to expand our higher-margin company-controlled footprint by 30,000 net sellable square feet. We believe these investments will generate strong returns on capital in the coming years.

Our balance sheet remains strong. At year end, debt and capital leases totaled $40 million and cash and cash equivalents were $60 million. A combination of increased EBITDA and continued working capital improvement has allowed us to maintain a relatively stable cash position despite a large increase in 2010 CapEx. With a combined cash and unused debt capacity of approximately $115 million, we continue to have flexibility to scale our operations by investing in positive net present value opportunities. Our total liabilities-to-equity ratio was 55% in the fourth quarter. Efficient collection processes and a rigorous pre-screening have continued to keep our days sales outstanding at optimal levels. Fourth quarter of 2010 days sales outstanding were 26 days.

I'll provide a little more color on our segment results on Slide 15. In Data Center Services, fourth quarter revenue decreased 4% compared with the same quarter last year, but increased sequentially by 1%. Our recently completed initiative to eliminate less profitable revenue at partner data center sites drove the year-over-year decrease.

We've made steady progress in our Data Center segment profit and margins, particularly since we implemented our data center profitability program in the third quarter of 2009. In the fourth quarter of 2010, Data Center Services segment profit increased by 21% over the fourth quarter of 2009. Data Center segment margin expanded by 820 basis points over the same period in 2009.

Revenue churn in this segment has been elevated over the past five quarters because of our proactive churn initiative. In the fourth quarter, Data Center churn was 2.1%, up year-over-year and sequentially. In our IP Services segment, we continue to see modest sequential declines on the top line and relatively stable segment margins. Fourth quarter IP services revenue was $28.2 million compared with $28.8 million in the prior quarter and $30.4 million in the fourth quarter of 2009.

IP Services segment margin was 61% in the quarter, flat sequentially and down 200 basis points compared to the fourth quarter of 2009. We continue to see signs of improvement in the metrics that drive IP Services revenue. Traffic is up and IP churn reached its lowest level in two years. We continue to invest to new and innovate IP services, which should open up new markets and create additional sales opportunities.

On Slide 16, we've broken out the year-over-year change in the net sellable square footage. When taken in total, net sellable square feet decreased by 3,000 and occupied square feet decreased by 20,000. But these parts, however, more accurately portray the impact to our business namely: The shift to higher-margin, Internet-operated data centers.

We replaced almost all of the 31,000 net sellable square feet that we returned to our data center partners in conjunction with our recently completed data center profitability program with additions to new company-controlled capacity in Boston, Seattle, Houston and Santa Clara. Moreover, 90% of the 8,000 square feet that we added to our company-controlled facilities in 2010 was added in the second half of our third quarter data center openings, as our third quarter data center openings began to sell.

Total utilization of net sellable square footage decreased year-over-year due to the 2010 deployments of our new build and expansion capacity in Boston, Houston, Santa Clara and Seattle. I detailed our forecast of capital expenditure plans for 2011 on Slide 17.

As we mentioned on our third quarter call, we expect our 2011 CapEx to increase over the last year. We expect expansion capital in 2011 to be between $75 million and $85 million, and maintenance capital to be between $10 million and $15 million. Similar to last year, the majority of the spend is allocated for data center expansions in Boston, Dallas, and other yet-to-be announced markets, we intend to expand our capacity in high-performance IT infrastructure capabilities. Success-based capital allocations in managed hosting, IP and cloud are also included in our expansion capital forecast.

In summary, we continue to deliver improved profitability in terms of both segment profit and adjusted EBITDA. The efforts we characterized almost two years ago as strengthening the core of our business are clearly having a positive impact and we are laying the groundwork for continued improvements in 2011.

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.

J. Cooney

Thank you, George. Summing things up on Slide 18, we significantly strengthened our business in 2010. Positive progress is most clearly visible in our adjusted EBITDA results with 2010 marking the highest level of annual adjusted EBITDA in the history of the company at $39.2 million.

