Internap Network Services Corporation Q1 2009 Earnings Call Transcript

| About: Internap Network (INAP)

Internap Network Services Corporation (NASDAQ:INAP)

Q1 2009 Earnings Call Transcript

May 7, 2009 5:00 pm ET


Andrew McBath – Director of IR

Eric Cooney – President and CEO

George Kilguss – CFO


Colby Synesael – Kaufman Brothers

Jonathan Schildkraut – Jefferies

Sri Anantha – Oppenheimer

Erik Suppiger – Signal Hill

Shane Larkin – Thomas Weisel Partners

Dave Coleman – RBC Capital Markets


Good day everyone and welcome to the Internap First Quarter 2009 Earnings Call. Today’s call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Mr. Andrew McBath, Director of Investor Relations. Please go ahead, sir.

Andrew McBath

Thank you. Good afternoon and thank you for being with us today. I’m joined by Eric Cooney, our President and Chief Executive Officer; and George Kilguss, our Chief Financial Officer. Following the prepared remarks this afternoon, we will open up the call for your questions.

Before I go through the cautionary language concerning forward-looking statements, I want to point out that we will be referencing slides that correspond with our conference call this afternoon. These slides are available under our Quarterly Results section of the Investor Services page on Internap’s website, along with non-GAAP reconciliations and our supplementary data sheet, which includes additional operational and financial metrics for your use.

Let me remind everyone that today’s call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements regarding future financial position and performance, customer growth, business strategy and prospects, including our belief regarding the prospects for our three business segments, projections regarding levels of growth, costs and costs savings, expenses and margins, capital expenditures and financing needs.

Because these forward-looking statements are not guarantees of future performance and involve risk and uncertainties, there 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 update these statements.

In addition to reviewing first quarter results, we will also discuss recent developments. Any non-GAAP financial measures discussed during this call will be reconciled to the most directly comparable GAAP financial measure.

With that, I’ll turn the call over to Mr. Eric Cooney.

Eric Cooney

Thank you, Drew and good afternoon, everyone. Let me start by saying how honored and pleased I am to assume the role of CEO of Internap. I’ve spent the past seven weeks working with staff, partners, meeting with our customers to better understand our business, our challenges and our opportunities. It seems clear to me that this company has some very valuable assets that should enable us to deliver long-term profitable growth for our shareholders.

I decided to come to work for Internap, because I thought I saw a diamond in the rough. And everything I’ve learned in the past seven weeks towards that belief. Today, I will take you through an overview of our financial results, discuss some of my observations on the company thus far, and then discuss our strategy for the business going forward. Then I will hand over to George to provide a more detailed look at our financial results and finally we will open up for your questions.

Moving on to slide three in the presentation, turning to a quick summary of our financial results, Internap posted revenue of $63.9 million during the first quarter of 2009. Revenue by business unit was $30.6 million in datacenter services, $28.6 million in our IP segment and $4.7 million in CDN services. Segment gross profit totaled $28.3 million and adjusted EBITDA was $4.5 million or 7% of revenue for the quarter. Internap generated free cash flow of $1.8 million during the first quarter and ended March with $55.5 million in cash and short-term investments on the balance sheet.

Our datacenter services segment continued to perform well in the first quarter. Despite substantial weakness in the overall economy, we saw a solid demand in co-location and related services. In the first quarter, datacenter services showed strong year-over-year and sequential top line growth. Segment gross margins also trended higher as newly expanded company-controlled datacenter space was occupied. Also in the first quarter, we completed the 40,000 square foot datacenter build out plan announced in June of 2007 with a turn up of our expansions in Boston and New York representing 15,000 and 8,000 square feet respectively.

Our IP and CDN businesses continued to underperform showing year-over-year and sequential declines in revenue and segment gross margins. Overall, we are disappointed with our second consecutive quarter of declining revenue and adjusted EBITDA. We are implementing a number of actions, one of which was the cost reduction plan we announced on March 31st, which we believe will help to reverse these trends. This plan streamlines our back office functions and better aligns cost with revenue.

When completed, we expect this initiative will generate approximately $5 million in annualized savings. As you saw in today’s press release, first quarter results include $900,000 restructuring charge related to this program.

Moving on to slide four, now I believe it could be useful to share just a few of my high-level observations having spent the past seven weeks reviewing Internap’s business. These observations will help provide an understanding for the strategic direction we planned for the company.

