Internap's (INAP) Michael Ruffolo on Q4 2015 Results - Earnings Call Transcript

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Internap, Inc. (NASDAQ:INAP)

Q4 2015 Earnings Conference Call

February 18, 2016, 04:30 PM ET

Executives

Michael Nelson - Vice President of Investor Relations

Michael A. Ruffolo - Chief Executive Officer

Kevin M. Dotts - Chief Financial Officer

Analysts

George Sutton - Craig-Hallum Capital Group LLC

Frank Louthan - Raymond James Financial Inc.

Frederick Moran - Burke & Quick Partners LLC.

Daniel Kurnos - The Benchmark Company, LLC

Mark Kelleher - D.A. Davidson & Co.

Matthew Heinz - Stifel, Nicolaus & Company

Operator

Good day, ladies and gentlemen, and welcome to the Internap Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions] As a reminder, this call maybe recorded.

I would now like to introduce your host for today’s conference Mr. Michael Nelson, Vice President of Investor Relations. You go ahead sir.

Michael Nelson

Good afternoon and thank you for joining us today. Michael Ruffolo, our Chief Executive Officer; and Kevin Dotts, our Chief Financial Officer join me. Following prepared remarks, we will open up the call for your questions. The slides we reference in the call are available on our website in the Presentations section on the Investor Relations page. 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 Relations page.

Today's call contains Forward-Looking Statements including belief in our business strategy, including acceleration of the business unit realignment and expected results, including cost savings and restructuring charges, expected market growth rate and our ability to capitalize on them, expectations regarding customer churn and its drivers, margins, and our ability to generate positive levered free cash flow for 2016, expectations regarding the drivers of adjusted EBITDA in 2016, including bookings, sales of MIRO controller, contributions from the channel, cost of goods sold, and operating expenses, and expectations for revenue, adjusted EBITDA, and capital expenditures in 2016, and our ability to drive profitable growth and deliver enhanced value to shareholders.

These statements are not guarantees of future performance, because these statements are based on certain assumptions and involve risks and uncertainties. There are important factors that could cause our actual results to differ materially from those in the forward-looking statements. We discuss these factors 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 fourth quarter and full-year results, we will also discuss recent developments.

Now, let me turn the call over to Michael Ruffolo.

Michael A. Ruffolo

Thank you, Michael, and good afternoon. In today’s call, I'm going to start with a discussion, provide some color around the strategic review process, and the business realignment. I'm also going to provide a summary of the quarter before I turn the call over to Kevin Dotts, our Chief Financial Officer, and Kevin will review our financial and operational results in more detail. We’ll then conclude with an overview of our Company wide focus for future growth and then take your questions.

So beginning on Slide 3, as committed, I wanted to update everyone on the strategic review process. As you know, we announced last September that Internap’s Board of Directors created a strategy committee of independent directors to explore strategic alternatives to maximize shareholder value. During this process, the company and its advisories undertook a thorough review process designed to look at all available options.

We contacted a wide range of financial and strategic parties to ascertain interest in a potential transaction. In connection with these discussions, we did receive several preliminary non-binding indications of interest with respect to a potential acquisition of the company. However, due to a variety of factors including the inability to obtain financing and volatility in the credit markets, no agreement was reached.

At this time, the Board has determined that accelerating Internap’s business unit realignment represents the best alternative available to enhance shareholder value. We also believe that establishing two distinct integrated business units that can operate independent of the other may open up additional strategic options in the future. It may go without saying, but let me emphasize that the Board and management team are committed to making the right decisions for the company and our shareholders. We are always open to considering all opportunities for the company and its businesses to create and maximize shareholder value.

I would now like to provide some additional perspective on the business realignment and the associated cost optimization activities on Slide 4. Today we announced steps to accelerate Internap’s operations into two integrated business units; data center and network services; and cloud and hosting services. This transition has been designed to facilitate more effective and efficient business operations and improve our customer and product focus.

These restructuring actions create a management and cost structure that better aligns with the opportunities of each business and the needs of their respective customers. Operating as two integrated business units will enable us to respond better to customers and to grow faster as a result. The transition into two business units also allows us to eliminate non-core functions and better align our cost structure. We expect to see achieve approximately $4 million to $5 million of annualized cost savings beginning in the second quarter of 2016 as a result.

Savings will be generated primarily from optimizing the company's cost structure during the business realignment as well as reduced discretionary spending and improved marketing program efficiencies. We expect to record a one-time, below-the-line restructuring charge of approximately $2.5 million to $3 million, associated with severance and other costs to implemented plan.

