INAP Reports Second Quarter 2017 Financial Results - 03.08.17 - News

ATLANTA, Aug. 3, 2017

"Second quarter 2017 represents a turning point for INAP," stated Peter D. Aquino, President and CEO of INAP. "Our top-line initiatives and focus are driving new sales, while we continue to rationalize our portfolio of datacenter assets. Our new sales team is building momentum, landing certain large deals that can anchor major markets. Adjusted EBITDA margin also continued to expand, hitting a high of 33%, as both our business units' contribution margins crossed above 40%. With today's reporting, we are debuting INAP's new identity as a strong, emerging retail COLO provider that can bundle Cloud and Network connectivity with a redefined data center portfolio in 20 major markets. Our effort to continue to optimize our datacenter portfolio and strive for profitable growth, we believe, will position us well for 2018."

Revenue

Revenue totaled $69.6 million in the second quarter, a decrease of 6.3% year-over-year and 3.5% sequentially. However, approximately $1 million of the decline, included both the planned closure of our 75 Broad Street, New York facility representing $500k and other one-time events. Excluding these two events, sequential revenue decline was 2.1% and year over year was 4.9%. The balance of the year-over-year decrease was attributable to the decline in network services in part due to market pricing trends and churn which was lower than previous quarter. The declines were partially offset year over year by growth in Agile bare metal server revenue.
INAP COLO revenue totaled $52.0 million in the second quarter, a decrease of 6.8% year-over-year and 2.4% sequentially. However, approximately $800k of the decline was attributed to the events above. Excluding these events, sequential revenue was down less than 1% and year over year approximately 5.3%. The balance of the decrease year over was attributable to lower network services in part due to market pricing trends and churn, which was lower than prior quarter.
INAP CLOUD revenue totaled $17.6 million in the second quarter, a decrease of 4.8% year-over-year and 6.4% sequentially. The decrease was driven by churn from a small number of large customers and the impact of the planned closure of the New York location. This was partially offset on a year-over-year basis by growth in Agile Bare-Metal server revenue.

Second Quarter 2017 Financial Summary

($ in thousands)

YoY

ARIVA.DE Börsen-Geflüster

Kurse

Internap

-

0,00%

QoQ

2Q 2017

1Q 2017

2Q 2016

Growth

Total Revenue

$ 69,642

$ 72,133

$ 74,315

-6.3%

-3.5%

Operating Costs and Expenses

$ 71,695

$ 71,641

$ 76,789

-6.6%

0.1%

Depreciation and Amortization

$ 18,934

$ 17,745

$ 19,217

-1.5%

6.7%

Exit activities, restructuring and impairments

$ 4,628

$ 1,023

$ 152

2944.7%

352.4%

All Other Operating Costs and Expenses

$ 48,133

$ 52,873

$ 57,420

-16.2%

-9%

GAAP Net Loss

$ (19,283)

$ (8,230)

$ (10,693)

80.3%

134.3%

GAAP Net Loss Margin

-27.7%

-11.4%

-14.4%

-1,330 BPS

-1,630 BPS

Minus goodwill impairment and other items*

$ 13,378

$ 4,161

$ 5,109

161.9%

221.5%

Normalized Net Loss²

$ (5,905)

$ (4,069)

$ (5,584)

5.7%

45.1%

Adjusted EBITDA¹

$ 23,051

$ 21,554

$ 20,167

14.3%

6.9%

Adjusted EBITDA Margin¹

33.1%

29.9%

27.1%

600 BPS

320 BPS

Capital Expenditures (CapEx)

$ 6,748

$ 5,989

$ 14,402

-53.1%

12.7%

Adjusted EBITDA less CapEx¹

$ 16,303

$ 15,565

$ 5,765

182.8%

4.7%

Beginning with first quarter 2017 reporting, INAP redefined its segment reporting into two pure play business units:

INAP COLO, formerly Data Center and Networking Services, comprised of colo, IP network services, and managed hosting. Managed hosting was previously included in the Cloud and Hosting Services segment; and
INAP CLOUD, formerly Cloud and Hosting Services, comprised of AgileCLOUD, iWeb, Ubersmith and Funio.