First of all, we compete in three markets today, datacenter, IP and content delivery services to the business enterprise customer. These markets represent a significant growth opportunity for Internap driven by a combination of underlying market growth as well as a significant potential if we are able to expand our market share. And as you can see in the slide, the forecasted market growth is approximately 9% per year through 2011.

The second observation I mentioned ago, in my belief that the company has some very valuable assets. These include our customer base with over 3,100 customers today, an extremely talented and motivated staff, and 67 active service locations from which we deliver our services.

Furthermore, there are two additional assets which provide a fundamental basis for our competitive advantage. These assets are our technology leadership and a reputation for delivering exceptional customer service and I will come back to the importance of those two assets in a moment.

The third observation I would like to mention is that in recent history, we may have sacrificed profit margins in pursuit of revenue growth. Simply stated, not all business is good business.

Moving on to slide number five, so observations are one thing, but more importantly is what are we going to do with the business going forward. Given that we are competing in growing markets and we feel we can effectively leverage our core assets to create a compelling customer offering, we will remain in all three of our current businesses, datacenter, IP and CDN services. Our goal is to deliver shareholder value by becoming a leading supplier of Internet services which will include all three of these businesses for enterprise customers.

The strategy is straightforward. We will invest, develop, and enhance the two key assets that can sustain our competitive advantages. These are technology leadership and customer service. We will challenge ourselves to be first to market with best-in-class technology and to deliver best-in-class customer service.

With this strategic vision in place, there are a number of specific tactical initiatives we are taking that I describe as strengthening the core. These initiatives span the entire organization and are really a means of driving operational excellence in our day-to-day activities.

The need for us to strengthen the core is probably obvious given the recent financial performance. But I think it is made even more apparent when we consider that there are competitors in each of our target markets who are outperforming Internap today. We look to close those gaps with a focus on our strategy for technology leadership and customer service, along with some applied operational excellence.

As I mentioned, strengthening the core initiatives will have impacts across the entire organization. However to give you a sense for the types of initiatives, I will mention a few specifics including simplifying the customer billing, optimizing the sales process, refining customer service performance metrics and streamlining our partnerships to focus on fewer mutually beneficial partnerships. And to be clear, we will also not be chasing revenue and sacrificing long-term profitability.

Now I would also like to comment on the topic of earnings guidance. Specifically, we expect to maintain our current policy of not providing earnings guidance. We believe that the long-term interests of the company and shareholders are best served by not providing earnings guidance and then chasing the numbers. Rather, we will remain focused on delivering long-term profitable growth.

We will work to increase our analysts and investors understanding in the markets in which we compete, our strategy and our competitive positioning. We will endeavor to give you a clear understanding of the key drivers for Internap’s current and future results. George will provide some further comments on the topic of guidance in a moment.

Finally, moving on to slide six, I will close by thanking our staff for their enthusiasm and commitment as we pursue our goal of making Internap one of the world’s leading Internet services organizations.

We are aligned in our desire to improve Internap’s financial performance and deliver returns to our shareholders. I am energized and excited by the potential I see and look forward to strengthening our core business over the coming months as we seek to uncover diamond in the rough. My commitment to you is for action and transparency as we move the company forward.

Now, I’ll turn over to George.

George Kilguss

Thank you, Eric and good afternoon, everyone. Before I get started, I would like to take a moment and welcome Eric to Internap as President and CEO. We are excited to have him join the company and we look forward to working with him to achieve our goals and objectives.

Turning to our Q1 results, starting on slide seven, datacenter services delivered solid revenue growth and gross margin expansion in the quarter. From a revenue perspective, this segment grew to be our largest unit in the first quarter generating 48% of total sales. As we outlined for you last quarter, we did continue to see pressure in our IP and CDN segments in part due to a slowing economy.

Operationally, we took steps to streamline our back office functions and reduce our cost structure. Our March 31st announcement of a 10% reduction in force is expected to save us approximately $5 million in operating expense on an annualized basis. We will continue to look for ways to optimize growth and profitability in the coming months and quarters.

Total revenue for the first quarter was $63.9 million, up 3% year-over-year. This increase was driven by an improvement in our datacenter services segment which increased 22% compared to the prior year period and was offset by declines in both of our IP and CDN service segments. When compared to our fourth quarter 2008, total revenue was down slightly. Total company churn across all segments was 1.7%, which was down from 1.9% in both first and fourth quarters of 2008.

Total segment gross margin in our first quarter as shown on slide eight, totaled 44.2%, down 530 basis points from 49.5% one year ago, but slightly down with fourth quarter 2008 gross margin. These decreases were primarily the result of lower gross margins in the IP services and CDN service segment, which I will discuss later in my comments.

