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Internap Reports Second Quarter 2014 Financial Results

Companies mentioned in this article: Internap Network Services Corporation

ATLANTA, July 29, 2014 /PRNewswire/ -- Internap Network Services Corporation (NASDAQ: INAP), a provider of high-performance Internet infrastructure services, today announced financial results for the second quarter of 2014.

"We delivered solid financial results for the second quarter of 2014 driven by strong growth in our core data center services business. The continued execution of our strategy to provide high-performance hybrid Internet infrastructure services is reflected in the revenue growth, segment margin expansion and record adjusted EBITDA margin for the quarter," said Eric Cooney, President and Chief Executive Officer of Internap. "With greater clarity on the future New York data center migration and IP services segment margin, we move into the second half of 2014 with a simplified focus to leverage our performance-based differentiation in support of long-term profitable growth and stockholder value creation."

Second Quarter 2014 Financial Summary



                                                                                                                                   YoY                   QoQ

                                                  2Q 2014                   2Q 2013                   1Q 2014                    Growth                Growth
                                                  -------                   -------                   -------                    ------                ------

    Revenues:

                            Data center
                            services      $61,395                   $45,580                   $58,283                     35%                    5%

                           IP services     22,673                    24,403                    23,678                     -7%                   -4%
                           -----------

                           Total Revenues $84,068                   $69,983                   $81,961                     20%                    3%


    Operating Expenses                                      $88,582                   $71,082                     $86,498                   25%                  2%


    GAAP Net Loss                                         $(11,185)                 $(3,702)                  $(10,675)                 202%                  5%


    Normalized Net Loss(2)                                 $(7,668)                 $(1,278)                   $(7,265)                 500%                  6%


    Segment Profit(1)                                       $47,506                   $37,330                     $46,201                   27%                  3%

    Segment Profit Margin                                     56.5%                    53.3%                      56.4%       320 BPS               10 BPS


    Adjusted EBITDA                                         $18,503                   $14,067                     $17,799                   32%                  4%

    Adjusted EBITDA Margin                                    22.0%                    20.1%                      21.7%       190 BPS               30 BPS

Revenue

    --  Revenue totaled $84.1 million in the second quarter, an increase of 20%
        year-over-year and 3% sequentially. The increase in revenue was due to
        growth in our data center services segment, which includes $11.5 million
        of revenue attributable to iWeb, which we acquired in November 2013.
    --  Data center services revenue totaled $61.4 million in the second
        quarter, an increase of 35% year-over-year and 5% sequentially. Both
        increases were attributable to increased sales of core data center
        services including iWeb.
    --  IP services revenue totaled $22.7 million in the second quarter, a
        decrease of 7% year-over-year and 4% sequentially. Both decreases were
        driven by per unit price declines in IP and the loss of legacy contracts
        at higher effective prices, partially offset by an increase in overall
        traffic.

Net Loss

    --  GAAP net loss was $(11.2) million, or $(0.22) per share, compared with
        $(3.7) million, or $(0.07) per share, in the second quarter of 2013 and
        $(10.7) million, or $(0.21) per share, in the first quarter of 2014.
    --  Normalized net loss was $(7.7) million, or $(0.15) per share, compared
        with normalized net loss of $(1.3) million, or $(0.03) per share, in the
        second quarter of 2013, and normalized net loss of $(7.3) million, or
        $(0.14) per share, in the first quarter of 2014.