Net Loss, Normalized Net Loss, Adjusted EBITDA and Business Unit Contribution

GAAP net loss was $(19.3) million, or $(0.24) per share, including $4.6 million of costs associated with exit activities, restructuring and impairment and $7.1 million of debt extinguishment and modification expenses, compared with $(10.7) million, or $(0.21) per share in the second quarter of 2016 and $(8.2) million, or $(0.13) per share in the first quarter of 2017, including $7.1 million of costs associated with exit activities, restructuring and impairment in the first quarter of 2017. GAAP net loss margin was –27.7% in the second quarter of 2017.
Normalized net loss was $(5.9) million compared with $(5.6) million in the second quarter of 2016 and $(4.1) million in the first quarter of 2017.
Adjusted EBITDA totaled $23.1 million in the second quarter, an increase of 14.3% compared with the second quarter of 2016 and 6.9% compared to the first quarter of 2017. Adjusted EBITDA margin was 33.1% in the second quarter, up 600 basis points year-over-year and 320 basis points sequentially. The increases in Adjusted EBITDA were attributable to continued focus on cost control and our initiatives of eliminating unproductive sites and investing in long-term key markets.
Business Unit Contribution³ – As part of the realignment of its segments into two pure play business units, INAP COLO and INAP CLOUD, INAP is providing a measure of unit-level profitability called business unit contribution³.

INAP COLO business unit contribution totaled $22.0 million in the second quarter, a 10% increase compared with the second quarter of 2016 and a 10.3% increase from the first quarter of 2017. As a percent of revenue, INAP COLO business unit contribution margin was 42.2% in the second quarter, up 640 basis points year-over-year and 480 basis points sequentially. The year-over-year business unit contribution increase reflects improving cost control. The sequential business unit contribution increase was primarily driven by cost control and our initiatives of eliminating unproductive sites and investing in long-term key markets.
INAP CLOUD business unit contribution totaled $8.1 million in the second quarter, a 1.8% increase compared with the second quarter of 2016 and a 14% decrease from the first quarter of 2017. As a percent of revenue, INAP CLOUD business unit contribution margin was 46.0% in the second quarter, up 300 basis points year-over-year and down 410 basis points sequentially. The year-over-year increase reflects improving cost control. The sequential decrease reflects the decline in revenue and the closure of the 75 Broad location.

Balance Sheet and Cash Flow Statement

Cash and cash equivalents totaled $17.5 million at June 30, 2017. Total debt was $486.8 million, net of discount and prepaid costs, at the end of the quarter, including $197.6 million in capital lease obligations. As previously reported, on April 6, 2017 INAP entered into a new Senior Secured Credit Facility, including a $300 million First Lien Term Loan and a $25 million Revolver (which remains undrawn), thereby completing the refinancing of its senior secured debt. The capital lease balance reflects INAP's conversion of certain operating leases to capital leases as part of its strategic growth investments. $134.7 million of our capital lease obligations are excluded from debt for bank covenant purposes as they were operating leases at the time of the refinancing.
Cash generated from operations for the three months ended June 30, 2017 was $14.8 million compared to $14.0 million in second quarter 2016 and $7.3 million in first quarter of 2017. Capital expenditures over the same periods were $6.8 million compared to $14.4 million and $6.0 million, respectively. Adjusted EBITDA less CapEx was $16.3 million compared to $5.8 million in second quarter 2016 and $15.6 million in first quarter 2017. Free cash flow⁴ over the same periods was $8.1 million compared to less than $(1) million and $1.3 million, respectively. Unlevered free cash flow⁴ was $15.6 million for the second quarter 2017 compared to $7.4 million in second quarter 2016 and $8.6 million in first quarter 2017.

"In the second quarter of 2017, we continued to drive improvements in operating performance while expanding our operating leverage both through cost reductions and our initiatives to eliminate unproductive sites and invest in long-term key markets," said Robert M. Dennerlein, Chief Financial Officer of INAP. "We are deep into Phases II and III of our data center footprint evaluation and network cost optimization and are closely managing the ROI of our remaining CapEx program, which has enabled us to revise Capex guidance downward for the year. These efforts are designed to improve run rate profitability, increase our asset utilization, and establish a baseline for future growth."

Business Outlook

Full-Year 2017 Expected Range

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