IIP InterNAP Network Services

Internap Network Services Corporation (AMEX: IIP) -- Record Revenues of $42.6 Million for Q1 2006 -- Record Net Income (GAAP) of $0.5 Million for Q1 2006 (including stock-based compensation expense of $1.5 million) compared with a Net Loss (GAAP) of $(0.6 million) for Q1 2005 (not including stock-based compensation expense) -- Q1 2006 Cash Flow from Operations of $5.5 million compared with negative Cash Flow from Operations of $(1.7 million) for Q1 2005 -- Record Adjusted EBITDA of $5.8 million for Q1 2006 Internap Network Services Corporation (AMEX: IIP), a leading provider of performance-based routing services for IP networks, today reported financial results for the first quarter ended March 31, 2006. For the first quarter of 2006, revenues totaled $42.6 million, an increase of 12.6% compared to the first quarter of 2005. Net income for the first quarter of 2006, on a generally accepted accounting principles (GAAP) basis, was $0.5 million, or $0.00 per diluted share, which includes a charge for non-cash stock-based compensation expense of $1.5 million, or $0.00 per diluted share, pursuant to the adoption of SFAS No. 123R in the first quarter, compared to a net loss on a GAAP basis for the first quarter of 2005 of $(0.6 million), or $(0.00) per basic and diluted share, which does not include the effect of stock-based compensation expense. Net income prior to 2006 did not include comparable stock-based compensation. Had the Company accounted for stock-based compensation under SFAS 123 in prior periods it would have reported a normalized net loss(1) and normalized net loss per share for the first quarter of 2005 of $(3.2 million) and $(0.01), respectively. Pro-forma net income(1) for the first quarter of 2006 was $2.0 million, or $0.01 per diluted share, which excludes stock-based compensation expense of $1.5 million, or $0.00 per diluted share. For comparative purposes to the fourth quarter of 2005, pro forma net income(1) for the first quarter of 2006 was $2.0 million and $0.01 pro forma net income per diluted share(1) versus a net loss on a GAAP basis of $(0.2 million) and $(0.00) per basic and diluted share for the fourth quarter of 2005. Gross margin (defined as revenues of $42.6 million less $22.2 million of direct cost of network, excluding depreciation and amortization, divided by revenues) for the first quarter of 2006 was 48%. The Company reported Adjusted EBITDA(1) of $5.8 million for the first quarter, an improvement of $2.0 million from the fourth quarter of 2005 and an improvement of $2.8 million over Q1 2005. The Company also reported cash, cash equivalents and investments in marketable securities at March 31, 2006 of $44.4 million, an increase of $3.9 million from the end of the fourth quarter 2005. "Internap started 2006 with strong results by delivering quarterly year-over-year, double-digit revenue growth, as well as $0.5 million of net income and $2.0 million of pro forma net income in the first quarter," said James DeBlasio, chief executive officer, Internap. "Our focus on managing costs and driving an increasing percentage of every incremental dollar of new revenue to the bottom line is evidenced by our reported positive net income and increasing cash position in the first quarter." Internap ended the quarter with 2,142 customers under contract, adding 50 new customers in the first quarter on a net basis. 2006 Full Year Guidance -- Full year revenue growth over 2005 revenues is expected to be between 10-12%, up from earlier guidance of 5-7% -- Gross margins are expected to be in the mid-to-high 40%'s range -- Capital expenditures are expected in the range $12 million to $14 million, up from earlier guidance of $10 million to $12 million. -- Adjusted EBITDA(1) is expected to range between $18 million to $22 million, up from earlier guidance of $16 - $19 million. Conference Call Information: Internap's first quarter teleconference will be held today beginning at 5:00 p.m. EDT. The dial-in numbers are 866.202.0886; pass code 86358891 for domestic callers, and 617.213.8841; pass code 86358891 for international participants. The simultaneous web cast will be available from the Investor Relations section of the web site at: www.internap.com. Internap will provide a replay of the teleconference on its website. A replay will be available from May 4th through May 11th at 888.286.8010; replay code 91895636 and international dial-in at 617.801.6888; replay code 91895636. A reconciliation between GAAP information and non-GAAP information contained in this press release is provided in the tables below entitled, "Reconciliation of Net Income (Loss) to EBITDA and Net Cash Provided By (Used In) Operating Activities," "Reconciliation of Net Income (Loss) to Adjusted EBITDA and Net Cash Provided by (Used In) Operating Activities," "Reconciliation of Net Income (Loss) and Diluted Net Income (Loss) Per Share to Normalized Net Income (Loss) and Diluted Net Income (Loss) Per Share, Including the Effect of Stock-Based Compensation," and "Reconciliation of Net Income (Loss) and Diluted Net Income (Loss) Per Share to Pro Forma Net Income (Loss) and Diluted Net Income (Loss) Per Share, Excluding the Effect of Stock-Based Compensation