We also successfully executed our Data Center Services strategy, which included the addition of 30,000 net sellable square feet of company-controlled data center footprint, successful completion of our proactive partner churn program, strong 35% annual growth in our Managed Hosting business, record Data Center segment profit of $45.4 million and record Data Center segment margin of 35%. While not yet delivering top line growth for our IP Services business, we have seen enough positive results in terms of traffic, bookings in churn to remain confident we are on the path to deliver that revenue growth.

Looking ahead, we are very pleased to add our seventh data center market in Dallas, Fort Worth as we continue to expand our company-controlled footprint. We will continue to expand Internap's portfolio of IT infrastructure services to include broader managed hosting and cloud enterprise offerings that leverage our performance, availability and support differentiators.

The strategy we implemented in the second half of 2009 is delivering profitable growth and we enter 2011 with momentum and a commitment to driving long-term profitable growth for the company.

Now, we'd be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Erik Suppiger with Signal Hill.

Erik Suppiger - Signal Hill

First off, just what was the headcount?

J. Cooney

416 at the end of fourth quarter.

Erik Suppiger - Signal Hill

Can you give us a little color on where you think the Data Center segment margins can go?

J. Cooney

Well, essentially, if you break the Data Center business into its two components, the partnered-half, which still remains a significant piece of our Data Center business and the company-controlled-half of our business. As we've said in the past for the company-controlled portion, we expect to drive, call it, industry segment margins there, i.e, something north of 50% is certainly our expectation for our company-controlled facilities. For the partner facilities, we're not investing to grow that business. And as we announced earlier, it's today, something north of 20% margins on that portion of our revenue.

Erik Suppiger - Signal Hill

And what did you say the breakout between the controlled and partner revenues is right now?

J. Cooney

There's a slide in the deck. But as of the end of Q4, it's 53% company-controlled.

Erik Suppiger - Signal Hill

And you talked about your managed services. Can you remind us of, you talked about the storage service, what are the current revenues that you're getting from some of the managed services? And where could that go by the end of 2011?

J. Cooney

We don't actually break out the Managed Hosting revenues. It's a component Data Center Services business. So infer from that, that it's a relatively small proportion of our Data Center Services business, but nonetheless, as we pointed out in the presentation, it's clearly an area that's undergoing very significant growth year-over-year of 35%, and it's clearly an area where we see future growth potential and therefore we're investing aggressively to accelerate that growth.

Erik Suppiger - Signal Hill

What are the key services that are driving that growth right now?

J. Cooney

The key differentiators for Internap are primarily our performance availability and support. And we're seeing success in industry verticals that for whom our differentiators resonate. So it's industry segments like the Financial Services segment, we mentioned Defense & Aerospace, a number of e-commerce, retail providers, all of those folks benefit from the performance availability and support of our Managed Hosting offering.

Operator

Our next question comes from Robert Dezego with SunTrust Robinson.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

I have a question on the IP Services side of the business here. The revenue continued to slide and it looks like the sequential losses accelerated a little in the quarter on a year-over-year basis. You spoke on the call about getting this back to growth. And I'm just wondering if you could just give us a little bit of more color on what gives you the confidence here to get to this growth? And really kind of how quickly you think this can make that churn? And is this churn you're going to think you're going to see in 2011 or is it more of a longer-term path?

J. Cooney

Without giving a lot of details, we indicated in the prepared remarks the metrics we're following are, of course, traffic in the IP Services segment, bookings and churn. George did specifically mentioned churn in IP Services segment reached its lowest level in about two years, at about 1.1%. And as we look forward into 2011, this is clearly one of the key questions for the business, and without giving explicit guidance, what we are prepared to say is that when we look at the first half of 2011, we do expect that we will be able to deliver sequential growth across both of the company's business units during the first half of 2011. So again, without giving explicit guidance, that's as close as we're prepared to come, but again, reiterate the point that we do clearly expect we can drive top line growth in the IP Services segment.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

And as a follow-up, if you look at the margins in the IP Services business, they seem to have flattened out around that 61%. Is there an area for a potential increase in that margin? Or is that kind of what you're getting out of that business, and we should think about that as more of a flattish margin-type business?

