Internap (INAPQ) 8-K Internap Reports Third Quarter 2006 Financial Results

Exhibit 99.1

NEWS RELEASE

Internap Reports Third Quarter 2006 Financial Results

·   Record Revenues of $45.9 Million for Q3 2006

·   Net Income of $0.2 Million for Q3 2006 (including stock-based compensation expense of $1.6 million) compared with a Net (Loss) of $(3.2 million) for Q3 2005 (not including stock-based compensation expense)

·   Adjusted EBITDA¹ of $6.1 million for Q3 2006

·   Q3 2006 Cash Flow from Operations of $7.8 million

·   Raises Revenue and Adjusted EBITDA Guidance for the Year

ATLANTA - November 6, 2006 - Internap Network Services Corporation (NASDAQ: INAP), a leading provider of performance-based routing services for IP networks, today reported financial results for the third quarter ended September 30, 2006.

For the third quarter of 2006, revenues totaled $45.9 million, an increase of 21% compared to the third quarter of 2005. Net income for the third quarter of 2006, on a generally accepted accounting principles (GAAP) basis, was $0.2 million, or $0.01per diluted share. This includes a non-cash charge for stock-based compensation expense of $1.6 million, or $0.05 per diluted share, pursuant to the adoption of SFAS No. 123R in the first quarter of 2006. GAAP net income for the third quarter of 2006 compares to a net (loss) on a GAAP basis of $(3.2 million), or $(0.09) per basic and diluted share for the third quarter of 2005. GAAP net income prior to 2006 did not include stock-based compensation expense. Normalized net income¹ and normalized net income per diluted share¹, which exclude the impact of stock-based compensation, were $1.8 million and $0.05, respectively, for the third quarter of 2006.

Adjusted gross margin¹ was 45% for the third quarter of 2006, compared to 46% and 44% for the second quarter of 2006 and third quarter of 2005, respectively.

The Company reported adjusted EBITDA¹ of $6.1 million (GAAP net income of $0.2 million) for the third quarter of 2006, an increase of $0.1 million from the second quarter of 2006 and an improvement of $5.3 million, or almost 700%, over the third quarter of 2005. The Company also reported cash, cash equivalents and investments in marketable securities at September 30, 2006 of $53.9 million, an increase of $6.1 million from the end of the second quarter 2006.

“We once again posted record revenues for the quarter of $45.9 million and our cash position improved significantly year over year," said James P. DeBlasio, president and chief executive officer of Internap. "Internap has also recently taken strategic actions to reposition the company. Our goal is to continue driving solid results and increasing shareholder value.”

Internap ended the quarter with 2,235 customers under contract, adding 47 new customers in the third quarter on a net basis.

2006 Full Year Guidance

·   Full year revenue growth over 2005 revenues is increased to 15-17%, up from the earlier guidance of 12-15%.

·   Full year adjusted EBITDA is expected to be $24 to $26 million, up from the prior $20 - $24 million guidance.

·   Full year net income of $2.0 million to $3.0 million.

·   Capital expenditures are expected in the range of $13.5 million to $14.5 million.

Conference Call Information:

Internap’s third quarter teleconference will be held today beginning at 5:00 p.m. EDT. The dial-in numbers are (800) 591-6945; passcode 17832249 for domestic callers, and (617) 614-4911; passcode 17832249 for international participants. The simultaneous web cast will be available from the Investor Relations section of the Website at: http://www.internap.com/investor/presentations/page1294.html

Internap will provide a replay of the teleconference on its Website. A replay will be available from November 6th through November 13th. The dial in numbers are (888) 286-8010: passcode 47455749 for domestic callers, and (617) 801-6888; passcode 47455749 for international participants.

¹ Reconciliations between GAAP information and non-GAAP information contained in this press release are provided in the tables below entitled “Reconciliation of Net Income (Loss) to Adjusted EBITDA,” “Reconciliation of Net Income (Loss) and Basic and Diluted Net Income (Loss) Per Share to Normalized Net Income (Loss) and Basic and Diluted Normalized Net Income (Loss) Per Share” and “Reconciliation of Gross Margin to Adjusted Gross Margin.” This information is also available on our Web Site under the Investor Services heading.