If you would turn to Slide 5, it will show you that the revenue mix from our infrastructure services portfolio has represented our new business realignment structure. As you can see, roughly two-thirds of our 2015 revenue was represented by data center and network services with the remaining one-thirds driven by cloud and hosting services. We believe the additional autonomy and accountability derived from our business realignment will drive improved financial performance in each of the segment.

Turning to Slide 6, you will see we delivered record results for adjusted EBITDA, adjusted EBITDA margins, and segment margin. Total revenue in the fourth quarter of 2015 totaled $78.8 million, representing an increase of 1% quarter-over-quarter and a decrease of 7% year-over-year. Core data center services revenue, which includes company controlled co-location out hosting and cloud services totaled $49.1 million, an increase of 1% sequentially and a decrease of 1% year-over-year.

Segment profit of $47.3 million increased 6% quarter-over-quarter and decreased 3% year-over-year. Segment margin was a record high at 60.1%, an increase of 310 basis points sequentially and 220 basis points year-over-year.

Adjusted EBITDA of $22.8 million increased 15% quarter-over-quarter and was flat year-over-year. Adjusted EBITDA margin expanded 380 basis points sequentially and 200 basis points year-over-year to 29%. Adjusted EBITDA and adjusted EBITDA margin represented the highest level in the company's history. As a result, we generated positive levered free cash flow of $1.4 million in the fourth quarter, which is our second consecutive positive quarter.

Now, I'll pass the call over to Kevin Dotts our CFO who will give us a more detail review of our financial results.

Kevin M. Dotts

Thanks, Mike. I'll start my comments on Slide 7. Data center services revenue totaled $59 million in the fourth quarter of 2015, an increase of 1% sequentially and a decrease of 4% year-over-year. The sequential increase was attributable to increased sales of co-location in company controlled data centers, hosting, and cloud services, partially offset by decreased partner co-location revenue.

The year-over-year decrease was primarily due to the loss of revenue from the 111 8th Avenue, New York metro data center migration last year. And our IT services segment revenues totaled $19.7 million, flat sequentially and a decrease of 14% year-over-year. MIRO controller contributed $0.5 million to the fourth quarter results. In the fourth quarter, our churn mitigation program produced positive results as total company revenue returned decreased 40 basis points sequentially to 1.6%.

Turning to Slide 8, we are pleased with the positive mix shift towards our core data center services. Revenue from these core data center services increased 1% sequentially and decreased 1% year-over-year. Core data center service revenues returned to sequential growth and has increased at a 17%, three-year compound annual growth rate through the fourth quarter of 2015 and now represents 83% of data center service revenues and 62% of total revenues.

Importantly, the favorable mix shift to core data center services has been the primary driver and our strong adjusted EBITDA growth and adjusted EBITDA margin expansion,. Adjusted EBITDA has increased at a 15%, three-year compound annual growth rate and adjusted EBITDA margin has expanded 750 basis points over the same timeframe.

Turning to the Slide 9, we recorded data center segment profit of $35.3 million an increase of 5% sequentially and flat year-over-year. Data center segment margin expanded 270 basis points sequentially and 230 basis points year-over-year to 59.9%. Core segment profit was $32.7 million an increase of 5% sequentially and 2% year-over-year. Core segment margin expanded 220 basis points sequentially and 240 basis year-over-year to 66.6%.

Primary driver was strong improvement in segment margin was due to the favorable product mix shift of selling a larger proportion of higher margin company controlled co-location hosting and cloud services. Over the long-term, we see significant opportunities to continue to further expand data center service margins based on the mix shift towards these higher margin services.

In addition to the mix shift benefits we also see the opportunity to expand margins as we increase utilization in our datacenter footprint, with approximately 55% utilization across our company controlled data center footprint, we expect further upside to the data center services margins derived from utilization efficiencies as occupancy increases.

On Slide 10, we show IP services segment profit and segment margin results. IP segment profit of $12 million increase 8% sequentially and decrease 11% year-over-year. IP segment margin expanded 420 basis points sequentially and 200 basis points year-over-year to 60.7%. Despite the impact of secular pricing trends, we expect continued renegotiation of vendor contracts and the contribution from MIRO controller to be accretive to IP margins as we execute our strategy in coming quarters.

The IP services segment continue to deliver solid segment profitability and cash flow which we leverage to invest and the more capital-intensive data center services segment. Further, the IP business is an enabler of our data centers service business, because our high performance network enhances the competitive differentiation of our high performance IP infrastructure service offerings. Over 95% of our data center customers also take our IP service.