J. Cooney

I think for the near to midterm, that being 2011, I would not expect any significant change in the segment margins for IP Services. As we start to look longer-term, 2012 and beyond, based on what we've we seen this year with some of our new product launches and let's say margin development based on new features and functions, then I'd be prepared to talk more about, perhaps, margin expansion. But for 2011, I would expect it in the low 60s.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

And that's even with the new product launches, is there going to be some kind -- any kind of pressure from costs as you're ramping up these new products?

J. Cooney

We don't see that at this point.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

My final question is could you just remind us of some of the seasonal revenue and cost items that we should look for hitting into next quarter?

George Kilguss

So, Robert, this is George Kilguss. So as far as seasonal revenue, we're not that seasonal from a revenue perspective. The only seasonality we have with regard to cost is some of our power costs in our Data Center business, which typically hits us in the third quarter, a tiny bit in the second, but primarily in the third, we get a little bit increased power costs in our cost of goods sold.

Operator

Our next question comes from Colby Synesael with Cowen and Company.

Colby Synesael - Cowen and Company, LLC

I have two questions. The first one is can you talk about the difference in prices within the IP segment for the deals that you're signing today versus those that are actually being canceled or repriced? I'm just trying to figure out what the delta is. And then the other question has to do with the IP segment. As part of the growth opportunity that you're referring to based on you adding additional products that will be included in the IP segment? Or is it based simply on the sales improvement that you've made over the past year and being more effective in selling that product that you've been selling historically for the company?

J. Cooney

Sure. So your first question about what we're seeing, if I understood the question, it's essentially around the price erosion for our IP Services.

Colby Synesael - Cowen and Company, LLC

Yes, I mean, as simple as possible, I mean, what's the price over T1 that you may have been selling in, for example, the New York market that's currently on your book of business, on your books today versus when that customer comes up to renew that, what's the pricing looking like, something to that affect?

J. Cooney

Sure. We're seeing -- first of all, I'd say we've not seen a significant change in the past several quarters in terms of the annual price erosion, and it's something north of 20%, let's call it 25% year-over-year sell price erosion across the board for our IP Services business. And that's obviously offset, in part, based on our ability to negotiate our cost with our carriers at similar or better rates. And also offset by traffic, which we're seeing growing at rates above that traffic volume.

Colby Synesael - Cowen and Company, LLC

And that's -- those are the two components, right? So when we're talking about what you're seeing from the bookings perspective in traffic and in churn and so forth, you're basically assuming somewhere around 25% price erosion. So therefore, your traffic is going at a clip fast enough that you're going to see what's the top line growth on a sequential basis somewhere in the next quarter or two?

J. Cooney

Yes, exactly, a combination of traffic growth, which is reflected in bookings, as well as the hole in the bottom of the bucket, which is of course, churn. Your second question about what's giving us confidence? Is it more new products, or more improvements from the sales organization? Obviously, it's a little bit of both, but if I had to weigh [ph] the two, I would say more recently we're seeing impact from, call it, sales improvements than it is so much an impact from new product launches.

Colby Synesael - Cowen and Company, LLC

And are there any other products that you piloted in the last six months that you've announced gone into the IP segment? Are they predominantly or all exclusively in the Data Center segment?

J. Cooney

No, the product launches like our XIP, except TCP Acceleration service and some of the announcements we've made with regard to our CDN platform, those are all rolled up under the IP Services segment.

Operator

[Operator Instructions] Our next question comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co.

Eric, if I understood correctly, so are you not seeing decent growth in the XIP product? Or can you give us a little more color on that?

J. Cooney

That's not correct. The last question from Colby, he was asking about with regard to the drivers for our IP Services business, do we see more of the impact coming from the new products or more of the impact coming from our sales initiatives, training, expansion of the sales force, commission plans, et cetera, et cetera? So in proportion, we're seeing, today, more of an impact on the IP Services business from the sales initiatives. That is definitely not to say that we are not seeing a positive impact from some of the new product launches for both IP and for CDN.