Segment Profit and Adjusted EBITDA

    --  Segment profit totaled $47.5 million in the second quarter, a 27%
        increase compared with the second quarter of 2013 and a 3% increase from
        the first quarter of 2014. Segment margin was 56.5%, an increase of 320
        basis points year-over-year and 10 basis points sequentially.
    --  Data center services segment profit totaled $34.8 million in the second
        quarter, a 52% increase compared with the second quarter of 2013 and an
        8% increase from the first quarter of 2014. Data center services segment
        margin was 56.7% in the second quarter, up 640 basis points
        year-over-year and 110 basis points sequentially. An increasing
        proportion of higher-margin services, specifically colocation sold in
        company-controlled data centers, hosting and cloud services and the
        contribution from iWeb drove data center services segment profit and
        margin higher.
    --  IP services segment profit totaled $12.7 million in the second quarter,
        a 12% decrease compared with the second quarter of 2013 and an 8%
        decrease from the first quarter of 2014. IP services segment margin was
        55.9% in the second quarter, down 310 basis points year-over-year and
        240 basis points sequentially. Lower IP transit revenue and the loss of
        legacy contracts led to a decrease in IP services segment profit and
        margin.
    --  Adjusted EBITDA totaled $18.5 million in the second quarter, a 32%
        increase compared with the second quarter of 2013 and a 4% increase from
        the first quarter of 2014. Adjusted EBITDA margin was 22.0% in the
        second quarter, up 190 basis points year-over-year and 30 basis points
        sequentially. Both the year-over-year and sequential increases in
        adjusted EBITDA and adjusted EBITDA margin were attributable to
        increased segment profit in our data center services segment, including
        iWeb.

Balance Sheet and Cash Flow Statement

    --  Cash and cash equivalents totaled $27.9 million at June 30, 2014. Total
        debt was $355.4 million, net of discount, at the end of the quarter,
        including $60.6 million in capital lease obligations.
    --  Cash generated from operations for the three months ended June 30, 2014
        was $11.1 million. Capital expenditures over the same period were $13.1
        million.

Recent Operational Highlights

Historical trends of key financial and operational metrics can be found in a supplementary data schedule on Internap's website at http://ir.internap.com/results.cfm.

    --  We expanded our bare-metal public cloud service to London and Hong Kong.
        Internap's expanded bare-metal cloud footprint - which includes existing
        locations in Amsterdam, Singapore, Dallas, New York Metro and Santa
        Clara, California - addresses growing demand for cloud services that can
        meet the high-performance requirements of globally distributed,
        real-time, data-intensive applications, like big data analytics, mobile
        and digital advertising and online gaming.
    --  Internap launched the general availability of our next-generation
        OpenStack powered public cloud, AgileCLOUD. It is a massively scalable,
        flexible and cost-efficient public cloud platform designed to meet the
        demands of large-scale, performance-intensive application environments.
    --  Internap's Atlanta data center recently received ENERGY STAR
        certification, a program run by the U.S. Environmental Protection Agency
        to identify ways in which energy efficiency can be measured, documented
        and implemented in data centers.
    --  We had approximately 12,000 customers at June 30, 2014.




            1     Segment margin and segment profit are
                  non-GAAP financial measures which we
                  define in an attachment to this press
                  release entitled "Non-GAAP (Adjusted)
                  Financial Measures." Reconciliations
                  between GAAP and non-GAAP information
                  related to segment profit and segment
                  margin are contained in the table
                  entitled "Segment Profit and Segment
                  Margin" in the attachment.


            2     Adjusted EBITDA, adjusted EBITDA margin
                  and normalized net loss are non-GAAP
                  financial measures which we define in
                  an attachment to this press release
                  entitled "Non-GAAP (Adjusted)
                  Financial Measures." Reconciliations
                  between GAAP information and non-GAAP
                  information related to adjusted EBITDA
                  and normalized net loss are contained
                  in the tables entitled "Reconciliation
                  of Loss from Operations to Adjusted
                  EBITDA," and "Reconciliation of Net
                  Loss and Basic and Diluted Net Loss
                  Per Share to Normalized Net Loss and
                  Basic and Diluted Normalized Net Loss
                  Per Share" in the attachment.

Conference Call Information:

Internap's second quarter 2014 conference call will be held today at 5:00 p.m. ET. Listeners may connect to a webcast of the call, which will include accompanying presentation slides, on the investor relations section of Internap's web site at http://ir.internap.com/events.cfm. The call can be also accessed by dialing 866-515-9839. International callers should dial 631-813-4875. An online archive of the webcast presentation will be available for one month following the call. An audio-only replay will be accessible from Tuesday, July 29, 2014 at 8 p.m. ET through Monday, August 4, 2014 at 855-859-2056 using replay code 72250083. International callers can listen to the archived event at 404-537-3406 with the same code.