Moving on to Slide 11, you can see we delivered record high adjusted EBITDA and adjusted EBITDA margin results. Fourth quarter adjusted EBITDA was $22.8 million an increase of 15% sequentially. Adjusted EBITDA margin expanded 380 basis points sequentially and 200 basis points year-over-year to 29%. The improvement in adjusted EBITDA and the associated margin expansion was predominately due to a favorable product mix shift towards core data center services, lower cash operating expenses and positive operating leverage in our business model.

Cash flow and balance sheet summaries are also shown on Slide 12. We are pleased to report the generation of positive levered free cash flow for the second consecutive quarter. Adjusted EBITDA, less capital expenditures and cash interest expense totaled $1.4 million in levered free cash flow. With our disciplined approach to capital allocation, we expect to generate positive levered free cash flow for the full-year 2016.

At the end of the fourth quarter, cash and cash equivalent totaled $17.8 million, funded debt totaled $318.5 million. As of December 31, 2015 our debt consisted up $287.5 million borrowed under our term loan at a rate of 6% and $31 million borrowed under our revolving credit facility at a rate of 4.7%. We also have $57.1 million in capital leases. We do not have any near-term debt maturities with our revolving credit facilities detouring in November 2018 and our term loan detouring in November 2019.

Our net debt totaled $357.8 million while our net debt to last quarter annualized adjusted EBITDA was 3.9 times. We are below the financial covenants in our segment payment and our current capital deployment plan wholly funded with our current debt facilities, which include an incremental $14.9 million in borrowing capacity, cash generation and our cash on hand.

On Slide 13, we are providing full-year 2016 revenue, adjusted EBITDA and capital expenditures guidance. We expected to deliver full-year 2016 revenue in the range of $310 million to $320 million, adjusted EBITDA in the range of $80 million to $90 million and capital expenditures in the range of $40 million to $50 million.

Our CapEx guidance includes $30 million to $35 million of growth based capital and $10 million to $15 million of maintenance capital. Our capital intensity significantly declined in 2015 with CapEx of $57 million compared to $77 million in 2014. We expect a further reduction in capital intensity in 2016 as we leverage our available data center capacity and repurpose hardware to meet growing demand for our hosting and cloud services.

On Slide 14, we've provided a bridge from 2015 to 2016 revenue. We continue to internally challenge ourselves to growth at or above industry growth rates within our core data center services. You can separate the core data center services market into colocation hosting and cloud. We have described market growth rate of approximately 8% to 10% for colocation, mid-teens for traditional custom hosting and 20% to 25% for cloud services. We also estimate our total addressable market is growing in the aggregate and in mid-teen growth rate over the next several years. Our guidance considers these expected market growth rates fourth quarter data center services market offset by anticipated churn which I’ll discuss in a moment. We expect lower partner colocation revenue and lower IP revenue.

Turning to Slide 15, we provide a bridge from 2015 and 2016 adjusted EBITDA. We expect continued execution on our growth initiatives to resolve in incremental bookings of $2 million to $7 million. Our value proposition of providing high performance Internet infrastructure service offerings tends to attract high growth Internet centric companies, like online gaming or ad tech, that grow very rapidly with Internap and due to their high growth are susceptible being acquired by much larger companies with significant scale.

Although we do not have any single customer that accounts for more than 3% of revenue, a few of these customers have been acquired. And we expect several customers that have that acquired by very large technology social media companies to move the infrastructure in-house in an effort to realize the synergies associated with the acquisitions.

We have much better visibility and customer churn as a result of our account management program. And as you know turn events resulting in immediate loss of revenue while new bookings take kind of a ramp. Implicit in our 2016 guidance is churn, which may large offset our growth initiatives. As we continue to execute our growth initiatives and acquire new logos we believe we can outgrow the churn headwind over time.

In 2016, we project the solid funnel and success we have in fourth quarter from MIRO controller to result in $1 million to $3 million of incremental adjusted EBITDA. On the expense side, we expect to realize cost of goods sold savings of $1 million to $3 million. Finally, we expect to achieve incremental operating expense benefits of $3 million to $6 million inclusive of the cost optimization benefits from our business realignment.

Now let me turn the call back to Mike.

Michael A. Ruffolo

Thanks Kevin. I thought it would be beneficial to our investors to provide an update on our growth initiatives and then summarize our progress.