Cash operating expenses which exclude segment direct cost, depreciation, amortization, stock-based compensation and restructuring charges totaled $23.6 million in the quarter compared to $21.1 million of cash operating expense in the first quarter of 2008 and include approximately $1.4 million of cash CEO transition costs in the quarter.

Adjusted EBITDA in the first quarter totaled $4.5 million compared to EBITDA of $9.6 million in the first quarter of 2008 and $9.2 million of EBITDA in the fourth quarter of 2008. Both higher cash operating expenses and decreased total gross margins drove the year-over-year and sequential declines.

Moving on to our balance sheet on slide nine, cash and short-term securities totaled $55.5 million at the end of the quarter, up from $54.1 million last quarter. Day sales outstanding in the first quarter improved to 37 days compared with 48 days in the same quarter last year and 40 days in the fourth quarter of 2008. This decrease highlights the work we have doing to improve credit quality and enhance our cash conversion metrics.

Interest bearing debt and capital lease obligations totaled $23.4 million at the end of March, flat compared with our fourth quarter of 2008 balance. Total liabilities increased by $600,000 in the quarter and totaled $82.5 million and when compared to our stockholders’ equity of $244 million, reduced total liabilities to equity ratio of 0.34 to 1.

Cash from operations totaled $7.3 million in the first quarter. Capital expenditures in the first quarter totaled $5.5 million, of which $3.7 million of this total were spent in our datacenter segment. This compares with total capital expenditures in the fourth quarter and the first quarter of 2008 of $17.2 million and $10.1 million respectively.

While EBITDA less capital expenditures in the quarter totaled a negative of $1 million. Improved management of working capital balances helped to increase our total cash position by $1.4 million in the quarter.

Now I will take you through our performance by business segment beginning on slide ten and 11. As mentioned, our largest segment by revenue in the first quarter was datacenter services. Revenue from this unit totaled $31 million, up 22% over the same quarter in 2008 and up 5% sequentially.

Since the first quarter of 2008, the company has deployed 40,000 of company-controlled build-outs square footage and 17,000 square feet in partner sites. Historically, approximately 80% of company-controlled and 90% of partner sites build-out space is available to sale to customers.

In the first quarter, off the 99,000 square feet of build-out space at partner sites, 86,000 was occupied. In company-controlled sites 87,000 square feet was occupied compared with 144,000 square feet build-out. Our Boston and Seattle markets have been among our strongest company-controlled facilities from the demand perspective.

Datacenter segment gross margin in the first quarter of 2009 totaled 27% compared with 28% in the first quarter of 2008. Higher cost associated with an increased datacenter footprint primarily at the company-controlled sites more than offset the year-over-year increase in revenue. However, as compared with our 2008 fourth quarter, datacenter margins improved by 180 basis points sequentially as new revenue began to cover existing fixed cost.

Moving to slide 12, IP services revenue totaled $29 million in the quarter and represented approximately 45% of total company revenue. Revenue in this segment declined 5% sequentially and is down $2.5 million from a year ago. Approximately $0.5 million of this year-over-year decline was attributable to lower equipment sales in the quarter.

Lower IP service revenue filled the remainder of the first quarter decrease as revenue churn outpaced new subscriber additions. IP segment gross profit totaled $17 million or 60.4% of revenue which was down 330 basis points year-over-year and 60 basis points sequentially. Weakness in the top line was the main contributor to the year-over-year decrease in this segment’s gross margin.

Because we have a recurring revenue model, bookings and churn weakness in previous periods flow through to subsequent quarters. This was the case at the end of 2008 as customers delayed purchases and consolidated IP infrastructure requirements.

In CDN as shown on slide 13, revenue totaled $4.7 million down from $4.9 million sequentially and $5.7 million versus the same quarter in 2008 as customer churn and pricing pressure impacted the year-over-year comparison. Segment gross profit in this unit totaled $2.6 million down from $2.8 million sequentially, primarily due to the decreased revenue.

On a combined basis, total IP and CDN traffic was up 25% from the same period a year ago, but flat sequentially as traffic from two large volume IP customers we churned last quarter was replaced in Q1. Customers had purchased more than one service offering from us in the quarter increased to 45.2% of total, up from 42.5% last quarter and 35% a year ago.

From a reporting standpoint, we are working towards increasing the detail and relevancy of the operational metrics we disclose. Beginning this quarter and as shown on slide 14, we changed the method we count customers to include only IP, co-lo and CDN subscription customers that maintain service in the final month of each quarter.