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 Web. Through a portfolio of high-performance IP solutions, customers can bypass congestion points, overcome routing inefficiencies and optimize the performance of their applications. Internap solutions are backed by an industry-leading performance guarantee that covers multiple Internet backbones 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 2,200 customers, including Fortune 1000 and mid-tier enterprises in the financial services, travel/hospitality, manufacturing, media/entertainment, technology and retail industries. The company provides services throughout North America, Canada, Europe, Asia and Australia. For more information, please visit the company website at www.internap.com.

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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 technological change; 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; the ability to successfully integrate the operations of Internap and VitalStream; our ability to protect our intellectual property; claims relating to intellectual property rights; 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 and the Internap logo are trademarks of Internap. All other trademarks and brands are the property of their respective owners.

Contacts:

Media Contact                                                              Investor Contact

L.A. CampbellAndrew Albrecht

(404) 302- 9721                                                              (404) 302-9841

lcampbell@internap.com                                            albrecht@internap.com

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INTERNAP NETWORK SERVICES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005
Revenue	$	45,874		$	37,999		$	132,404		$	113,425
Costs and expense:
Direct cost of network and sales, exclusive of depreciation and amortization		25,373			21,325			71,471			60,550
Direct cost of customer support*		2,930			2,870			8,596			8,139
Product development*		1,107			1,405			3,490			3,955
Sales and marketing*		6,569			6,639			20,611			19,552
General and administrative*		5,618			5,385			15,888			15,121
Depreciation and amortization		4,074			3,784			11,717			10,913
Asset impairment and restructuring		319			13			319			36
Gain on disposal of property and equipment		--			--			(114	)		(4	)
Total operating costs and expense		45,990			41,421			131,978			118,262
(Loss) income from operations		(116	)		(3,422	)		426			(4,837	)
Non-operating (income) expense:
Interest income		(619	)		(339	)		(1,563	)		(903	)
Interest expense		215			342			698			1,089
Income from equity method investment		(7	)		(33	)		(111	)		(25	)
Other income, net		--			(221	)		(146	)		(211	)
Total non-operating (income) expense		(411	)		(251	)		(1,122	)		(50	)
Income (loss) before income taxes		295			(3,171	)		1,548			(4,787	)
Income taxes		100			--			100			--
Net income (loss)	$	195		$	(3,171	)	$	1,448		$	(4,787	)
Net income (loss) per share:
Basic	$	0.01		$	(0.09	)	$	0.04		$	(0.14	)
Diluted	$	0.01		$	(0.09	)	$	0.04		$	(0.14	)
Shares used in per share calculations:
Basic		34,839			34,006			34,537			33,933
Diluted		35,894			34,006			35,343			33,933
*Includes the following amounts related to stock-based compensation:
Direct cost of customer support	$	280		$	--		$	871		$	--
Product development		170			--			503			--
Sales and marketing		560			--			1,754			--
General and administrative		629			--			1,590			--
Total	$	1,639		$	--		$	4,718		$	--

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INTERNAP NETWORK SERVICES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	September 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	41,389		$	24,434
Short-term investments in marketable securities		12,507			16,060
Accounts receivable, net of allowance of $1,117 and $963, respectively		19,823			19,128
Inventory		600			779
Prepaid expenses and other assets		3,324			2,741
Total current assets		77,643			63,142
Property and equipment, net of accumulated depreciation and amortization of $149,853 and $143,686, respectively		48,099			50,072
Investments		2,123			1,999
Intangible assets, net of accumulated amortization of $18,534 and $18,100, respectively		1,896			2,329
Goodwill		36,314			36,314
Deposits and other assets		1,656			1,513
	$	167,731		$	155,369
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion	$	4,375		$	4,375
Accounts payable		8,374			5,766
Accrued liabilities		6,773			7,267
Deferred revenue, current portion		2,905			2,737
Capital lease obligations, current portion		442			559
Restructuring liability, current portion		957			1,202
Other current liabilities		63			--
Total current liabilities		23,889			21,906
Notes payable, less current portion		4,375			7,656
Deferred revenue, less current portion		903			533
Capital lease obligations, less current portion		92			247
Restructuring liability, less current portion		4,204			5,075
Deferred rent		11,117			9,185
Other long-term liabilities		1,011			1,039
Total liabilities		45,591			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, 60,000 shares authorized, 35,284 and 34,168 shares issued and outstanding, respectively		35			34
Additional paid-in capital		980,528			970,221
Deferred stock compensation		--			(420	)
Accumulated deficit		(858,664	)		(860,112	)
Accumulated items of other comprehensive income		241			5
Total stockholders' equity		122,140			109,728
	$	167,731		$	155,369