About Internap

Internap is the high-performance Internet infrastructure provider that powers the applications shaping the way we live, work and play. Our hybrid infrastructure delivers performance without compromise - blending virtual and bare-metal cloud, hosting and colocation services across a global network of data centers, optimized from the application to the end user and backed by rock-solid customer support and a 100% uptime guarantee. Since 1996, the most innovative companies have relied on Internap to make their applications faster and more scalable. For more information, visit www.internap.com.

Forward-Looking Statements

This press release contains forward-looking statements. These forward-looking statements include statements related to our ability to drive long-term profitable growth and create stockholder value. Because such statements are not guarantees of future performance and involve risks and uncertainties, there are important factors that could cause Internap's actual results to differ materially from those in the forward-looking statements. These factors include our ability to execute on our business strategy; the robustness of the IT infrastructure services market; our ability to achieve or sustain profitability; our ability to expand margins and drive higher returns on investment; our ability to sell into new data center space; the actual performance of our IT infrastructure services; our ability to maintain current customers and obtain new ones, whether in a cost-effective manner or at all; our ability to correctly forecast capital needs, demand planning and space utilization; our ability to respond successfully to technological change and the resulting competition; 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, data centers, network access points or computer systems; our ability to provide or improve Internet infrastructure services to our customers; and our ability to protect our intellectual property, as well as other factors discussed in our filings with the Securities and Exchange Commission. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to update, amend or clarify any forward-looking statement for any reason.




    Press Contact:            Investor Contact:

    Mariah Torpey             Michael Nelson

    (781) 418-2404            (404) 302-9700

    internap@daviesmurphy.com ir@internap.com
    ------------------------- ---------------


                                                                                        INTERNAP NETWORK SERVICES CORPORATION

                                                                              UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                       (In thousands, except per share amounts)



                                                                                                                                    Three Months Ended June 30,           Six Months Ended June 30,
                                                                                                                                    ---------------------------           -------------------------

                                                                                                                                                2014                 2013                    2014          2013
                                                                                                                                                ----                 ----                    ----          ----

    Revenues:

       Data center services                                                                                                                  $61,395              $45,580                $119,678       $89,973

       Internet protocol (IP) services                                                                                                        22,673               24,403                  46,351        49,710
                                                                                                                                              ------               ------                  ------        ------

           Total revenues                                                                                                                     84,068               69,983                 166,029       139,683
                                                                                                                                              ------               ------                 -------       -------


    Operating costs and expenses:

       Direct costs of network, sales and services, exclusive of

          depreciation and amortization, shown below:

             Data center services                                                                                                             26,563               22,643                  52,454        45,290

             IP services                                                                                                                       9,999               10,010                  19,869        20,234

       Direct costs of customer support                                                                                                        9,553                7,372                  18,480        14,523

       Direct costs of amortization of acquired technologies                                                                                   1,551                1,190                   3,012         2,369

       Sales and marketing                                                                                                                     9,977                8,077                  20,080        15,561

       General and administrative                                                                                                             11,429                9,555                  22,826        19,242

       Depreciation and amortization                                                                                                          17,917               11,554                  35,382        21,811

       Loss (gain) on disposal of property and equipment, net                                                                                     32                  (2)                     32             -

       Exit activities, restructuring and impairments                                                                                          1,561                  683                   2,945           932
                                                                                                                                               -----                  ---                   -----           ---


    Total operating costs and expenses                                                                                                        88,582               71,082                 175,080       139,962
                                                                                                                                              ------               ------                 -------       -------


    Loss from operations                                                                                                                     (4,514)             (1,099)                (9,051)        (279)
                                                                                                                                              ------               ------                  ------          ----



    Non-operating expenses:

       Interest expense                                                                                                                        6,806                2,474                  13,297         4,895

       Other, net                                                                                                                                382                  479                     483           610
                                                                                                                                                 ---                  ---                     ---           ---

    Total non-operating expenses                                                                                                               7,188                2,953                  13,780         5,505
                                                                                                                                               -----                -----                  ------         -----


    Loss before income taxes and equity in (earnings) of

       equity-method investment                                                                                                             (11,702)             (4,052)               (22,831)      (5,784)

    Benefit for income taxes                                                                                                                   (437)               (288)                  (853)        (352)

    Equity in (earnings) of equity-method investment, net of taxes                                                                              (80)                (62)                  (117)         (87)
                                                                                                                                                 ---                  ---                    ----           ---