Turning to Slide 16, this is a slide that we've discussed for a couple of quarters now, which is a good one to help describe our view on what makes the great company in our industry. At Internap, we’re very pragmatic and remain focused on what we can control. We all know about numerous macroeconomic events currently taking place that are out of our control, which we believe had placed significant downward pressure on our stock price.

For example, we can’t control the price of oil, debt market situation in the U.S. or macroeconomic issues in China. However, we can control how we execute our strategy and that’s what we’re focused on. Without a question we compete in a large addressable market. Based on third party research an unknown analysis we believe that total addressable market for these services is a $60 billion plus global opportunity. Given Internap’s current size and revenue base, we have a lot of opportunity for growth in this market.

We also continue to believe that we have a product portfolio that provide the basis for long-term competitive differentiation and allows us to compete effectively in the market. Our high performance infrastructure services portfolio enables us to effectively compete with the performance based value proposition. And as Kevin indicated that’s very attractive to high growth technology based companies and other key vertical markets.

The final aspect of what makes the great company is execution. And this is an area where we’ve demonstrated that we’ve improved a lot, but I believe we can do better. The good news is that execution is almost entirely within our control. We believe improved execution along with the strategic realignment of our business will drive enhanced operational performance and shareholder value over the next 12 to 18 months.

So on Slide 16, let me provide an update on the six key growth initiatives that we discussed the last couple of quarters, which are all yielding positive results. First, our sales force productivity initiative. The changes we made to our sales compensation plan and our training and selling methodology, have resolved in solid fourth quarter bookings which continues to improve from the third quarter.

Secondly, our churn mitigation and account management program. As you know, we've put in place a global account management program, which provides great club management and support for our Top-100 customers. We believe these actions are beginning to positively impact churn with fourth quarter churn the lowest level in six quarters. Although as Kevin indicated, we expect churn to increase in 2016 as a result of the few customers that have been acquired and will move their infrastructure in-house, we have much greater visibility into churn and expect fewer customers to churn as a result of our high touch program.

Third, we’re focusing on increasing data center utilizations, we began to roll out specific sales initiatives and product programs around improving utilization in data centers where we have lower than expect utilizations. For example, in the fourth quarter we experienced the largest quarterly leasing increase in our Dallas data center, since the facility opened in the fourth quarter of 2011. Fourth, our channel programs. New channel partner programs and incentives are showing positive signs and have started to have the desired effect of being a sales force multiplier.

Channel bookings have increased significantly in the second half of 2015 when we implemented change compared to the first half of 2015. We believe and more importantly our channel partners believe we’re on the right track and expect to generate a larger contribution over time from our channel partners as we continue to grow the business.

Fifth, our lead generation in targeted marketing initiatives. We have more tightly focused lead generation programs on the performance centric industry verticals that will truly value Internap's competitive differentiation. As a result we have increased the number of new logos and the monthly recurring revenue for our marketing source new logo and has significantly accelerated over the past two quarters. And sixth and finally, our new and enhanced product and service offerings.

On the last two quarterly conference calls, you have heard me discuss the solid funnel we are building for our MIRO controller, while we are pushing for even more growth, I'm happy to report that we've been gaining attraction for the product which generated the $0.5 million in sales in the fourth quarter. We believe that these growth initiatives will both improve profitability across the business and leverage the positive mix shift toward our core data center services that Kevin outlined earlier.

So, let me briefly summarize on Slide 18, we believe our fourth quarter 2015 results demonstrate improved operational and financial performance and provide a solid foundation for our return to profitable growth as our growth initiatives beginning to yield positive results. For the fourth quarter and full-year 2015, we achieved several significant milestones including the highest levels of adjusted EBITDA, adjusted EBITDA margin and segment margin in our company's history. In the fourth quarter, we also generated the second consecutive quarter positive levered free cash flow.

As we look into 2016, we're confident that our strategic realignment and the associated cost savings will further improve our margin profile and position Internap for long-term growth. With our disciplined approach to capital allocations. We are encouraged in our ability to generate positive levered free cash flow for the full-year 2016. We remain confident that our compelling performance based value proposition should drive long-term profitable growth for the business and deliver enhanced value to our shareholders.

Now, we would like to open the call for your questions. Let me hand it back to the operator. Christy.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question comes from the line of George Sutton of Craig-Hallum. Your line is now open.

George Sutton

Thank you. I wondered if you could just give us at least a tangible example of kind of how our customer would view the two integrated business units differently than the way you have been going to market. How is that going to affect the customer? And could you give us a sense of what in the strategic review process prompted you to move in this direction as well?

