Internap Network Services Corp. (INAP - $6.90)

Transcription

1 Equity Research Data Centers November 6, 2015 Internap Network Services Corp. (INAP - $6.90) INAP: In-Line Results; No Update on Strategic Alternatives Outperform PT: $10.00 Trading Data: Last Price (11/05/2015) $ Week High (04/27/2015) $ Week Low (09/29/2015) $5.75 Market Cap. $0.39(B) Shares Out. 56,036(M) 3 Month Avg. Daily Vol. 359,894 AFFO Estimates: ($ per share) (Dec) Q1 Q2 Q3 Q4 FY FY-16E FY-15E 0.13A 0.15A 0.18A FY-14A FY-13A Valuation: Multiple Curr. FY Next FY Next PT P/AFFO EV/EDITDA PEG Source: estimates SVP/Senior Analyst (561) See required disclosures at the end of report. Internap reported modest 3Q15 results as expected. 3Q15 was preannounced on September 25 th including lowered full year guidance. Internap had said it expected 3Q15 revenue between $77.5 million and $79 million and adjusted EBITDA between $18 million and $19 million. INAP in 3Q15 showed a 7% revenue decline to $79 million. EBITDA reached $20 million which was $1 million above the guidance. Full year 2015 guidance was reiterated at a range of $320 million to $325 million for revenue and $80 million to $85 million for EBITDA. Our estimates call for 2015 revenue down 4% to $322 million leading to EBITDA up 2% to $80 million. Our 2016 EBITDA estimate is $92 million, up 15%, leading to AFFO per share of $0.80. Modest recent financial performance has undoubtedly hindered valuation, but we suspect given that the struggles are company specific while the data center sector is experiencing robust, accelerating fundamentals, the Board could be motivated to sell the company and flexible on the sale price. Strategic buyers are likely larger companies with stronger sales teams that could more easily uncover the hidden value of the untapped data center capacity (please see page 2 for a list of potential acquirers). Based on the current financial outlook, we believe a realistic range for a buyout could be $9-$12 per share. Given that the strategic review has been underway for many months, there could be a good chance it could concluded soon. Internap has been under pressure from activist shareholders to sell the company. On September 1 st Internap publicly announced that it is exploring strategic alternatives to maximize shareholder value. The Board of Directors created a Strategy Committee of independent directors early this year and hired Morgan Stanley. Internap looks attractive at $7 because despite the poor execution there is cash flow and unutilized data center capacity representing hidden assets that can be harnessed by potential buyers. Acquisition activity has continued with Windstream (WIN) on October 19 th selling its data centers to TierPoint for $575 million or 14x LQA EBITDA. Data Center stocks trade at 14x 2016E EBITDA. Using 10x 2016E EBITDA of $92 million, our price target is $10. We reiterate our Outperform rating. Trading (800) / Member FINRA/SIPC

2 Investment Thesis We reiterate our recommendation to purchase the shares of Internap with an outperform rating for the following reasons: Internap spent $300 million on new Data Centers More content at faster speed is fueling demand 1) Internap spent $300 million over the last few years building out company owned data centers. The 16 company owned data centers are at only a 54% data center utilization rate providing Internap room to meaningfully add customers without spending heavily on facilities expansion. 2) Internet growth and more content at faster speed is fueling demand. Internet traffic and data storage demand has blossomed over the last few years and could sustain strong growth for many more years. 3) Today, data centers capture less than 20% of all data storage. As companies experience the superior reliability, speed and pricing of outsourced offerings demand should blossom allowing market share gains. Leasing demand has accelerated 4) Outsourcing and leasing demand has accelerated, pricing looks stable and facilities investments are scalable allowing margin expansion as existing customers demand more storage space. 5) GDP growth is helpful for data center demand, but not required as social, video, mobile and data secular capacity demand is so powerful that spending could continue unabated. Accelerate profitable growth $230 million of NOLs Consolidation candidate Trades well below peers Possible sale at $9-$12 6) New CEO Michael Ruffalo has been brought in to accelerate profitable growth. 7) Internap s $230 million of net operating loss carry forwards shields it from most corporate income tax. 8) Internap represents an attractive consolidation candidate. Telecom and cable companies like Level 3 (LVLT), Nippon Telegraph (NTT), Singapore Telecom and Zayo (ZAYO) could find data center companies attractive for acquisition. Data Center operators like CyrusOne (CONE), CoreSite (COR), Equinix (EQIX), InterXion (INXN), QTS Realty (QTS) and perhaps even Amazon (AMZN) or Microsoft (MSFT) might find Internap complementary. Private equity investors might view the assets as especially undervalued relative to its publicly traded peers. 9) Internap trades well below peers despite somewhat unique market positioning and takeover potential. 10) Given the accelerating data center sector demand trends and robust sector M&A activity, we believe Internap has a well-supported valuation with potential upside from a possible sale at $9-$12 per share. Internap Network Services Corp. Page 2 of 16