    Net loss                                                                                                                               $(11,185)            $(3,702)              $(21,861)     $(5,345)
                                                                                                                                            ========              =======                ========       =======


    Basic and diluted net loss per share                                                                                                     $(0.22)             $(0.07)                $(0.43)      $(0.10)
                                                                                                                                              ======               ======                  ======        ======


    Weighted average shares outstanding used in computing net loss per share:

        Basic and diluted                                                                                                                     51,045               50,856                  51,125        50,965
                                                                                                                                              ======               ======                  ======        ======


                                                       INTERNAP NETWORK SERVICES CORPORATION

                                                  UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                                                      (In thousands, except par value amounts)



                                                                    June 30,                      December 31,

                                                                                            2014                       2013
                                                                                            ----                       ----


                            ASSETS

    Current assets:

    Cash and cash equivalents                                                            $27,863                    $35,018

    Accounts receivable, net of allowance
     for doubtful accounts of $1,793 and
     $1,995, respectively                                                                 18,541                     23,927

    Deferred tax asset                                                                       472                        371

    Prepaid expenses and other assets                                                     15,467                     22,533
                                                                                          ------                     ------


    Total current assets                                                                  62,343                     81,849


    Property and equipment, net                                                          338,015                    331,963

    Investment in joint venture                                                            2,737                      2,602

    Intangible assets, net                                                                54,969                     57,699

    Goodwill                                                                             130,313                    130,387

    Deposits and other assets                                                              9,432                      7,999

    Deferred tax asset                                                                     1,629                      1,742
                                                                                           -----                      -----

    Total assets                                                                        $599,438                   $614,241
                                                                                        ========                   ========


             LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:

    Accounts payable                                                                     $24,711                    $29,774

    Accrued liabilities                                                                   13,054                     13,549

    Deferred revenues                                                                      7,959                      6,729

    Capital lease obligations                                                              6,195                      5,489

    Term loan, less discount of $1,424 and
     $1,387, respectively                                                                  1,576                      1,613

    Exit activities and restructuring
     liability                                                                             2,279                      2,286

    Other current liabilities                                                              2,428                      2,493
                                                                                           -----                      -----

    Total current liabilities                                                             58,202                     61,933


    Deferred revenues                                                                      3,847                      3,804

    Capital lease obligations                                                             54,409                     49,800

    Term loan, less discount of $7,290 and
     $8,006 respectively                                                                 288,210                    288,994

    Revolving credit facility                                                              5,000                          -

    Exit activities and restructuring
     liability                                                                             3,196                      1,877

    Deferred rent                                                                         11,778                     14,617

    Deferred tax liability                                                                 7,492                      8,591

    Other long-term liabilities                                                            2,784                      2,415
                                                                                           -----                      -----

    Total liabilities                                                                    434,918                    432,031
                                                                                         -------                    -------



    Commitments and contingencies

    Stockholders' equity:

    Preferred stock, $0.001 par value;
     20,000 shares authorized; no shares
     issued or outstanding

                                                                                               -                         -

    Common stock, $0.001 par value; 120,000
     shares authorized; 54,385 and 54,023
     shares outstanding, respectively

                                                                                              54                         54

    Additional paid-in capital                                                         1,258,072                  1,253,106

    Treasury stock, at cost; 552 and 461
     shares, respectively                                                                (4,159)                   (3,474)

    Accumulated deficit                                                              (1,087,881)               (1,066,020)

    Accumulated items of other
     comprehensive loss                                                                  (1,566)                   (1,456)
                                                                                          ------                     ------

    Total stockholders' equity                                                           164,520                    182,210
                                                                                         -------                    -------

    Total liabilities and stockholders'
     equity                                                                             $599,438                   $614,241
                                                                                        ========                   ========


                                                                                              INTERNAP NETWORK SERVICES CORPORATION

                                                                                    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                                         (In thousands)



                                                                                               Three Months Ended June 30,                    Six Months Ended June 30,
                                                                                               ---------------------------                    -------------------------

                                                                                                                               2014                                          2013        2014        2013
                                                                                                                               ----                                          ----        ----        ----

    Cash Flows from Operating Activities:

    Net loss                                                                                                              $(11,186)                                     $(3,702)  $(21,861)   $(5,345)