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INTERNAP NETWORK SERVICES CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine months ended September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,448		$	(4,787	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		12,129			11,279
Gain on disposal of assets		(114	)		(4	)
Provision for doubtful accounts		(311	)		1,011
Income from equity method investment		(111	)		(25	)
Non-cash changes in deferred rent		1,932			2,039
Stock-based compensation expense		4,718			--
Loss on asset impairment		319			--
Other, net		--			(45	)
Changes in operating assets and liabilities:
Accounts receivable		(385	)		(1,170	)
Inventory		179			(232	)
Prepaid expenses, deposits and other assets		(726	)		13
Accounts payable		2,608			(3,507	)
Accrued liabilities		(494	)		1,059
Deferred revenue		537			156
Accrued restructuring charge		(1,116	)		(1,435	)
Net cash provided by operating activities		20,613			4,352
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(9,867	)		(8,072	)
Purchases of investments in marketable securities		(10,515	)		(16,727	)
Maturities of marketable securities		14,179			13,561
Proceeds from disposal of property and equipment		127			76
Other, net		113			(326	)
Net cash used in investing activities		(5,963	)		(11,488	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable		(3,281	)		(4,972	)
Payments on capital lease obligations		(434	)		(380	)
Proceeds from exercise of stock options, employee stock purchase plan and warrants		5,985			1,164
Other, net		35			50
Net cash provided by (used in) financing activities		2,305			(4,138	)
Net increase (decrease) in cash and cash equivalents		16,955			(11,274	)
Cash and cash equivalents at beginning of period		24,434			33,823
Cash and cash equivalents at end of period	$	41,389		$	22,549

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INTERNAP NETWORK SERVICES CORPORATION

NON-GAAP (ADJUSTED) 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 measures that are not prepared in accordance with GAAP (non-GAAP), including adjusted EBITDA, normalized net income (loss), adjusted gross margin and normalized diluted shares. The most directly comparable GAAP equivalent to adjusted EBITDA and normalized net income (loss) is net income (loss). The most directly comparable GAAP equivalent to adjusted gross margin is gross margin. The most directly comparable GAAP equivalent to normalized diluted shares is diluted common shares outstanding.

We define non-GAAP measures as follows:

·   Adjusted EBITDA is net income (loss) plus stock based compensation, depreciation and amortization, asset impairment and restructuring, income taxes and interest expense less interest income

·   Normalized net income (loss) is net income (loss) plus stock-based compensation

·   Normalized diluted shares are diluted common shares outstanding used in GAAP net income per share calculation, excluding the effect of SFAS No. 123R under the treasury stock method

·   Normalized net income (loss) per share is normalized net income (loss) divided by basic and normalized diluted shares

·   Adjusted gross profit is gross profit (GAAP) plus direct cost of customer support and depreciation and amortization included in or associated with cost of sales.

·   Adjusted gross margin is adjusted gross profit as a percentage of revenues.

Reconciliations of each of our non-GAAP financial measures to the most directly comparable financial measure are detailed 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 as well as restructuring and impairment to calculate adjusted EBITDA provides supplemental information and an alternative presentation that is useful to investors' understanding of the Company's 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. Restructuring costs relate to differences between actual costs incurred and estimates of liabilities incurred during the implementation of restructuring plans and impairment costs relate to the Company’s write-down of certain costs that were capitalized during the development of software to be used internally. Management believes that such restructuring and impairment charges were unique costs that are not expected to recur on a regular basis, and consequently, does not consider these charges as a normal component of expenses related to current and ongoing operations.

Similarly, we believe that excluding the effects of share-based compensation from non-GAAP financial measures provides supplemental information and an alternative presentation useful to investors' understanding of the Company's core operating results and trends, especially when comparing those results on a consistent basis to results for previous periods and anticipated results for future periods. Investors have indicated that they consider financial measures of our results of operations excluding share-based compensation expense 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 share-based compensation, our non-GAAP financial measures provide investors with transparency into what is used by management 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, 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.

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Stock-based compensation is an important part of total compensation, especially from the perspective of employees. However, the inclusion of stock-based compensation in the current period operating results due to the adoption of SFAS No. 123R effective January 1, 2006 makes comparisons to prior period results more difficult. Therefore we believe that supplementing GAAP net income (loss) and net income (loss) per share information by providing normalized net income (loss) and normalized net income (loss) per share for those periods, excluding the effect of stock-based compensation expense 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 overall performance of the Company because it eliminates the effect of a non-cash item.