Expense." This information is also available on our Web Site under the Investor Relations heading. (1)See "Use of Non-GAAP Financial Measures" below for definitions. A reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures is attached to this release and commences at the bottom of our condensed consolidated financial statements. About Internap Internap is a market leader of intelligent route-control solutions that bring reliability, performance and security to the Internet. The company's patented and patent-pending technologies address the inherent weaknesses of the Internet, enabling enterprises to take full advantage of the benefits of deploying business-critical applications such as e-commerce, Voice-over-IP (VoIP), video-conferencing, and streaming audio/video across the Internet. Through a portfolio of high-performance IP solutions, customers can bypass congestion points, overcome routing inefficiencies and optimize performance of their applications. Internap solutions are backed by an industry-leading performance guarantee that covers the Internet as opposed to just one network. These offerings include: network- and premise-based route optimization solutions, colocation, VPN, content distribution and managed security services. Internap currently serves more than 2,000 customers, including Fortune 1000 and mid-tier enterprises in the financial services, government, travel/hospitality, manufacturing, media/entertainment, technology and retail industries. The company provides services throughout North America, Europe, Asia and Australia. For more information, please visit the company website at www.internap.com. Internap "Safe Harbor" Statement Certain information included in this press release constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, including, among others, statements regarding our future financial position, business strategy, projected levels of growth, projected costs and projected financing needs, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Internap and members of our management team, as well as the assumptions on which such statements are based, and equally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "projects," "forecasts," "plans," "intends," "should" or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by forward-looking statements. Our reported GAAP-based results are negatively affected by the implementation of new accounting rules related to the expensing of stock options, commencing in 2006. Other important factors that may affect Internap's business, results of operations and financial condition include, but are not limited to, our ability to sustain profitability; our ability to compete against existing and future competitors; pricing pressures; our ability to respond successfully to the evolution of the high performance Internet connectivity and services industry; our ability to respond successfully to technological change; our ability to deploy new access points in a cost-efficient manner; the availability of services from Internet network service providers or network service providers providing network access loops and local loops on favorable terms or at all; failure of third party suppliers to deliver their products and services on favorable terms or at all; failures in our network operations centers, network access points or computer systems; fluctuations in our operating results; our ability to secure adequate funding; the incurrence of additional restructuring charges; our ability to operate in light of restrictions in our credit facility, including our ability to maintain ratios set forth in the credit facility; our ability to attract and retain qualified personnel; our ability to protect ourselves and our customers from security breaches; our ability to protect our intellectual property; our ability to successfully complete future acquisitions; risks associated with international operations; claims relating to intellectual property rights; government regulation of the Internet; the dilutive effects of our stock price due to outstanding stock options and warrants; future sales of stock; effects of natural disasters or terrorist activity; and volatility of our stock price. Our Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K and other Securities and Exchange Commission filings discuss the foregoing risks as well as other important risk factors that could contribute to such differences or otherwise affect our business, results of operations and financial condition. The forward-looking statements in this release and the related conference call for analysts and investors speak only as of the date they are made. We undertake no obligation to revise or update publicly any forward-looking statement for any reason. Internap is a trademark of Internap. All other trademarks and brands are the property of their respective owners. -0- *T INTERNAP NETWORK SERVICES CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) For the three months ended March 31, -------------------------- 2006 2005 -------------------------- Revenue $ 42,625 $ 37,855 -------------------------- Costs and expense: Direct cost of revenue, exclusive of depreciation and amortization, shown below 22,217 19,887 Customer support(a) 2,897 2,662 