Internap Reports Third Quarter 2016 Financial Results

ATLANTA, Nov. 3, 2016

"I am very excited about INAP's presence in major U.S. and global markets with our impressive upper Tier colocation assets, high-capacity network capabilities and in-demand AgileCloud services led by our Montreal team," said Peter D. Aquino, President and Chief Executive Officer of Internap. "I believe focusing on our core strengths, reorganizing, cutting costs and aligning into pure-play businesses will position us in early 2017 to leverage these great platforms to significantly increase our sales productivity. In addition, we are simultaneously exploring strategies to improve our capital structure so we have the flexibility and runway to grow organically, participate in accretive strategic transactions, and to capture growing demand for premier products and services in the expanding internet infrastructure market."

Third Quarter 2016 Financial Summary

										YoY		QoQ
				3Q 2016 ARIVA.DE Börsen-Geflüster Kurse Internap -   0,00%		2Q 2016		3Q 2015		Growth		Growth
Revenues:
Data center and network services				$    49,767		$    50,459		$    52,440		-5%		-1%
Cloud and hosting Services				24,173		23,856		25,878		-7%		1%
Total Revenues				$    73,940		$    74,315		$    78,318		-6%		-1%
Operating Expenses				$  157,338		$    76,789		$    87,503		80%		105%
GAAP Net Loss				$  (91,297)		$  (10,693)		$   (14,197)		543%		754%
Normalized Net Loss2				$    (7,681)		$     (7,300)		$     (9,990)		-23%		5%
Segment Profit3				$    42,378		$    42,945		$    44,637		-5%		-1%
Segment Profit Margin3				57.3%		57.8%		57.0%		30 BPS		-50 BPS
Adjusted EBITDA1				$    19,840		$    20,167		$    19,752		0%		-2%
Adjusted EBITDA Margin1				26.8%		27.1%		25.2%		160 BPS		-30 BPS

Revenue

• Revenue totaled $73.9 million in the third quarter, a decrease of 6% year-over-year and 1% sequentially. Both decreases were attributable to lower IP connectivity revenue and negatively impacted by churn from a small number of large customers.
• Data Center and Network Services revenue totaled $49.8 million in the third quarter, a decrease of 5% year-over-year and 1% sequentially. Both decreases were primarily attributable to lower IP connectivity revenue related to the continued decline in pricing for new and renewing customers, the loss of legacy contracts and churn from one customer. The year-over-year results were also impacted by a decrease in partner colocation revenue offset by an increase in company-controlled colocation revenue.
• Cloud and Hosting Services revenue totaled $24.2 million in the third quarter, a decrease of 7% year-over-year and an increase of 1% sequentially. The year-over year decrease was driven by the continued negative impact of churn from a small number of large customers slightly offset by Agile bare metal server revenue growth. The sequential increase was driven by growth in Agile bare-metal server revenue.

Goodwill Impairment Charge

The company began its annual goodwill impairment test during the third quarter of 2016. Due to the complexity and the effort required to estimate the required fair values of certain reporting units, we recorded an impairment estimate of $78.2 million to adjust goodwill in our Data Center and Networks Services segment to an implied fair value of $1.9 million. We derived the fair value estimate based on preliminary assumptions and analysis that are subject to change. We will record any adjustment to the estimated impairment in the fourth quarter of 2016.

Net Loss

• GAAP net loss was $(91.3) million, or $(1.75) per share, compared with $(14.2) million, or $(0.27) per share, in the third quarter of 2015 and $(10.7) million, or $(0.21) per share, in the second quarter of 2016. The GAAP net loss for third quarter 2016 includes a $78.2 million goodwill impairment charge.
• Normalized net loss was $(7.7) million, or $(0.15) per share, compared with normalized net loss of $(10.0) million, or $(0.19) per share, in the third quarter of 2015, and normalized net loss of $(7.3) million, or $(0.14) per share, in the second quarter of 2016.

Segment Profit and Adjusted EBITDA

• Segment profit totaled $42.4 million in the third quarter, a 5% decrease compared with the third quarter of 2015 and a 1% decrease from the second quarter of 2016. Segment margin was 57.3%, an increase of 30 basis points year-over-year and a decrease of 50 basis points sequentially.
• Data Center and Network Services segment profit totaled $24.7 million in the third quarter, a 4% decrease compared with the third quarter of 2015 and a 4% decrease from the second quarter of 2016. Data Center and Network Services segment margin was 49.7% in the third quarter, up 70 basis points year-over-year and down 140 basis points sequentially. Lower IP connectivity revenue was the main contributor to lower segment profit.
• Cloud and Hosting Services segment profit totaled $17.7 million in the third quarter, a 7% decrease compared with the third quarter of 2015 and a 3% increase from the second quarter of 2016. Cloud and Hosting Services segment margin was 73.0% in the third quarter, down 20 basis points year-over-year and up 120 basis points sequentially. The year-over year decrease in Cloud and Hosting Services revenue resulted in declines in segment profit and segment margin. The sequential increase was driven by revenue growth and continued cost management.
• Adjusted EBITDA totaled $19.8 million in the third quarter, flat compared with the third quarter of 2015 and a 2% decrease from the second quarter of 2016. Adjusted EBITDA margin was 26.8% in the third quarter, up 160 basis points year-over-year and down 30 basis points sequentially. The year-over-year increase in adjusted EBITDA and adjusted EBITDA margin was attributable to lower cash operating expense (see attached reconciliation tables) primarily from optimizing our cost structure and improved marketing program efficiencies. Benefits included a decrease in cash-based compensation and a decrease in marketing expenses. Sequentially, lower segment profit weighed on adjusted EBITDA.

Balance Sheet and Cash Flow Statement

• Cash and cash equivalents totaled $9.6 million at September 30, 2016. Total debt was $375.1 million, net of discount and prepaid costs, at the end of the quarter, including $55.2 million in capital lease obligations.
• Cash generated from operations for the three months ended September 30, 2016 was $11.5 million. Capital expenditures over the same period were $12.9 million. Free cash flow⁴ was ($1.3) million and unlevered free cash flow⁴ was $6.2 million for the third quarter 2016.

Business Outlook

Internap updated its financial outlook for full-year 2016:

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