Adjusted EBITDA is not a measure of liquidity calculated in accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to — not a substitute for — our results of operations presented on the basis of accounting principles generally accepted in the United States. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by accounting principles generally accepted in the United States. Our statement of cash flows presents our cash flow activity in accordance with accounting principles generally accepted in the United States. 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, 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 restructuring and stock-based compensation expenses, 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, shareholders, analysts and investors concerning our financial performance.

Our presentation of adjusted gross margin excludes depreciation, amortization and direct cost of customer support in order to allow investors to see the business through the eyes of management. Direct cost of network and sales is viewed by management as generally non-controllable, external costs and the margin of revenue in excess of these direct costs is regularly monitored by management. Similarly, we view the cost of customer support to also be an important component of costs of revenue but believe that the cost of customer support to be within our control and to some degree discretionary as we can adjust that cost by hiring and terminating employees.

Adjusted gross 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 affect on our revenue. The presentation of adjusted gross 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 and sales. Conversely, we have much greater latitude in controlling the compensation component of cost of revenue, represented by customer support, and we analyze this component separately from the direct external costs.

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Depreciation and amortization have also been excluded from adjusted gross 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 cost incurred to build out the Company's 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.

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.

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INTERNAP NETWORK SERVICES CORPORATION

RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA

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

	Three Months Ended
	September 30,			June 30,			September 30,
	2006			2006			2005
Net income (loss) (GAAP)	$	195		$	713		$	(3,171	)
Stock-based compensation expense		1,639			1,568			--
Depreciation and amortization		4,211			3,987			3,921
Asset impairment and restructuring		319			--			13
Income taxes		100			--			--
Interest (income) expense, net		(404	)		(288	)		3
Adjusted EBITDA (non-GAAP)	$	6,060		$	5,980		$	766

INTERNAP NETWORK SERVICES CORPORATION

RECONCILIATION OF NET INCOME (LOSS) AND BASIC AND DILUTED NET INCOME (LOSS) PER SHARE TO NORMALIZED NET INCOME (LOSS) AND BASIC AND DILUTED NORMALIZED NET INCOME (LOSS) PER SHARE

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

	Three Months Ended
	September 30,			June 30,			September 30,
	2006			2006			2005
Net income (loss) (GAAP)	$	195		$	713		$	(3,171	)
Stock-based compensation expense		1,639			1,568			--
Normalized net income (non-GAAP)	$	1,834		$	2,281		$	(3,171	)
Shares used in per share calculation:
Basic (GAAP)		34,839			34,465			34,006
Diluted (GAAP)		35,894			35,787			34,006
Less dilutive effect of SFAS No. 123R under the treasury stock method:		(1,014	)		(1,430	)		--
Normalized diluted shares (non-GAAP)		34,880			34,357			34,006
GAAP earnings per share:
Basic	$	0.01		$	0.02		$	(0.09	)
Diluted	$	0.01		$	0.02		$	(0.09	)
Normalized net income per share (non-GAAP):
Basic	$	0.05		$	0.07		$	(0.09	)
Diluted	$	0.05		$	0.07		$	(0.09	)

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INTERNAP NETWORK SERVICES CORPORATION

RECONCILIATION OF GROSS MARGIN TO ADJUSTED GROSS MARGIN

A reconciliation of gross margin, the most directly comparable GAAP measure, to adjusted gross margin, for each of the fiscal periods indicated is as follows (in thousands):

	Three Months Ended
	September 30,			June 30,			September 30,
	2006			2006			2005
Revenue	$	45,874		$	43,905		$	37,999
Direct cost of network and sales, exclusive of depreciation and amortization		25,373			23,744			21,325
Direct cost of customer support		2,930			2,769			2,870
Depreciation and amortization associated with cost of sales		3,495			3,043			3,060
Total cost of sales		31,798			29,556			27,255
Gross profit (GAAP)	$	14,076		$	14,349		$	10,744
Gross margin (GAAP)		30.7	%		32.7	%		28.3	%
Add:
Customer support	$	2,930		$	2,769		$	2,870
Depreciation and amortization:
Included in direct cost of network and sales		137			137			137
Associated with cost of sales		3,495			3,043			3,060
Adjusted gross profit (non-GAAP)	$	20,638		$	20,298		$	16,811
Adjusted gross margin (non-GAAP)		45.0	%		46.2	%		44.2	%

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