Product development(a) 1,225 1,445 Sales and marketing(a) 6,970 6,326 General and administrative(a) 5,190 4,490 Depreciation and amortization 3,932 3,496 Loss on disposals of property and equipment 2 6 -------------------------- Total operating costs and expense 42,433 38,312 -------------------------- Income (loss) from operations 192 (457) -------------------------- Non-operating (income) expense: Interest expense 251 374 Interest income (424) (275) Other, net (176) 14 -------------------------- Total non-operating (income) expense (349) 113 -------------------------- -------------------------- Net income (loss) $ 541 $ (570) ========================== Basic net income (loss) per share $ 0.00 $ (0.00) ========================== Diluted net income (loss) per share $ 0.00 $ (0.00) ========================== Weighted average shares used in computing basic net income (loss) per share 342,928 338,199 ========================== Weighted average shares used in computing diluted net income (loss) per share 344,567 338,199 ========================== *T -0- *T (a)Includes the following amounts related to equity awards: Customer support $ 378 $ -- Product development 159 -- Sales and marketing 585 -- General and administrative 385 -- ---------------------- Total $ 1,507 $ -- ====================== *T -0- *T INTERNAP NETWORK SERVICES CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) March 31, December 31, 2006 2005 -------------------------- ASSETS Current assets: Cash and cash equivalents $ 30,007 $ 24,434 Short-term investments in marketable securities 14,402 16,060 Accounts receivable, net of allowance of $711 and $963, respectively 17,148 19,128 Inventory 610 779 Prepaid expenses and other assets 4,048 2,957 -------------------------- Total current assets 66,215 63,358 Property and equipment, net of accumulated depreciation of $145,910 and $143,687, respectively 47,674 50,072 Investments 2,068 1,999 Intangible assets, net of accumulated amortization of $18,245 and $18,100, respectively 2,185 2,329 Goodwill 36,314 36,314 Deposits and other assets 1,134 1,297 -------------------------- $ 155,590 $ 155,369 ========================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable, current portion $ 4,375 $ 4,375 Accounts payable 4,396 5,766 Accrued liabilities 6,370 7,267 Deferred revenue, current portion 2,544 2,737 Capital lease obligations, current portion 571 559 Restructuring liability, current portion 1,246 1,202 -------------------------- Total current liabilities 19,502 21,906 Notes payable, less current portion 6,563 7,656 Deferred revenue, less current portion 607 533 Capital lease obligations, less current portion 100 247 Restructuring liability, less current portion 4,687 5,075 Deferred rent 10,301 9,185 Other long-term liabilities 1,058 1,039 -------------------------- Total liabilities 42,818 45,641 -------------------------- Commitments and contingencies Stockholders' equity: Series A convertible preferred stock, $0.001 par value, 3,500 shares designated, no shares issued or outstanding -- -- Common stock, $0.001 par value, 600,000 shares authorized, 343,999 and 341,677 shares issued and outstanding, respectively 344 342 Additional paid-in capital 971,908 969,493 Accumulated deficit (859,571) (860,112) Accumulated items of other comprehensive income 91 5 ------------- ----------- Total stockholders' equity 112,772 109,728 -------------------------- $ 155,590 $ 155,369 ========================== *T -0- *T INTERNAP NETWORK SERVICES CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three months ended March 31, ------------------------ 2006 2005 ------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 541 $ (570) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,932 3,496 Loss on disposal of assets 2 -- Provision for doubtful accounts (23) 363 (Income) loss from equity method investment (47) 16 Non-cash changes in deferred rent 1,116 470 Stock-based compensation expense 1,507 -- Other, net -- (48) Changes in operating assets and liabilities: Accounts receivable 2,002 (22) Inventory 169 75 Prepaid expenses, deposits and other assets (928) (81) Accounts payable (1,369) (4,389) Accrued liabilities (897) (427) Deferred revenue (120) 36 Accrued restructuring charge (344) (620) ------------------------ Net cash provided by (used in) operating activities 5,541 (1,701) ------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (1,391) (2,958) Purchases of investments in marketable securities (2,996) -- Maturities of marketable securities 4,704 1,815 Proceeds from disposal of property and equipment 15 -- Other, net -- (52) ------------------------ Net cash used in (provided by) investing activities 332 (1,195) ------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on notes payable (1,094) (1,729) Payments on capital lease obligations (135) (124) Proceeds from exercise of stock options, employee stock purchase plan, and exercise of warrants 910 99 Other, net 19 -- ------------------------ Net cash used in financing activities (300) (1,754) ------------------------ Net increase (decrease) in cash and cash equivalents 5,573 (4,650) Cash and cash equivalents at beginning of period 24,434 33,823 ------------------------ Cash and cash equivalents at