Michael A. Ruffolo

Okay, let me take the second one first. In terms of the strategic review process, we certainly picked up a lot of the data as we talk to various companies in the industry, and one of the comments that was made is that we are clearly a business that has a number of different service offerings and business models and the feedback we got with that to the extent that we could clarify that externally to the market and run our businesses in a way where they were more integrated in the way they go to market that they view that as a better way to both show the power of the model and visibility to the marketplace.

In terms of that customer situation, as you know, we cross sell our services to our customers, so some customers are traditional Colo and IP customers, and that overtime also acquire some of our hybrid services perhaps the cloud or a managed hosting offering, and we will continue to do this. We will have a singular sales force that represents the entire product line.

However, from a customer standpoint, they are going to get the benefit of the full product; from a development and marketing standpoint, we fundamentally compete against different competitors in each of the two business units and sharpening that focus and ensuring that we're focused on winning in each of the respective units, we think helped us as well even though again we bring it to market with a singular sales force.

George Sutton

Okay. Kevin you mentioned relative to churn that may largely offset your growth initiatives, but I think in a different part of the commentary, the white glove service and some other things have actually improved the churn outlook, I come away from those comments a little…

Kevin M. Dotts

I think what we talked about is that we had noted that there was improved underlying operational performance in the fourth quarter versus prior quarter as the churn had continued to come down. Also at the same time, we are talking about, and as Mike had come onboard to talk about some of the initiatives, we talked about the sales force initiatives and being able to get focused on our Top-100 customers et cetera.

And so with that we are being able to better see potential churn coming down to play, that churn is less per say related to call it other operational issues and more oriented idea that some of our larger customers that have grown with us very rapidly are also subject to being acquired by our social media and technology companies. We do anticipate and the guidance that we are giving, that will happen going into 2016 and thus be offset.

Michael A. Ruffolo

Hey George its Mike again, let me just add to Kevin's comments. Our visibility into our Top-100 customers is extremely high, we actually set a goal in the first 100 days that I was on the job or either myself or head of sales or head of business development to meet at high levels of all 100 of our top customers, and we achieved that in the first 100 days in the job.

The good news is we have a lot of relationship capital with these large customers and we have a lot of visibility into their plans. What we don’t control is that some of these very successful companies got acquired by large technology and social media companies that have huge infrastructure and data centers where they are bringing some other infrastructure in-house.

And we actually I think did a good job of essentially managing that process and we will continue to do that but there is some inevitable movement that’s part of the synergies of these acquisitions that these big companies made. And so that’s what is causing the churn. I would say we get high marks for customer retention, kind of unlucky in terms of which companies got got acquired.

George Sutton

Got you okay, that’s helpful. One other quick if I could, the MIRO controller of 500,000 revenues this quarter, could you tell us how that was different than expectation you might have for Q4?

Kevin M. Dotts

Sure, I think George if you look back and going to the guidance that we have provided earlier, I think it was kind of at the end of the third quarter. Clearly MIRO controller did pick up in sales comparative to the prior quarter. I think we were probably less than $100,000 in the prior qarter. So, we certainly did see some momentum, but certainly the sales cycles that we talked about before have just been a little bit longer than what we anticipated. And so, we finally saw the half a million coming across. That was the largest element probably of the revenue shortfall as it relates to the guidance that we had provided previously.

Michael A. Ruffolo

Yes. So in our case the MIRO controller we recognized 100% of revenue at the time of sale and not a recurring revenue model, and clearly had we saw more of that in Q4 than obviously if revenue would have gone dollar for dollar.

George Sutton

Okay. Thanks guys.

Michael A. Ruffolo

Okay.

Kevin M. Dotts

Okay thanks.

Operator

Thank you. Our next question is from Frank Louthan of Raymond James. Your line is open.

Frank Louthan

Great thank you. Talk to us a little bit about how above separating the businesses is going to save money, it sounds like it's creating more overhead, how separating two businesses do that? And then what sort of valuation do you think those you might get and we rack space earlier this talking about public cloud how to take winning in lot of their market share. What is it about your cloud market share and your business there that might be different in what they are seeing? Thanks.

Michael A. Ruffolo

So Frank, in terms of the operational separation of these two businesses, well basically we are getting a quite a bit of savings from shared services that we are actually able to use or spend less money, have less cost associated with its when we separate them into that two units. And so we actually are eliminating some overhead in that regard and frankly we are dedicating pure resources by making them fully dedicated to each of the unit.