    Adjustments to reconcile net loss to net cash provided by operating activities:

       Depreciation and amortization                                                                                         19,468                                        12,743      38,394      24,180

       Impairment of property and equipment                                                                                     537                                           555         537         555

       Amortization of debt discount                                                                                            343                                            60         678         120

       Stock-based compensation expense, net of capitalized amount                                                            1,956                                         1,741       3,897       3,378

       Equity in (earnings) of equity-method investment                                                                        (80)                                         (61)      (117)       (87)

       Provision for doubtful accounts                                                                                          134                                           518         177         847

       Non-cash change in capital lease obligations                                                                             325                                             -        353         121

       Non-cash change in exit activities and restructuring liability                                                         1,243                                           156       2,851         550

       Non-cash change in deferred rent                                                                                       (646)                                        (447)    (1,382)      (877)

       Deferred taxes                                                                                                         (476)                                         (36)    (1,134)        101

       Other, net                                                                                                               278                                           151         489          92

    Changes in operating assets and liabilities:                                                                                  -

       Accounts receivable                                                                                                    4,273                                       (3,131)      5,209     (3,386)

       Prepaid expenses, deposits and other assets                                                                          (2,511)                                        (764)    (3,191)      (367)

       Accounts payable                                                                                                     (5,089)                                          841     (3,199)    (3,739)

       Accrued and other liabilities                                                                                          2,365                                         (266)      2,804     (1,097)

       Deferred revenues                                                                                                        934                                           122       1,328       (249)

       Exit activities and restructuring liability                                                                            (776)                                        (729)    (1,540)    (1,466)

       Other liabilities                                                                                                          3                                         (596)          7       (596)

    Net cash flows provided by operating activities                                                                          11,095                                         7,155      24,300      12,735
                                                                                                                             ------                                         -----      ------      ------


    Cash Flows from Investing Activities:

    Purchases of property and equipment                                                                                    (12,505)                                     (13,636)   (37,261)   (20,545)

    Additions to acquired technology                                                                                          (563)                                        (269)    (1,300)      (269)

    Net cash from acquisition                                                                                                     -                                            -         74           -

    Net cash flows used in investing activities                                                                            (13,068)                                     (13,905)   (38,487)   (20,814)
                                                                                                                            -------                                       -------     -------     -------


    Cash Flows from Financing Activities:

    Proceeds from credit agreements                                                                                           5,000                                             -      5,000       9,999

    Principal payments on credit agreements                                                                                   (750)                                        (875)    (1,500)    (1,750)

    Return of deposit collateral on credit agreement                                                                          1,775                                             -      6,153           -

    Payments on capital lease obligations                                                                                   (1,383)                                      (1,169)    (2,743)    (2,273)

    Proceeds from exercise of stock options                                                                                      18                                           451         878       1,848

    Tax withholdings related to net share settlements of restricted stock awards                                               (85)                                         (91)      (685)    (1,323)

    Other, net                                                                                                                 (45)                                          557        (89)       (82)

    Net cash flows provided by (used in) financing activities                                                                 4,530                                       (1,127)      7,014       6,419
                                                                                                                              -----                                        ------       -----       -----

    Effect of exchange rates on cash and cash equivalents                                                                       104                                           (7)         18       (225)
                                                                                                                                ---                                           ---         ---        ----

    Net increase (decrease) in cash and cash equivalents                                                                      2,661                                       (7,884)    (7,155)    (1,885)

    Cash and cash equivalents at beginning of period                                                                         25,202                                        34,552      35,018      28,553

    Cash and cash equivalents at end of period                                                                              $27,863                                       $26,668     $27,863     $26,668
                                                                                                                            =======                                       =======     =======     =======

INTERNAP NETWORK SERVICES CORPORATION
NON-GAAP (ADJUSTED) FINANCIAL MEASURES

In addition to providing financial measurements based on accounting principles generally accepted in the United States of America ("GAAP"), Internap has historically provided additional financial measures that are not prepared in accordance with GAAP ("non-GAAP"), including adjusted EBITDA, normalized net loss, normalized diluted shares outstanding, segment profit and segment margin. The most directly comparable GAAP equivalent to adjusted EBITDA and normalized net loss is loss from operations and net loss, respectively. The most directly comparable GAAP equivalent to normalized diluted shares outstanding is diluted common shares outstanding.