end of period $ 30,007 $ 29,173 ======================== NON-CASH INVESTING AND FINANCING TRANSACTIONS Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized $ 229 $ 358 Non-cash acquisition of fixed assets -- 971 Changes in accounts payable attributable to purchases of property and equipment -- (1,306) *T Use of Non-GAAP Financial Measures In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), Internap has historically provided additional financial metrics that are not prepared in accordance with GAAP (non-GAAP). Recent legislative and regulatory changes discourage the use of and emphasis on non-GAAP financial metrics and require companies to explain why non-GAAP financial metrics are relevant to management and investors. We believe that the inclusion of these non-GAAP financial measures helps investors to gain a more meaningful understanding of our future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts. Our management uses these non-GAAP measures, in addition to GAAP financial measures, as the basis for measuring our core operating performance and comparing such performance to that of prior periods and to the performance of our competitors. This measure is also used by management in their financial and operating decision-making. Internap defines "normalized net income (loss)" and the comparable per share calculation as net income (loss) including pro forma stock-based compensation in periods prior to the adoption of SFAS No. 123R on January 1, 2006. Internap defines "pro forma net income (loss)" and the comparable per share calculation as net income (loss) excluding stock-based compensation in periods subsequent to the adoption of SFAS No. 123R on January 1, 2006. Internap considers normalized and pro forma net income (loss) and the comparable per share calculations to be important factors in comparing operating results before and after our adoption of SFAS No. 123R. Internap defines "Adjusted EBITDA" as net income, before interest, taxes, depreciation and amortization, excluding stock-based compensation expense. Internap considers Adjusted EBITDA to be an important indicator of the company's operational strength and performance of its business and a good measure of the company's historical operating trends. Adjusted EBITDA eliminates items that are not part of the company's core operations, such as net interest, and excludes depreciation and amortization expense, which is based on the Company's estimate of the useful life of tangible and intangible assets. These estimates could vary from actual performance of the asset, are based on historic cost incurred to build out the company's deployed network and may not be indicative of current or future capital expenditures. Normalized and pro forma net income (loss), the comparable per share calculations and Adjusted EBITDA should be considered in addition to, not as a substitute for, the company's net income, as well as other measures of financial performance reported in accordance with GAAP. Internap does not provide forward-looking guidance for certain financial data, such as depreciation, amortization, stock-based compensation, net income (loss) from operations, interest income, cash generated from operating activities and cash used in investing activities, and as a result, is not able to provide a reconciliation of GAAP to non-GAAP financial measures for forward-looking data. Internap intends to calculate the various non-GAAP financial measures in future periods consistent with how it was calculated for the three months ended March 31, 2006 and December 31, 2005 and year ended December 31, 2005, presented within this press release. Reconciliation of Non-GAAP Financial Measures In accordance with the requirements of Regulation G issued by the Securities and Exchange Commission, the company is presenting the most comparable GAAP financial measures and reconciling the non-GAAP financial measures to such comparable GAAP measures. -0- *T INTERNAP NETWORK SERVICES CORPORATION RECONCILIATION OF NET INCOME (LOSS) TO EBITDA AND NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (Unaudited, in thousands) Three Months Ended ------------------------ March 31, December 31, 2006 2005 ------------------------ Revenue $ 42,625 $ 40,292 ------------------------ Direct cost of revenue, excluding depreciation and amortization 22,217 21,774 Customer support(a) 2,897 2,531 Product development(a) 1,225 910 Sales and marketing(a) 6,970 6,311 General and administrative(a) 5,190 5,035 Depreciation and amortization 3,932 4,035 Restructuring costs -- 8 Loss (gain) on sale of equipment 2 (15) ------------------------ Income (loss) from operations 192 (297) Non-operating income, net (349) (120) ------------------------ Net income (loss) $ 541 $ (177) ======================== EBITDA reconciliation: Net income (loss) $ 541 $ (177) Depreciation and amortization 3,932 4,035 Income taxes -- -- Interest income, net (173) (97) ------------------------ EBITDA 4,300 3,761 Interest income, net 173 97 Provision for doubtful accounts (23) 420 Non-cash changes in deferred rent 1,116 651 Stock-based compensation expense 1,507 60 Lease incentive -- 713 Other non-cash adjustments (45) (73) Changes in operating assets and liabilities: Accounts