This methodology differs from the company’s historical convention as it excludes customers who billed during the quarter, but were not present in the last month of the quarter, excludes new customers obtained in the quarter, but not yet billed and excludes FCP equipment sales.

This change will remove quarter-over-quarter fluctuations related to non-recurring customer in-and-out and provide management and investors a clear view of per customer revenue trends.

Utilizing this method, total customers were 3,174 at the end of the first quarter of 2009, down from 3,311 customers in the fourth quarter of 2008, primarily as a result of customer losses in our IP and CDN business segments. Additional information on this change can be found in our Form 10-Q filed this afternoon.

In future quarters, you should expect to see additional disclosure or fine tuning to help you get a consistent picture of our business trends. While the economy has had an impact on our business in the past two quarters, we remain confident in our ability to grow revenue and margins over the long-term.

With that, we will open up the call for questions.

Question-and-Answer Session


(Operator instructions) And we’ll go first to Colby Synesael, Kaufman Brothers.

Colby Synesael – Kaufman Brothers

Great. Thank you for taking the questions and welcome aboard, Eric.

Eric Cooney

Thanks, Colby.

Colby Synesael – Kaufman Brothers

Just have two questions. The first one has to do with the performance IP product. From my understanding, historically, you guys have charged a premium, because what you brought with that is that improved solution as it relates to acceleration and route optimization. But with the Internet improving in terms of technology and speed and delivery, it seems like the value-add of that has decreased, especially when you relate that back to what a typical Q1 would cost. How are you going to be able to maintain that premium pricing and if you are not able to do that, how much further do you think we have a bleeding before we get to a some point of stabilization? And then my next question, really the 45% number that you guys mentioned, it continues to go up each quarter. How much of that is it related to – in terms of bundling, how much of that is related you guys actually selling to more customers and more services versus you’re just seeing more of your single customers churning out and therefore the math is just bringing that number up? Thanks.

Eric Cooney

Thanks, Colby. This is Eric. I will let George comment on the bundle figure and I will get a stab at the IP performance question. I think at a high level, the reality is we’ve not been let’s say living up to our expectations in terms of successfully selling the value proposition for our performance IP products. I mean, I think that’s relatively clear based on the financial results.

That being said, we do still – I’ll say firmly believe that our product does in fact provide performance benefits beyond what you can get, let’s say in the rest of the Internet today. So there is very clearly from our perspective a compelling customer value proposition based on that increased performance.

I take your point and agree that in aggregate, of course, the Internet’s performance as a whole has improved. But that’s not shrunk the gap and of course our job from here is to do let’s say a better job of characterizing how much better our performance is and characterizing that value proposition for the customer.

And at the end of the day that’s well combined with investment and actually increasing that gap based on technology, investments on our side. But first and foremost, it’s successfully compelling or successfully communicating that compelling value proposition to the customer, I think in, let’s say relatively recent history is where we can do a significantly better job.

George Kilguss

And Colby, this is George. In regard to your question on bundling, the answer is it’s a little bit of both. We still do see our bundle percentages increasing and we see them increasing in the individual segments. But you are correct, there’s a little bit of math that does drive the number north.

Colby Synesael – Kaufman Brothers

Okay, thank you.


And we’ll go next to Jonathan Schildkraut with Jefferies.

Jonathan Schildkraut – Jefferies

Good evening. I actually just have a housekeeping question. I know that – I think George during your prepared comments; you gave us some of the year-over-year traffic trends. Unfortunately, I didn’t catch that. And I was also wondering if I can get the amount of equipment revenues that were captured in your IP services line for the quarter? Thank you.

George Kilguss

Sure. From a traffic perspective, our traffic was up 25% in the year and it was flat sequentially. And from equipment sales, it was approximately $30,000.

Jonathan Schildkraut – Jefferies

Thank you very much.

George Kilguss

You’re welcome.


And we’ll go next to Sri Anantha with Oppenheimer.

Sri Anantha – Oppenheimer

Thank you. Eric, given your comments that we’re not going to be chasing revenue at any costs, could you just outline your plans for how do you plan to stabilize your IP and CDN services revenue? That’s one. Second one is on datacenter services, you guys had a nice sequential growth in datacenter services, is that partly because there was additional space that you brought on line and that’s why you were able to sell it and what’s driving that growth there? Thank you.