We define non-GAAP measures as follows:

    --  Adjusted EBITDA is loss from operations plus depreciation and
        amortization, loss (gain) on disposals of property and equipment, exit
        activities, restructuring and impairments, stock-based compensation and
        acquisition costs.
    --  Adjusted EBITDA margin is adjusted EBITDA as a percentage of revenues.
    --  Normalized net loss is net loss plus exit activities, restructuring and
        impairments, stock-based compensation and acquisition costs.
    --  Normalized diluted shares outstanding are diluted shares of common stock
        outstanding used in GAAP net loss per share calculations, excluding the
        dilutive effect of stock-based compensation using the treasury stock
        method.
    --  Normalized net loss per share is normalized net loss divided by basic
        and normalized diluted shares outstanding.
    --  Segment profit is segment revenues less direct costs of network, sales
        and services, exclusive of depreciation and amortization for the
        segment, as presented in the notes to our consolidated financial
        statements. Segment profit does not include direct costs of customer
        support, direct costs of amortization of acquired technologies or any
        other depreciation or amortization associated with direct costs.
    --  Segment margin is segment profit as a percentage of segment revenues.

We detail reconciliations of our non-GAAP financial measures to the most directly comparable financial measure in the reconciliations of GAAP to non-GAAP measures below. We believe that presentation of these non-GAAP financial measures provides useful information to investors regarding our results of operations.

We believe that excluding depreciation and amortization and loss on disposals of property and equipment, as well as impairments and restructuring, to calculate adjusted EBITDA provides supplemental information and an alternative presentation that is useful to investors' understanding of our core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that may have little bearing on present or future replacement costs, but also they are based on management estimates of remaining useful lives. Loss on disposals of property and equipment is also based on historical costs of assets that may have little bearing on replacement costs. Impairments and restructuring expenses primarily reflect goodwill impairments and subsequent plan adjustments in sublease income assumptions for certain properties included in our previously disclosed restructuring plans.

We believe that impairment and restructuring charges are unique costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a normal component of expenses related to current and ongoing operations.

Similarly, we believe that excluding the effects of stock-based compensation from non-GAAP financial measures provides supplemental information and an alternative presentation useful to investors' understanding of our core operating results and trends. Investors have indicated that they consider financial measures of our results of operations excluding stock-based compensation as important supplemental information useful to their understanding of our historical results and estimating our future results.

We also believe that, in excluding the effects of stock-based compensation, our non-GAAP financial measures provide investors with transparency into what management uses to measure and forecast our results of operations, to compare on a consistent basis our results of operations for the current period to that of prior periods and to compare our results of operations on a more consistent basis against that of other companies, in making financial and operating decisions and to establish certain management compensation.

INTERNAP NETWORK SERVICES CORPORATION
NON-GAAP (ADJUSTED) FINANCIAL MEASURES (Continued)

Stock-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that supplementing GAAP net loss and net loss per share information by providing normalized net loss and normalized net loss per share, excluding the effect of exit activities, restructuring and impairments, stock-based compensation and acquisition costs in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons. We consider normalized diluted shares to be another important indicator of our overall performance because it eliminates the effect of non-cash items.

Adjusted EBITDA is not a measure of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to -- not a substitute for -- our results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided by operating activities as defined by GAAP. Our statements of cash flows present our cash flow activity in accordance with GAAP. Furthermore, adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.

We believe adjusted EBITDA is used by and is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

    --  EBITDA is widely used by investors to measure a company's operating
        performance without regard to items such as interest expense, income
        taxes, depreciation and amortization, which can vary substantially from
        company-to-company depending upon accounting methods and book value of
        assets, capital structure and the method by which assets were acquired;
        and
    --  investors commonly adjust EBITDA information to eliminate the effect of
        disposals of property and equipment, impairments, restructuring and
        stock-based compensation which vary widely from company-to-company and
        impair comparability.

Our management uses adjusted EBITDA:

    --  as a measure of operating performance to assist in comparing performance
        from period-to-period on a consistent basis;
    --  as a measure for planning and forecasting overall expectations and for
        evaluating actual results against such expectations; and
    --  in communications with the board of directors, analysts and investors
        concerning our financial performance.