3 Internap Company Description 16 company controlled Data Centers Internap Network Services Corporation operates 51 data centers in North America, Europe and Asia of which 16 are company controlled and 35 are partner facilities through which Internap resells. It aggregates 294,000 net sellable square feet of data center space of which 238,000 are core owned facilities. Internap serves 11,021 customers. The company headquarters is based at One Ravinia Drive, Atlanta, Georgia. Internap Data Center Locations North America Atlanta, GA Boston, MA Dallas, TX Houston, TX Los Angeles, CA Montreal, QC New York Metro Santa Clara, CA Seattle, WA Secaucus, NJ Europe Amsterdam London Asia Pacific Singapore Hong Kong Internap Network Services Corp. Page 3 of 16

4 Internap CEO Michael Ruffalo 25 years of leadership experience CEO Crossbeam Systems CEO Liquid Machines COO Akamai EVP Sales EMC CIO NCR MBA Harvard Graduate School of Business Michael Ruffolo is President and Chief Executive Officer of Internap Corporation. Mr. Ruffolo has more than 25 years of leadership experience in high technology, with a strong track record of driving profitable revenue growth, customer acquisition and retention and technology innovation. His extensive experience spans leadership positions in global sales and marketing, operations, information technology management and professional services. He also serves as a member on Internap s Board of Directors. Prior to assuming his current role, Mr. Ruffolo served on Internap s Board of Directors since 2010 and serves as Executive Chairman of Edgeware, a video delivery network provider. From 2010 to 2012, Mr. Ruffolo was President and Chief Executive Officer of Crossbeam Systems, Inc., a network security platform provider. Previously, Mr. Ruffolo was Chairman and Chief Executive Officer of Liquid Machines, Inc., a provider of enterprise rights management solutions. Prior to that, Mr. Ruffolo held the positions of Executive Vice President and Chief Operating Officer at Akamai Technologies, Executive Vice President of Global Sales, Services and Marketing at EMC Corporation and Vice President and Chief Information Officer at NCR Corporation. Mr. Ruffolo holds a Masters in Business Administration from the Harvard Graduate School of Business and a Bachelor of Science degree from the University of Dayton. He also has post-graduate education in advanced management from the European Institute of International Business in Fountainebleau, France. Gabelli is the Largest Shareholder Gabelli owns 11 million shares or 20% Gabelli bought 300,000 Mario Gabelli s GAMCO, Gabelli Funds and associated entities stand as Internap s largest shareholder owning roughly 11 million shares or 20%. Recently, Gabelli bought approximately 300,000 shares. We speculate that Gabelli seized upon the trading opportunity following the pre-announcement of lower 3Q15 and 2015 guidance. Gabelli may be confident that Internap s assets have strategic value that could be recognized. Internap Network Services Corp. Page 4 of 16