receivable 2,002 (2,446) Inventory, prepaid expenses, deposits and other assets (759) 49 Accounts payable, accrued liabilities, deferred revenue and accrued restructuring charges (2,730) (1,754) ------------------------ Net cash provided by operating activities $ 5,541 $ 1,478 ======================== *T -0- *T (a)Includes the following amounts related to equity awards: Customer support $ 378 $ -- Product development 159 -- Sales and marketing 585 -- General and administrative 385 60 ------------------------ Total $ 1,507 $ 60 ======================== *T -0- *T INTERNAP NETWORK SERVICES CORPORATION RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA AND NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (Unaudited, in thousands) Three Months Ended -------------------------------- March 31, December 31, March 31, 2006 2005 2005 -------------------------------- Revenue $ 42,625 $ 40,292 $ 37,855 ------------------------------ Direct cost of revenue, excluding depreciation and amortization 22,217 21,774 19,887 Customer support(a) 2,897 2,531 2,662 Product development(a) 1,225 910 1,445 Sales and marketing(a) 6,970 6,311 6,326 General and administrative(a) 5,190 5,035 4,490 Depreciation and amortization 3,932 4,035 3,496 Restructuring costs -- 8 -- Loss (gain) on sale of equipment 2 (15) 6 ------------------------------ Income (loss) from operations 192 (297) (457) Non-operating (income) expense, net (349) (120) 113 ------------------------------ Net income (loss) $ 541 $ (177) $ (570) ============================== Adjusted EBITDA reconciliation: Net income (loss) $ 541 $ (177) $ (570) Depreciation and amortization 3,932 4,035 3,496 Income taxes -- -- -- Interest (income) expense, net (173) (97) 99 Stock-based compensation expense 1,507 60 -- ------------------------------ Adjusted EBITDA 5,807 3,821 3,025 Interest income (expense), net 173 97 (99) Provision for doubtful accounts (23) 420 363 Non-cash changes in deferred rent 1,116 651 470 Lease incentive -- 713 -- Other non-cash adjustments (45) (73) (32) Changes in operating assets and liabilities: Accounts receivable 2,002 (2,446) (22) Inventory, prepaid expenses, deposits and other assets (759) 49 (6) Accounts payable, accrued liabilities, deferred revenue and accrued restructuring charges (2,730) (1,754) (5,400) ------------------------------ Net cash provided by operating activities $ 5,541 $ 1,478 $ (1,701) ============================== *T -0- *T (a) Includes the following amounts related to equity awards: Customer support $ 378 $ -- $ -- Product development 159 -- -- Sales and marketing 585 -- -- General and administrative 385 60 -- ------------------------------ Total $ 1,507 $ 60 $ -- ============================== *T -0- *T INTERNAP NETWORK SERVICES CORPORATION RECONCILIATION OF NET INCOME (LOSS) AND DILUTED NET INCOME (LOSS) PER SHARE TO NORMALIZED NET INCOME (LOSS) AND DILUTED NET INCOME (LOSS) PER SHARE, INCLUDING THE EFFECT OF STOCK-BASED COMPENSATION (Unaudited, in thousands, except per share data) Three Months Ended ------------------- March 31, March 31, 2006 2005 ------------------- Net loss, as reported for prior periods(1) $ N/A $ (570) Stock-based compensation expense(2) 1,507 2,616 Normalized net income (loss) including the effect of stock-based compensation expense(3) 541 (3,186) Diluted net loss per share - reported for prior periods(1) N/A (0.00) Stock-based compensation expense, per share(2) (0.00) (0.01) Diluted normalized net income (loss) per share, including the effect of stock-based compensation expense(3) 0.00 (0.01) (1) Net loss and net loss per share prior to the first quarter of 2006 did not include an expense related to stock options under Statement of Financial Accounting Standards (SFAS) No. 123 as the recognition provisions of SFAS No. 123 were not adopted. (2) Equity-based compensation expense and equity-based compensation expense per share prior to the first quarter of 2006 is calculated based on the pro forma application of SFAS No. 123 as previously disclosed in the footnotes to Internap's financial statements. (3) Net loss and net loss per share prior to the first quarter of 2006 is based on the pro forma application of SFAS No. 123 as previously disclosed in the footnotes to Internap's financial statements. *T -0- *T INTERNAP NETWORK SERVICES CORPORATION RECONCILIATION OF NET INCOME (LOSS) AND DILUTED NET INCOME (LOSS) PER SHARE TO PRO FORMA NET INCOME (LOSS) AND DILUTED NET INCOME (LOSS) PER SHARE, EXCLUDING THE EFFECT OF STOCK-BASED COMPENSATION EXPENSE (Unaudited, in thousands, except per share data) Three Months Ended ---------------------- March 31, December 31, 2006 2005 ---------------------- GAAP net income (loss), as reported(1) $ 541 $ (177) Stock-based compensation expense 1,507 60 ---------------------- Pro forma net income (loss) $ 2,048 $ (117) ====================== GAAP basic and diluted net income (loss) per share $ 0.00 $ (0.00) Pro forma basic and diluted net income (loss) per share $ 0.01 $ (0.00) (1) Net loss and net loss per share prior to the first quarter of 2006 did not include an expense related to stock options under Statement of Financial Accounting Standards (SFAS) No. 123 as the recognition provisions of SFAS No. 123 were not adopted. *T