And that whole idea of being able to get people more laser focused on the specific competitors for each of their markets and the go-to-market strategies. It actually yields a nice cost savings for us. So without getting into the details that’s generally what we've done there.

Your second question was around something about rack space in that public cloud, can you just ask that question one more time in terms of contacts?

Frank Louthan

So rack space made the statement on their conference call that they are seeing lot more competition and acceleration of customers taking cloud services at the large hyper scale public cloud businesses. As you separate the two business, increase sort of the focus on your cloud business. How are you may be different in that regard, are you seeing any similar competitive trends towards the large hyper scale guys like AWS or Azure that might risk that business?

Michael A. Ruffolo

Yes I think first of I think, everyone like to put AWS and Azure together, but let’s just want them together for this conversation, they are obviously responding to customer demand kind of general purpose cloud computing and as you see from the results there is lot of success that they are achieving. Our strategy I think you know from earlier calls is that we focus our cloud business really around the performance verticals, which we think require a different level of hand holding and service than the general purpose clouds, where it’s more of a do it yourself kind of model.

And as result of that we not only are going off to the markets that value our MIRO performance and the other initiatives we have around performance. But we also get what we call that like the Amazon graduates, the AWS graduates that start in a public cloud environment but then recognize that they need not just scale, but they also need technical support and lot more vendor support if you will as they kind of scale their business, because on small cases they have very few people that have IT skills within their organization and rely on us quite heavily. So we are not going head to head with them or are picking up a number of their customer that expands too quickly for what a general purpose cloud provider can do. But at the same time, we are focused on the key verticals that Kevin described.

Kevin M. Dotts

Hey Frank, yes this is Kevin, I was just going to add, we kind a laid things out on page five, breaking down the business kind of in the go forward data center and network services cloud hosting services. And as you go into the cloud hosting services I don’t think we will see a block cross from there about dedicated hosting and it kind of walks through there [indiscernible] where we go more head and somebody like rack spaces only roughly 8% to 10% of our business.

Frank Louthan

And with the additional clarity you’re seeking to provide at the market, are you able to break out the EBITDA and CapEx for the two different segments going forward?

Kevin M. Dotts

Again, I don’t think we’re going to go down to per say an EBITDA level, because basically we currently certainly understand what the gross margins are at the levels. We understand what the direct OpEx, but there is still large share of OpEx everything from what Mike talked about with that we’re going to market with the sales organizations to certainly the back office.

From a CapEx perspective, I think we have talked historically about expansion CapEx versus growth CapEx and the growth CapEx is pretty much oriented towards the cloud and hosting services while the expansion CapEx is mostly more oriented towards the data center and network services. There are a little bit a crossover there, but I would 90% to 95% of those aligned along those waves and then kind of obviously maintenance crosses everything.

Frank Louthan

Okay great. Thank you.

Operator

Thank you. Our next question is from Fred Moran of Burke and Quick. Your line is open.

Frederick Moran

Thank you. Michael two questions, one, did any actual offers materialize in light that they fall apart? And if realignment best positions the company for value creation, can you tell us if buyers specifically made offers for parts of your business and why after all this time you couldn’t finalize a sale of something?

Michael A. Ruffolo

Well, I think that’s actually three questions. So we’ll go through it as best we can. So in terms of the sale process that we announced in September, we did receive preliminary non-binding indications of interest and we did certainly have what I would consider to be a substantial and meaningful conversions with a number of different parties. But in the end, the inability to obtain financing and general volatility in the market, those agreements weren’t reached. So I don’t really have anything more to say about that outside of the fact that there was I think a good faith effort on the part of multiple parties along with us, but we did not reach the conclusion.

Frederick Moran

And in that vein, you were able to achieve a price for the total company that was essentially satisfactory to the board, but the buyer couldn’t get financing?

Michael A. Ruffolo

Well, again since they were all in the preliminary non-binding level, it’s hard to kind of really speculate on that because it won’t make sense if it's further down the path in terms of being able to conclude that with definition. But we clearly were engaged in meaningful conversations with the various parties, not to the point of Board approval or things of that nature.

But in terms of the issue of the separation of the business and offering for specific elements of the business, we didn’t look at the business in that way. Certainly there are certain companies that looked at our company that were more attracted to certain parts of the business than others, because of what their business model looks like, and so that was a learning that certainly the integrated business unit model as we said earlier we believe offers us additional way to create value in the future as we get more and more organized that way.

Frederick Moran

And safe to say you would comfortable selling one of these two business units and maintaining the rest of the business and/or that over time the business could be sold to different parties in two pieces?