5 The Data Center Industry Data Centers are buildings that house servers and related hardware Data centers are buildings that house servers and related hardware. Data centers require four things: power, space, bandwidth (fiber) and cooling. They are typically located in large metropolitan markets where these resources are readily available. The major US data center markets are Silicon Valley, New York, Northern Virginia, Dallas, Miami, Chicago and Los Angeles. The primary European markets are London, Frankfurt, Amsterdam and Paris. The top locations in Asia are Hong Kong, Tokyo, Singapore and Sydney. Different markets are driven by different customers, and the differences are predictable. Silicon Valley has many Internet content and software-as-a-service companies. New York has a sizable financial contingent complementing generally smaller Internet companies and European telecommunications companies. Northern Virginia is primarily telecoms, Internet companies and government. Miami hosts many Latin American companies. Data Center demand is growing annually at a midteens pace The global data center demand is growing annually at a double-digit pace while supply rises mid-single digits. Data center construction typically takes about one year. Over the past year demand have accelerated. Pricing has held steady. Pricing typically starts to move up once 70% of capacity is reached in any one center. At 70%, space is still available but not easily accessible for expansion by an existing customer. Businesses across Internet commerce, advertising and content, data center demand remain robust with sustained revenue growth. Internet traffic should grow over 20% per year through 2018 according to Cisco. Capacity, connectivity, power and uptime The biggest concerns of data center customers are capacity, connectivity, power and uptime. Other concerns include cooling, computing power, tech support, security and speed of expansion, which are equally important but somewhat easier to duplicate. Customers are typically charged rental space, power utilization fees and service costs. The main reasons for purchasing new servers are normal demand driven needs for increases in capacity, upgrades to old servers and new server purchases for new applications. All three of these drivers should increase demand for either data center capacity and/or power utilization. Addressable Market Worldwide IT spending of $3.5 trillion in 2015E Worldwide IT spending is on pace to total $3.5 trillion in 2015, a 5.5 percent decline from 2014, according to the latest forecast by Gartner, Inc. The decline can be attributed to the impact of the rising U.S. dollar. In constant-currency terms, the market is projected to grow 2.5 percent. IT will not be outsourced completely. However, a significant amount of IT infrastructure could be outsourced to data center providers over time. Another indicator of the addressable market for IT infrastructure is total IT hardware expenditures. IT infrastructure providers replace internal data centers, which represent a significant portion of IT hardware costs. IT infrastructure is becoming an increasingly larger portion of hardware costs as applications are delivered over networks instead of individual desktops. IDC says the top priority of Chief Information Officers is reducing costs. Sharing infrastructure via outsourcing is the most compelling way to reduce this capital and operating expense. Internap Network Services Corp. Page 5 of 16

6 Growth Drivers Data Center revenue growth has been about 15% per year Data Center revenue growth has been about 15% annually. Growth is maintained as companies recognize the efficiency inherent in sharing infrastructure. Cost savings of as much as 50%, coupled with more flexibility, drive corporations to outsource. Faster broadband speeds and improving technology also contribute to IT outsourcing growth. Roughly 85% of servers are on the premises of the company utilizing them. Blossoming Internet communications is a primary contributor to data center growth. The evolution of Internet communications as the primary means of communication for both companies and individuals is a core driver of IP and data center growth. This is evident in the consumption of Internet media, content and information, represented by Google, Facebook, Netflix and YouTube. Ecommerce is another contributor, best exemplified by the market share gains of online commerce companies like Amazon. Ecommerce spending sustains 20% growth while retail grows at a mid-single digits pace. Internet consumption continues to increase rapidly Consumer Internet consumption continues to increase rapidly. According to emarketer, 75% of online users watch digital videos. However, Nielsen believes the average online user watches less than four hours of online video per month. We believe as broadband speed increases, the consumption of online video will grow rapidly. The list goes on gaming, peer-2-peer, rich media advertising all should contribute to an explosion in usage that requires greater server capacity and drives data center demand and revenue. Beyond consumer-driven IP growth, corporations are relying increasingly on IP for communicating. , instant messaging, and voice are currently delivered via the Internet. In addition, software and applications such as customer relationship management are utilized via the Internet and housed remotely at data centers. Increasing real-time business requirements and storage needs add to demand. Electronic trading is also growing rapidly and adding to network and server demands. Internet data traffic grew increased more than fivefold over the last 5 years Internet data traffic has increased more than fivefold over the last 5 years and could increase threefold over the next 5 years according to Cicso Systems. Cisco Systems, which is the largest manufacturer of IP equipment, believes IP traffic will grow at a compound annual growth rate of over 20% through While IP traffic is growing rapidly, IT continues to be complex and everchanging. Coupling this with recent technology improvements such as virtualization and faster broadband speed creates an attractive environment for outsourcing IT to data centers. Given as much as 80% 90% of computing capacity on dedicated servers goes unused at any given time, virtualization enables unused capacity to be utilized. Internap Network Services Corp. Page 6 of 16