Eric Cooney

Sure. So in terms of your question, how do we plan to stabilize the IP and CDN businesses? I think I come back to my comments about fundamentally our strategy and the very straightforward message there is, our overall strategy going forward relies upon our ability to leverage best-in-class technology and let’s say best-in-class customer service and in particular, of course that technology relates directly to both the IP and the CDN businesses.

To the extent we are successful in being first to market with best-in-class technologies, we think we will be able to, let’s say leverage a distinction between ourselves and the other competitors in the space and successfully sell that value proposition to the customer.

I think particularly relating to customer service and particularly in the IP segment, I’ve been pleasantly surprised, I’d say in terms my reach out to customers over the past seven weeks. I have really had great feedback from customers in terms of customer service specifically related to our IP business. That is absolutely one of the reasons customers are buying our IP product today. And I think we need to do our part to, let’s say invest and continue to improve that, but also to do a better job of getting customer service proposition out there to those customers that aren’t buying from us today.

For CDN, I think you all probably know the history of at least as well as I do at this point. But on neither of those fronts, technology nor customer service have we yet successfully differentiated ourselves. So the answer to how we stabilize it is, well, we get to first to market with best-in-class technology based on some products we expect to launch here in the second half of this year. And the investments that we continue to make in terms of improving our knock in customer service will obviously accrue across all of our business segments not just to the IP.

George Kilguss

And Sri to answer your second question, this is George, on the datacenter business. The majority of that growth did come in our customer – our company-controlled facility. So yes, because we had more space become available, we were able to sell more datacenter space to customers.

Sri Anantha – Oppenheimer

And George – and just on the cost front, I know you guys have announced some restructuring initiatives. When should we begin to see the benefits of that especially going forward, should we expect gradual throughout the year?

George Kilguss

We should start seeing it probably on a run rate basis fully in the third quarter. We may get a little bit in the second quarter, but it will really start mostly in the third quarter. We do have some cost associated with the transition expense of employees that will hit us in the second quarter and that will be part of operating expenses.

Sri Anantha – Oppenheimer

And one last one, I know you guys don’t want to talk about guidance, but just looking at CapEx, could you just give us at least any qualitative comments, what should we expect CapEx relative to what you guys have done in the past and 2009? Thanks.

Eric Cooney

This is Eric. I think in terms of guidance, specifically with regard to CapEx, our intention will be to come back and give let’s say more visibility specifically around our CapEx spend expectations. The short answer right now, we’re not providing that frankly because we are going through as we speak an evaluation of exactly that. What sort of CapEx investments we want to make particularly around datacenter footprint to simply put ensure we can continue to do to drive profitable growth in the datacenter segment? So as we refine that CapEx spend, we will definitely give some further guidance, some further color to the market in terms of 2009 spend.

Sri Anantha – Oppenheimer

Thank you.


And we’ll go next to Erik Suppiger, Signal Hill.

Erik Suppiger – Signal Hill

Good afternoon. Just on the CDN side, right now 20% of customers are bundling. Where do you see that going exactly?

Eric Cooney

Can you elaborate on that a little bit?

Erik Suppiger – Signal Hill

I am just trying to understand the strategy value. Do you anticipate that that’s going to increase dramatically from here or – and I’m sure I didn’t understand the rationale for pursuing that that business at this point.

Eric Cooney

Okay. So what I would suggest is or at least the way I am looking at the business is simply put – I think I described in my remarks, the goal is to establish Internap as a leading Internet services provider. We are today actively pursuing essentially three businesses, co-lo, IP and CDN.

And as far as I am concerned on a go-forward basis, we need to be able to deliver a profitable growth in each of those businesses, let’s say on to itself, i.e., not dependent on subsidizing our let’s say CDN business based on success in IP or fare slightly differently. If we don’t have a compelling customer value proposition for customers to buy CDN, then we shouldn’t be in the CDN business. And if that answers your question in terms of let’s say the bundle.

Erik Suppiger – Signal Hill

I guess what I am trying to understand from a synergy perspective though, does it make sense to operate the CDN business even if you can get it profitability, does it make sense from a strategic perspective unless you can have a greater cross-selling opportunity?

Eric Cooney

Well, look let’s put it this way. From our perspective, the ability to sell a continuing or an expanding set of products and services to our enterprise customer base is of course one of the ways we will grow the business. So I think maybe more your question is, is the bundle “a particular perceived customer benefit”, are we selling more CDN because we are able to offer all three and that’s what I am saying, I’m at least at this stage less convinced that the bundle is in and of itself a compelling customer value proposition. I think the bundle is really just more a useful metric for yourselves and for us to judge our success in selling more products or selling an expanded set of products to our target customer base, if that makes sense.