Michael A. Ruffolo

Yes, I think what you should assume from this is that the board and the management team is open to any and all alternatives to maximize shareholder value, so that would be inclusive of what you just described.

Frederick Moran

I really appreciate it Michael. Thank you.

Michael A. Ruffolo

Thanks Frank.

Operator

Thank you. Our next question is from Dan Kurnos of Benchmark Company. Your line is now open.

Daniel Kurnos

Kevin let me ask George’s question, one of its question in a different way perhaps trying to get to the numbers here, because your guidance - appreciate the bridged breakout. I'm trying to reconcile the churn event with your guidance for essentially core growth at the midpoint almost roughly 6%. And so is there any way that you can give us any more granularity on just how large these customers were, or the percentage impact to growth there so we can understand some of the puts and taken that are going on in the core business?

Kevin M. Dotts

Happy to take a shot at that Dan. I think what we recognized and I think is that the churn events that we see and are looking over the year at, certainly we expect quarter-to-quarter from 1.6% total churn that will be a step up in the first quarter reflective of one of those early larger churn customers.

And because of that we’ll lose the revenue and margin [indiscernible] and so that kind of drops us down from a revenue and an EBITDA performance and then as the bookings come through as we go through install cycles, average install cycles 45 to as much as 90 days then we start kind of making up for some of that churn impact. So I'm not sure if that exactly got to your question, but if you are looking for more helpful I'm happy to clarify it.

Daniel Kurnos

Yes, we can take follow-up offline on that and then just high level, I know this has been asked several times in the past, but just if you guys think that there was any impact on operational performance as a result of the strategic review?

Michael A. Ruffolo

Yes, this is Mike and I would tell you Dan that initially, there certainly was, because there was question from customers and from employees and then it seemed like maybe 45 to 60 days later all the questions and issues kind of went away and we went back to just kind of doing our job. Our results in Q4 were best in the company’s history from an EBITDA standpoint and we grew quarter-to-quarter. So I was actually pretty pleased with the ability for the company, the employees and the customers to stay focused on the things that matter and so I think we did a good job of keeping the strategic process as non-impact to operational results as best we could.

Daniel Kurnos

And then Mike just again maybe just kind of following up and maybe I should ask you this also offline, when I get more color from Kevin just around the quantity, the size of the impact here. But as I think about your initiative both MIRO and channel partner sales and just again reconciling that with core growth maybe even versus to your expectation. I know you came in very [indiscernible] in terms of your expectations as being able to implement your initiatives and you have given us some color around early success, but maybe just your thoughts on timing of actually achieving your goals and frankly outside of your goal reaccelerating core growth and increasing occupancy outside of channel sales, would be helpful, I think that people to understand what is going on with the core business.

Michael A. Ruffolo

Yes, I think we've won in the job when I did the Investor Day in New York that's when we introduced six key growth initiatives that's why I keep coming back to those, because I think it's important that all of our investors kind of hold us accountable for what we said when we took on this effort. And in all six of them, we can show you very quantitatively the progress we are making.

Obviously, as Kevin has indicated, we're doing a lot of very good things, but one thing that makes it difficult to show the growth as much as we wanted to externally is when you have a churn event or multiple churn events that are impactful immediately to your revenue growth. So our bookings growth, our new logos, our channel partners all those things are progressing in a good way, but we have to kind of out maneuver the churn headwind as we grow into the future and that's what we do every day.

Daniel Kurnos

And just one more for me then - you talked in the press release and also in your prepared remarks just about marketing inefficiencies and rectifying some of those carriers, can you give us a little bit more color around that statement and sort of what channels you think you might press to improve or reallocate marketing spend?

Michael A. Ruffolo

Yes, so again similar to comments around our business unit, what we wanted to do is to make sure that - the danger of having lot of different businesses is that your marketing messages and as focused and pointed as we want it to be and so in our particular case the business units will certainly direct their marketing spend a lot more around with the competitors they can consider to be relevant to their business. So that's one of the marketing inefficiencies.

The other one was the amount of money that we're spending for example on online advertising, Google-Ad kind of stuff. We are finding that we actually get a lot more benefit out of shifting those resources to kind of traditional lead gen programs and marketing efforts that are driven by outbound marketers and so it's a shift that where we spend our money and overall reduction as well.

Daniel Kurnos

Got it, great thanks for all the color, I appreciate it.

Michael A. Ruffolo

Sure, no problem.

Operator

Thank you. Our next question is from Mark Kelleher of D.A. Davidson. Your line is open.