7 REITS REITS are Real Estate Investment Trusts REITS are Real Estate Investment Trusts. Companies with this tax structure can be of higher relative value than non-reit companies because profits are largely shielded from corporate income tax. That savings can be passed along to the shareholders in the form of dividend. Often REITs have fairly high dividend. The publicly traded data center REITs have dividends ranging from 2% to 6% annually. To qualify as a REIT a company must have at least 75% of its assets in real estate, 75% of income must come from real estate, 90% of pre-tax income must be distributed to shareholders, no more than 50% of the stock can be owned by five or fewer individuals, and the company cannot own more than 10% of a tenant. Most of the publicly traded Data Centers are REITs Today, most of the publicly traded Data Centers have a REIT structure. All would likely qualify because data centers are physical buildings that rent space to clients housing servers to store and transmit data. Risks Macro-Economic and Interest Rates Rising interest rates can hurt data centers Data center demand can fluctuate depending on economic conditions. Rising interest rates can hurt data center stocks in a number of different ways. First, rising interest rates make the dividend yield of REITs less attractive because alternatives including risk free treasuries become a more viable alternative. Second, the cost of borrowings of both existing variable loans and future loans can impair bottomline profits including AFFO. Third, rising interest rates lessen the present value of future cash flow. Competition and Pricing Communications real-estate and hosting services are highly fragmented and competitive sectors. Pricing may be pressured Recently contracts have spanned 3-7 years Pricing may be pressured over time as data centers compete with large companies that have greater resources, such as Microsoft, IBM, EDS, AT&T and Amazon. These companies have the ability to invest materially more capital in their businesses. They also could lower pricing given they have greater scale. Historically data center industry colocations contracts have averaged 2-3 years, but more recently contracts have spanned 3-7 years. While pricing pressure and potential margin erosion is a threat to the business opportunity, the outstripping of demand versus supply has allowed stable pricing in Virtualization and Potential Pricing Power Deterioration Virtualization is a broad IT term referring to the abstraction of computing resources to perform multiple tasks. As much as 80% 90% of computing capacity on dedicated servers goes unused at any given time. Cloud computing is a hot Internap Network Services Corp. Page 7 of 16

8 area within virtualization. Cloud computing refers to computing resources made accessible as scalable, on-demand services over a network. Cloud computing combines virtualization, service-orientation, elasticity, multi-tenancy and pay-asyou-go billing. Adopters of cloud computing seek to capture improved cost efficiencies, accelerated innovation cycles, faster time-to-market deployment, and scalability on-demand. Virtualization enables colocation clients to occupy less space Virtualization enables colocation clients to occupy less space because server efficiency improves. Customers can now run multiple applications or projects on a single or group of shared servers, as opposed to dedicating individual servers for each project or task. This can result in lower colocation revenue per customer for the group but might aid cloud revenue. Virtualization is an example of how technological advancement might impact the colocation business negatively. In general, as server hardware advances, the amount of physical space required to power the same computing capacity could lessen. If technological advancements overwhelm the trend of growing IP traffic, then colocation demand and pricing could decline. Availability of and Access to Credit Availability of capital is critical Churn Data Center development requires meaningful, substantial upfront spending to construct and build facilities. Availability of capital is critical to future growth. Should lending markets tighten, facility development could suffer. Dependence on a Limited Number of Large Enterprise Clients Liquidity crises and customer bankruptcies add to churn. Recent signs point to steady improvement in the economy, the consumer, credit and the economy, but demand can be sensitive to any change in these variables. Financials In 2014, Internap produced $335 million of revenue, $79 million EBITDA, $37 million of recurring free cash flow and $0.68 per share of AFFO. After all capital requirements Internap burned roughly $23 million in cash last year. Internap reported modest 2Q15 results as expected, but the potential for a recovery in the second half remains as sales activity could ramp up. INAP in 2Q15 produced a decline of 4% in revenue to $80 million due to increased churn. EBITDA of $19 million was up 3%. EBITDA margin of 23.8% improved 180 basis points. 3Q15 EBITDA $20 million 2015E EBITDA $80 million Internap in 3Q15 posted revenue of $78 million, down 7%. Adjusted EBITDA reached $20 million which was $1 million above the guidance. Full year 2015 guidance calls for revenue $320 million to $325 million and EBITDA of $80 million to $85 million. Our 2015 financial estimates call for revenue down 4% to $322 million and EBITDA up 2% to $80 million. Internap Network Services Corp. Page 8 of 16