Our presentation of segment profit and segment margin excludes direct costs of customer support and depreciation and amortization in order to allow investors to see the business through the eyes of management. Management views direct costs of network, sales and services as generally less controllable, external costs and management regularly monitors the margin of revenues in excess of these direct costs. Similarly, we view the costs of customer support to also be an important component of costs of revenues but believe that the costs of customer support to be more within our control and to some degree discretionary as we can adjust those costs by hiring and terminating employees.

Segment margin is an important metric to our investors and analysts, as we have regularly discussed and disclosed the effects of third party vendors' pricing declines and the corresponding effect on our revenues. The presentation of segment margin highlights the impact of the pricing declines and allows investors and analysts to evaluate our revenue generation performance relative to direct costs of network, sales and services. Conversely, we have much greater latitude in controlling the compensation component of costs of revenues, represented by customer support, and we analyze this component separately from the direct external costs.

We also have excluded depreciation and amortization from segment profit and segment margin because, as noted above, they are based on estimated useful lives of tangible and intangible assets. Further, depreciation and amortization are based on historical costs incurred to build out our deployed network and the historical costs of these assets may not be indicative of current or future capital expenditures.

Although we believe, for the foregoing reasons, that our presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, our non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure of financial performance prepared in accordance with GAAP.

INTERNAP NETWORK SERVICES CORPORATION
NON-GAAP (ADJUSTED) FINANCIAL MEASURES (Continued)

Use of non-GAAP financial measures is subject to inherent limitations because they do not include all the expenses that must be included under GAAP and because they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial measure. Management accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such information to supplement GAAP financial measures. Our non-GAAP financial measures may not be the same non-GAAP measures, and may not be calculated in the same manner, as those used by other companies.


                                                                                                                                   INTERNAP NETWORK SERVICES CORPORATION
                                                                                                                         RECONCILIATION OF LOSS FROM OPERATIONS TO ADJUSTED EBITDA


    A reconciliation of loss from operations, the most directly comparable GAAP measure, to adjusted EBITDA for each of the periods indicated is as follows (in thousands):


                                                                                                                                                      Three Months Ended
                                                                                                                                                      ------------------

                                                                                                                                                  June 30, 2014                    March 31, 2014           June 30, 2013
                                                                                                                                                  -------------                    --------------           -------------

    Loss from operations (GAAP)                                                                                                                                          $(4,514)                 $(4,537)                $(1,099)

    Depreciation and amortization, including amortization of acquired technologies                                                                                         19,468                    18,926                   12,744

    Loss (gain) on disposal of property and equipment, net                                                                                                                     32                         -                     (2)

    Exit activities, restructuring and impairments                                                                                                                          1,561                     1,384                      683

    Stock-based compensation                                                                                                                                                1,956                     1,941                    1,741

    Acquisition costs                                                                                                                                                           -                       85                        -
                                                                                                                                                                              ---                      ---                      ---

    Adjusted EBITDA (non-GAAP)                                                                                                                                            $18,503                   $17,799                  $14,067
                                                                                                                                                                          =======                   =======                  =======



                                                                                                                                                 INTERNAP NETWORK SERVICES CORPORATION
                                                                                                                                           RECONCILIATION OF NET LOSS AND BASIC AND DILUTED
                                                                                                                                             NET LOSS PER SHARE TO NORMALIZED NET LOSS AND
                                                                                                                                            BASIC AND DILUTED NORMALIZED NET LOSS PER SHARE


    Reconciliations of (1) net loss, the most directly comparable GAAP measure, to normalized net loss, (2) diluted shares outstanding used in per share calculations, the most directly comparable GAAP measure, to normalized diluted shares used in normalized per share outstanding calculations and
     (3) net loss per share, the most directly comparable GAAP measure, to normalized net loss per share for each of the periods indicated is as follows (in thousands, except per share data):


                                                                                                                                                                                     Three Months Ended
                                                                                                                                                                                     ------------------

                                                                                                                                                                                   June 30, 2014                                               March 31, 2014                                            June 30, 2013
                                                                                                                                                                                   -------------                                               --------------                                            -------------