Mark Kelleher

Thanks for taking the question. Just going back to the churn, you mentioned that a number of your module last year growing customers have been purchased and you're talking about the churn and needing to outgrow that and get pass that but is there a risk that other customers that are fast growing might be taken out as well. And is this a systemic risk of fast growing customers within your footprint?

Michael A. Ruffolo

Actually, it's not, what it is, is it's fast growing customers that get acquired by large technology and social media companies that has huge infrastructure. So a traditional M&A event wouldn't be near as complicated for us, because in many cases the impact on us could be positive or at least neutral.

But if you are being acquired by one of the big technology giant that has huge data centers of their own or big social media companies that have capabilities that are substantial and certainly cost effective for them that's the kind of M&A that's tough for us and I would argue it would probably be tough for anybody that’s in this business.

Mark Kelleher

If we look at the utilization rate 55% that's reflection of the churn, right, the churn is - customers going out, customers coming in, you are going to kind of stay around that 55. Is that accurate? Are you expecting to advance that utilization rate in 2016?

Michael A. Ruffolo

Yes, so a couple of things to think about, obviously it's a net in an out type of model, in terms of our revenue growth, our customer growth are recurring contract growth. However, so when you think about utilization though it also has to do with what kinds of services they are buying from us. So traditional colo type of services are clearly going to pick up physical floor space a lot more then cloud services would be for example.

So the density of the floor space that we are using is actually is the other variable that makes it a little bit more complicated. So as we do more cloud services and continues to do that our utilization may not grow as fast as if it was just traditionally setting up cages and doing colo, but it's actually a good thing from a revenue margin standpoint.

Mark Kelleher

Is there an opportunity to look at your underutilized data center footprint and monetize those, sell some of the lower utilization facilities and reinvest that capital into the faster growing data centers?'

Michael A. Ruffolo

You mean actually sell the data center, is that what you are talking about?

Mark Kelleher

Yes, actually sell the data center.

Michael A. Ruffolo

Yes I guess it's a possibility. I would say that we actually think to better approach is to get a aggressive in those specific data centers where we think we can sell. Some of that space under the physical space, but maybe not as a market attractive at some of other locations. But that’s a reasonable prediction, but it's not what we are currently doing.

Kevin M. Dotts

I would be to clear Mark, long-term lease generally are company controlled data centers, so they make sure asset sale is - it’s more of a can we sublease as appose to the sale. So that would be a cash optimization opportunity to look forward.

Mark Kelleher

Okay thanks.

Michael A. Ruffolo

Thank you.

Operator

Thank you. Our next question is from Matthew Heinz of Stifel. Your line is open.

Matthew Heinz

HI god afternoon, kind of along the lines to that last question, but I guess just looking at your data center portfolio its quite a bit [indiscernible] between the kind of the healthy market in the out performer and then inner performers that seem to be dragging down…hello operator might be…

Michael A. Ruffolo

We can hear you, so want you to just keep going on.

Matthew Heinz

Sorry, just in terms of kind of the underperforming assets and the portfolio that market that I guess have been sub 50% occupancy for a while is there any conversation internally as you think about very strategic review or your ongoing review of the business. You change course in a new way with some of those assets as you look to rationalize the portfolio?

Kevin M. Dotts

Yes, I would say Matt, certainly when we talk about some of the optimization, cost optimization inherent in that is we do have programs more so with the partner data centers as we really have not been focused let's say on growing those because of the lower margin profiles. We actually having been giving back space in that regard. This quarter, we actually have put up an assets or reclassified an assets for sale up in Montreal.

It was a legacy data center not per say probably most advance for high technology data center. So that actually is a reclassification of several thousand feet, in fact we would have gone up above a 1000 feet versus prior quarter of utilization [indiscernible] classification. So I think there is an opportunity and I think both your stuff and market talks about can we look at some of these other data centers and we look at those sublease opportunities and effectively think about other way of monetizing that floor space, it's not [indiscernible] to directly to customers.

The other thing I would also point out both related to past few questions goes to the CapEx balance that we are giving, which shows that we are getting obviously as we bring down the intensity of the capital spends, we are getting better asset utilization.

Matthew Heinz

Okay. That’s very helpful thank you.

Michael A. Ruffolo

Thank you.

Operator

Thank you. And that does conclude our Q&A session for today. I would now like to turn the call back over to Mr. Michael Nelson, for any further remarks.

Michael Nelson

Great. Thank you, for joining us today. We look forward to providing you an update on our progress next quarter. That’s it.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.

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