9 2016 EBITDA $92 million Our 2016 EBITDA estimate is $92 million, up 15%, leading to AFFO per share of $0.80. Internap - Consensus Estimates ($ in thousands, except per share data) Burke & Quick 4Q 2015 Guidance 4Q 2015 Consensus Revenue $82,464 $82,522 EBITDA $24,368 $23,763 AFFO $ Revenue $322,000 $311,000 $322,814 EBITDA $80,000 $75,000 $81,197 AFFO $ Revenue $335,000 $340,733 EBITDA $92,000 $96,209 AFFO $0.80 Source: Factset and Burke & Quick Partners Estimates. Internap has long-term debt of roughly $376 million including $58 million in capital lease obligations. Net debt to 2015E EBITDA stands at 4.7x. The company s goal is to reduce leverage ½ a turn every year until it hits 3x. Valuation Data Center stocks trade at 14x 2016E EBITDA Internap trades at only 8x Our price target is $10 The Data Center stocks trade at 14x 2016E EBITDA. With a recurring business model and infrastructure that has strategic value, we believe the sector can sustain or possibly extend its valuation multiples. Internap stock trades at only 8x 2016E EBITDA, a substantial discount to peers perhaps because of its modest growth rate, flat legacy IP business, being a reseller of colocation space, being a closely held stock with a small market capitalization and having low trading volume. Using 13x 2016E AFFO and/or 10x EBITDA, our price target for Internap is $10. Internap Network Services Corp. Page 9 of 16

10 Internap - Income Statement, E ($ in thousands, except per share data) Fiscal Year Ending December 31, E 2016E 2017E 2018E Core $195,400 $198,308 $224,000 $251,280 $276,688 Yr.-Yr. Pct. Change 45.7% 1.5% 13.0% 12.0% 10.0% Partner 47,200 41,798 36,800 34,960 33,212 Data Centers 242, , , , ,900 IP Services 92,336 81,894 74,200 72,716 71,262 Total Revenues $334,959 $322,000 $335,000 $358,956 $381,162 Yr.-Yr. Pct. Change 18.2% -3.9% 4.0% 7.2% 6.2% Direct Costs of Data Center (106,159) (98,710) (104,320) (111,634) (120,861) Pct. of Data Center Revenue 43.8% 41.1% 40.0% 39.0% 39.0% Direct Costs of IP (38,786) (34,495) (31,164) (30,541) (29,930) Pct of IP Revenue 42.0% 42.1% 42.0% 42.0% 42.0% Customer Support (35,357) (34,356) (34,000) (35,000) (36,000) Sales & Marketing (36,698) (34,672) (35,278) (36,278) (37,278) General & Administrative (39,231) (39,767) (38,238) (39,238) (40,238) Total Operating Costs (111,286) (108,795) (107,516) (110,516) (113,516) Pct. of Revenue 33.2% 33.8% 32.1% 30.8% 29.8% EBITDA 78,729 80,000 92, , ,855 Yr.-Yr. Pct. Change 35.7% 1.6% 15.0% 15.5% 10.0% EBITDA Margin 23.5% 24.8% 27.5% 29.6% 30.7% Depreciation & Amortization (81,170) (90,604) (97,396) (99,344) (101,331) Stock Compensation Expense (7,182) (8,400) (8,000) (8,000) (8,000) One-Time Costs (4,716) (2,045) Operating Income (14,340) (21,049) (13,396) (1,078) 7,524 Interest Income, Net (Expense) (26,743) (27,668) (28,600) (29,000) (29,300) Other, net (31) Pretax Income (Loss) (41,114) (47,899) (41,996) (30,078) (21,776) Tax Benefit and Equity Investment 1,620 2, Net income (Loss) (39,494) (45,880) (41,996) (30,078) (21,776) Diluted Shares 51,074 51,604 52,050 52,300 52,500 EPS ($0.77) ($0.89) ($0.81) ($0.58) ($0.41) Total Shares 54,410 55,757 56,750 57,000 57,200 FFO $0.88 $0.97 $1.12 $1.36 $1.53 AFFO $0.68 $0.70 $0.80 $1.02 $1.17 Free Cash Flow (FCF) EBITDA 78,729 80,000 92, , ,855 Cash Interest & Taxes (25,123) (25,649) (28,600) (29,000) (29,300) Maintenance Capital Expenditures (16,500) (15,500) (18,000) (19,000) (20,500) Recurring FCF 37,106 38,851 45,400 58,266 67,055 Recurring FCF/Share $0.68 $0.70 $0.80 $1.02 $1.17 Expansion Capital Expenditures (60,000) (46,000) (48,000) (48,000) (48,000) FCF (22,895) (7,149) (2,600) 10,266 19,055 FCF Per Diluted Share ($0.42) ($0.13) ($0.05) $0.18 $0.33 Source: Company reports and Burke & Quick Partners estimates. Internap Network Services Corp. Page 10 of 16