Erik Suppiger – Signal Hill

Yes that’s very helpful. Thank you very much.


(Operator instructions) And we’ll go next James Brean, Thomas Weisel Partners.

Shane Larkin – Thomas Weisel Partners

Hi guys. Thanks, it’s actually Shane Larkin for James Brean. Just a couple of quick questions, one, just wondering if you can talk a little bit about the pricing environment particularly for bandwidth and if that’s following – is that helping you at all on the cost side?

George Kilguss

On the cost side, as you know Shane from covering us, we try to keep our contracts with suppliers on very short-term basis. And yes, we continue to drive our cost out of the network. We continue to – as those contracts come due to be aggressive and obtain lower prices and we are doing that and you are seeing that in our ability even in a declining revenue environment to keep a stable gross margin percentage.

Shane Larkin – Thomas Weisel Partners

Okay, great. And I was wondering, as far as the datacenters go, if you could give us – is there any color you can provide us on what your thoughts on expansion there? In the coming year, what kind of strategy you guys might be considering?

Eric Cooney

I will make a couple of general comments and maybe George can elaborate. I think if you divide our co-location business into let’s say two buckets, the company-controlled facilities and the partner facilities, certainly the gross margins are significantly better on the company-controlled business and you can expect that in terms of CapEx and let’s say a relative waiting, probably likely that we will be investing proportionately more dollars in the company-controlled facilities for the gross margin and long-term let’s say business stability benefits. That being said, there are also clearly circumstances where it makes sense for us to partner.

On the partner side of our co-location business what you can expect to see us doing differently going forward, and I alluded to this in some of my remarks is, let’s say streamlining the number of partners essentially increasing the business volume that we pushed through certain key partners and of course in return for that looking for better terms and condition, better pricing, perhaps longer-term leases, et cetera, et cetera. Today we have from our perspective I think too many “co-location partners” and just need to simplify and streamline that business to help drive our profitability.

Shane Larkin – Thomas Weisel Partners

Okay. It’s very helpful. Thank you.


And we’ll go next to Dave Coleman, RBC Capital Markets.

Dave Coleman – RBC Capital Markets

Thank you. Just following up on Colby’s question earlier regarding your performance IP product, you seem to agree that performance of the Internet is improving, it seems – if I am thinking about this correctly, customers, happy do a cost benefit analysis as to whether they should be paying the same premium that they were maybe year or two earlier. So can you talk about the premium that you are pricing your IP product versus the marginal cost or the – I guess an alternative cost to the customer, how much of a premium you are charging? And then on the datacenter business, any plans to consolidate third party or partner datacenters into recently opened company-owned facilities? Thanks.

George Kilguss

Yes, thanks, Dave. It’s George Kilguss here. With regard to your question of performance IP, Internap still has a strong value prop in various customer segments. Clearly a customer does not need multiple providers with Internap for redundancy and reliability and we provide a 100% uptime guarantee.

And by being multi-homed ourselves, we are allowing customers to go over the best network that is uptime as well as performance. So we do see that being a value prop for a certain segment of our customer base. Smaller customers may not have the resources internally or wants to take cost of getting multiple providers in to get the same level of performance that a much larger provider, maybe able to trying to replicate.

From a pricing perspective or a premium perspective, we are competitive in the marketplace. We do believe our product deserves a premium. Historically, we have been probably a 20%, 25% premium, but – to me, that premium as bandwidth prices come down in a real dollar perspective, that dollar cost is not that significant as it used to be on a percentage basis. I think at the end of the day what the customers is looking for the value proposition. And as Eric said, we need to do a better job of installing [ph] that to customers and demonstrating its value prop which we truly believe in and believe will demonstrate in our future results.

With regard to datacenters and whether we have plans to consolidate partner sites into company-owned sites, we are – as Eric said, we are looking to maximize return on capital and maximize profit. So we’re looking at a variety of alternatives, we are trying to shrink the number of partners, find ways to increase the attach rate of those customers with our other IP and CDN services to increase our overall return and profit that we get from a particular customer. And if we have partner sites that today we believe are not as profitable as it like or we are not generating that with attach rate. I think you will see us look find ways to improve that return on that customer and that may involve some type of relocation of that customer.

Did I answer your question, David?


He’s no longer in the queue at this time.

George Kilguss


Andrew McBath

Okay. Thank you, operator. I think we’re ready to conclude the call.


And that concludes today’s conference. Thank you for your participation.

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