Donna Jaegers - D.A. Davidson & Co.

Can you give us any color on the CDN business? How fast you're seeing or what sort of growth you're seeing there and on the XIP product? Any other color there?

J. Cooney

We're not breaking out a lot of financial details on either specific products, À la XIP or CDN metrics. I can say -- particularly on CDN over, I would say the last quarter, largely derived from some of the new product features we've launched, reseller console, SSL capability, features like that have definitely, significantly expanded our addressable market and are clearly contributing to some of the momentum we're seeing on the CDN side of the business. With regard to the more traditional IP services, we are in the process of globally deploying the XIP capability. We launched it middle of 2010, but in a limited number of markets. We're now finishing up in the first quarter of 2011 the global deployment of that XIP product. So again, it's significantly expanding the addressable market for those IP services, which is positively impacting the e-business.

Operator

Our next question comes from Robert Dezego with SunTrust Robinson.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

Can you talk a little about the timing of the square footage? Do you think this is going to come online in 2011 and 2012? I mean, and the second question I had is the Dallas data center, is the 55,000 feet all going to come in one phase? Or are you going to kind of phase that 55,000 because it just seems like a pretty large deployment relative to your current footprint?

J. Cooney

Well, I'll answer the Dallas question first and maybe get George and Drew to help me out on the rest of the 2011 footprint. With regard to Dallas, the 55,000 square feet, we will not bring all that on in one phase. Phase I, which we expect to bring online early in first quarter of 2012, you can reasonably expect that to be a, let's say, 10,000 net sellable square-foot phase. And likely, subsequent phases will be brought on board in a similar capacity.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

And can you comment on the cost of that first phase to get that 10,000 square feet up?

J. Cooney

I wouldn't want to break that out at this stage, because frankly we're still finalizing some of the design elements and exactly how many feet we want to bring online in that first phase. But you can take a look at our previous data center expansions and we've averaged something around $1,500 per net sellable square foot for these type of builds. So if you use that for basic modeling, that'll get you in the church.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

And would you say it's going to be a little bit more expensive for the first 10,000 square feet, obviously, will you be above that 1,500 a square foot for the first deployment.

J. Cooney

Yes. That's not an unreasonable assumption.

George Kilguss

And Robert, to your first question about the expansion in 2011, we will announce those expansions when we plan to expand them. So I would say stay tuned. Having said that, we have the capacity under the facilities that we have contracted with, excluding the Dallas facility, of around I would say in excess of 30,000 net sellable square feet. So we can expand additional facilities of that capacity. And again, we'll announce those as they come to fruition.

J. Cooney

I think at this stage, the only 2011 expansion that we've already announced is in one of our existing markets in Boston. And that's approximately 7,000 net sellable square feet coming on early in the second quarter.

Robert Dezego - SunTrust Robinson Humphrey, Inc.

And also I'll just follow-up with one more. Given the Equinix's announcement this morning of a partnership with a managed hosting cloud provider, is that an area that you might explore to try to get to market quickly? Or are you comfortable with the kind of the organic ability to bring this product to scale pretty quickly?

J. Cooney

If I'm not mistaken, that's actually not Equinix's first announcement of that sort of, let's say, joint partnership, joint relationship. And while obviously, I'm not familiar with the details, my initial interpretation is that the products that Internap has today in our Managed Hosting business, as well as the new product we just launched, our Beta XIPCloud Storage product, as well as the roadmap we have for those products essentially enables us to accomplish organically everything that those partnerships are accomplishing jointly.

Operator

I'm showing no further questions on the phone. And I'll turn the call back over to Andrew McBath for closing remarks.

Andrew McBath

Thank you. Thanks, everybody for joining us today. We look forward to visiting with you for our First Quarter 2011 Earnings Conference Call coming up here in a couple of months. Thanks so much, and look forward to talking to you again.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.

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