11 Internap - Income Statement, 2014 ($ in thousands, except per share data) Fiscal Year Ending December 31, 1Q 2Q 3Q 4Q 2014 Core $46,400 $49,400 $49,900 $49,700 $195,400 Yr.-Yr. Pct. Change 48.2% 52.0% 51.7% 32.9% 45.7% Partner 11,900 12,000 11,700 11,600 47,200 Data Centers 58,283 61,395 61,640 61, ,623 IP Services 23,678 22,673 23,027 22,958 92,336 Total Revenues $81,961 $84,068 $84,667 $84,263 $334,959 Yr.-Yr. Pct. Change 17.6% 20.1% 21.7% 13.7% 18.2% Direct Costs of Data Center (25,891) (26,563) (27,716) (25,989) (106,159) Pct. of Data Center Revenue 31.6% 43.3% 45.0% 42.4% 43.8% Direct Costs of IP (9,869) (9,999) (9,432) (9,486) (38,786) Pct of IP Revenue 41.7% 44.1% 41.0% 41.3% 42.0% Customer Support (8,643) (9,220) (8,761) (8,733) (35,357) Sales & Marketing (9,851) (9,688) (8,610) (8,549) (36,698) General & Administrative (9,908) (10,095) (10,434) (8,794) (39,231) Total Operating Costs (28,402) (29,003) (27,805) (26,076) (111,286) Pct. of Revenue 34.7% 34.5% 32.8% 30.9% 33.2% EBITDA 17,799 18,503 19,714 22,712 78,729 Yr.-Yr. Pct. Change 25.8% 31.5% 39.1% 45.1% 35.7% EBITDA Margin 21.7% 22.0% 23.3% 27.0% 23.5% Depreciation & Amortization (18,926) (19,468) (20,915) (21,861) (81,170) Stock Compensation Expense (1,941) (1,956) (1,778) (1,507) (7,182) One-Time Costs (1,469) (1,593) (56) (1,598) (4,716) Operating Income (4,537) (4,514) (3,035) (2,254) (14,340) Interest Income, Net (Expense) (6,491) (6,806) (6,699) (6,747) (26,743) Other, net (101) (382) (31) Pretax Income (Loss) (11,129) (11,702) (9,585) (8,698) (41,114) Tax Benefit and Equity Investment ,620 Net income (Loss) (10,675) (11,185) (9,377) (8,257) (39,494) Diluted Shares 51,027 51,045 51,063 51,159 51,074 EPS ($0.21) ($0.22) ($0.18) ($0.16) ($0.77) Total Shares 54,318 54,385 54,386 54,550 54,410 FFO $0.22 $0.22 $0.24 $0.30 $0.99 AFFO $0.11 $0.15 $0.19 $0.23 $0.68 Free Cash Flow (FCF) EBITDA 17,799 18,503 19,714 22,712 78,729 Cash Interest & Taxes (6,037) (6,289) (6,491) (6,306) (25,123) Maintenance Capital Expenditures (5,800) (3,800) (2,900) (4,000) (16,500) Recurring FCF 5,962 8,414 10,323 12,406 37,106 Recurring FCF/Share $0.11 $0.15 $0.19 $0.23 $0.68 Expansion Capital Expenditures (19,700) (9,300) (11,900) (19,100) (60,000) FCF (13,738) (886) (1,577) (6,694) (22,895) FCF Per Diluted Share ($0.25) ($0.02) ($0.03) ($0.12) ($0.42) Source: Company reports and Burke & Quick Partners estimates. Internap Network Services Corp. Page 11 of 16