    Net loss (GAAP)                                                                                                                                                                                    $(11,185)                                                   $(10,675)                                           $(3,702)

    Exit activities, restructuring and impairments                                                                                                                                                         1,561                                                        1,384                                                 683

    Stock-based compensation                                                                                                                                                                               1,956                                                        1,941                                               1,741

    Acquisition costs                                                                                                                                                                                          -                                                          85                                                   -
                                                                                                                                                                                                             ---                                                         ---                                                 ---

    Normalized net loss (non-GAAP)                                                                                                                                                                       (7,668)                                                     (7,265)                                            (1,278)


    Normalized net income allocable to participating securities (non-GAAP)                                                                                                                                     -                                                           -                                                  -

    Normalized net loss available to common stockholders (non-GAAP)                                                                                                                                     $(7,668)                                                    $(7,265)                                           $(1,278)
                                                                                                                                                                                                         =======                                                      =======                                             =======

    Participating securities (GAAP)                                                                                                                                                                        1,119                                                        1,105                                                 997


    Weighted average shares outstanding used in per share calculation:

    Basic and diluted (GAAP)                                                                                                                                                                              51,045                                                       51,027                                              50,856


    Add potentially dilutive securities                                                                                                                                                                        -                                                           -                                                  -

    Less dilutive effect of stock-based compensation under the treasury stock method                                                                                                                           -                                                           -                                                  -
                                                                                                                                                                                                             ---                                                         ---                                                ---

    Normalized diluted shares (non-GAAP)                                                                                                                                                                  51,045                                                       51,027                                              50,856
                                                                                                                                                                                                          ======                                                       ======                                              ======


    Loss per share (GAAP):

    Basic and diluted                                                                                                                                                                                    $(0.22)                                                     $(0.21)                                            $(0.07)
                                                                                                                                                                                                          ======                                                       ======                                              ======


    Normalized net loss per share (non-GAAP):

    Basic and diluted                                                                                                                                                                                    $(0.15)                                                     $(0.14)                                            $(0.03)
                                                                                                                                                                                                          ======                                                       ======                                              ======


                                                                                                                                   INTERNAP NETWORK SERVICES CORPORATION
                                                                                                                                     SEGMENT PROFIT AND SEGMENT MARGIN


    Segment profit and segment margin, which does not include direct costs of customer support, direct costs of amortization of acquired technologies or any other depreciation or amortization, for each of the periods indicated is as follows (dollars in thousands):


                                                                                                                                                     Three Months Ended
                                                                                                                                                     ------------------

                                                                                                                                                June 30, 2014                                                  March 31, 2014                                            June 30, 2013
                                                                                                                                                -------------                                                  --------------                                            -------------

    Revenues:

       Data center services                                                                                                                                           $61,395                                                          $58,283                                         $45,580

       IP services                                                                                                                                                     22,673                                                           23,678                                          24,403
                                                                                                                                                                       ------                                                           ------                                          ------

          Total                                                                                                                                                        84,068                                                           81,961                                          69,983
                                                                                                                                                                       ------                                                           ------                                          ------


    Direct cost of network, sales and services, exclusive of

          depreciation and amortization:

       Data center services                                                                                                                                            26,563                                                           25,891                                          22,643

       IP services                                                                                                                                                      9,999                                                            9,869                                          10,010
                                                                                                                                                                        -----

          Total                                                                                                                                                        36,562                                                           35,760                                          32,653
                                                                                                                                                                       ------                                                           ------                                          ------


    Segment Profit:

       Data center services                                                                                                                                            34,832                                                           32,392                                          22,937

       IP services                                                                                                                                                     12,674                                                           13,809                                          14,393

          Total                                                                                                                                                       $47,506                                                          $46,201                                         $37,330
                                                                                                                                                                      =======                                                          =======                                         =======


    Segment Margin:

       Data center services                                                                                                                                             56.7%                                                           55.6%                                          50.3%

       IP services                                                                                                                                                      55.9%                                                           58.3%                                          59.0%

          Total                                                                                                                                                         56.5%                                                           56.4%                                          53.3%
                                                                                                                                                                         ====                                                             ====                                            ====

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SOURCE Internap Network Services Corporation