12 Internap - Income Statement, 2015E ($ in thousands, except per share data) Fiscal Year Ending December 31, 1Q 2Q 3Q 4QE 2015E Core $47,948 $48,711 $48,385 $53,264 $198,308 Yr.-Yr. Pct. Change 3.3% -1.4% -3.0% 7.2% 1.5% Partner 11,150 10,711 10,237 9,700 41,798 Data Centers 59,098 59,422 58,622 62, ,106 IP Services 21,688 21,010 19,696 19,500 81,894 Total Revenues $80,786 $80,432 $78,318 $82,464 $322,000 Yr.-Yr. Pct. Change -1.4% -4.3% -7.5% -2.1% -3.9% Direct Costs of Data Center (24,264) (24,335) (25,111) (25,000) (98,710) Pct. of Data Center Revenue 41.1% 41.0% 42.8% 39.7% 41.1% Direct Costs of IP (9,082) (8,643) (8,570) (8,200) (34,495) Pct of IP Revenue 41.9% 41.1% 43.5% 42.1% 42.1% Customer Support (8,744) (8,723) (8,689) (8,200) (34,356) Sales & Marketing (9,871) (9,344) (7,761) (7,696) (34,672) General & Administrative (10,907) (10,474) (9,386) (9,000) (39,767) Total Operating Costs (29,522) (28,541) (25,836) (24,896) (108,795) Pct. of Revenue 36.5% 35.5% 33.0% 30.2% 33.8% EBITDA 17,918 19,109 19,752 24,368 80,000 Yr.-Yr. Pct. Change 0.7% 3.3% 0.2% 7.3% 1.6% EBITDA Margin 22.2% 23.8% 25.2% 29.5% 24.8% Depreciation & Amortization (20,208) (22,566) (23,815) (24,015) (90,604) Stock Compensation Expense (1,579) (2,185) (2,435) (2,201) (8,400) One-Time Costs (250) (59) (1,736) 0 (2,045) Operating Income (4,119) (5,838) (9,185) (1,848) (21,049) Interest Income, Net (Expense) (6,865) (6,880) (6,923) (7,000) (27,668) Other, net Pretax Income (Loss) (10,454) (12,718) (15,820) (8,848) (47,899) Tax Benefit and Equity Investment , ,019 Net income (Loss) (10,442) (12,534) (14,197) (8,648) (45,880) Diluted Shares 51,336 51,579 51,699 51,800 51,604 EPS $0.20 ($0.24) ($0.27) ($0.17) ($0.89) Total Shares 54,969 55,522 56,036 56,500 55,757 FFO $0.20 $0.22 $0.24 $0.31 $0.97 AFFO $0.13 $0.15 $0.18 $0.23 $0.70 Free Cash Flow (FCF) EBITDA 17,918 19,109 19,752 24,368 80,000 Cash Interest & Taxes (6,853) (6,696) (5,300) (6,800) (25,649) Maintenance Capital Expenditures (3,800) (4,000) (3,300) (4,400) (15,500) Recurring FCF 7,265 8,413 11,152 13,168 38,851 Recurring FCF/Share $0.13 $0.15 $0.20 $0.23 $0.70 Expansion Capital Expenditures (11,900) (11,800) (7,600) (14,700) (46,000) FCF (4,635) (3,387) 3,552 (1,532) (7,149) FCF Per Diluted Share ($0.08) ($0.06) $0.06 ($0.03) ($0.13) Source: Company reports and Burke & Quick Partners estimates. Internap Network Services Corp. Page 12 of 16

13 Internap - Income Statement, 2016E ($ in thousands, except per share data) Fiscal Year Ending December 31, 1QE 2QE 3QE 4QE 2016E Core $54,500 $55,500 $56,500 $57,500 $224,000 Yr.-Yr. Pct. Change 13.7% 13.9% 16.8% 8.0% 13.0% Partner 9,500 9,300 9,100 8,900 36,800 Data Centers 64,000 64,800 65,600 66, ,800 IP Services 19,000 18,700 18,400 18,100 74,200 Total Revenues $83,000 $83,500 $84,000 $84,500 $335,000 Yr.-Yr. Pct. Change 2.7% 3.8% 7.3% 2.5% 4.0% Direct Costs of Data Center (25,600) (25,920) (26,240) (26,560) (104,320) Pct. of Data Center Revenue 40.0% 40.0% 40.0% 40.0% 40.0% Direct Costs of IP (7,980) (7,854) (7,728) (7,602) (31,164) Pct of IP Revenue 42.0% 42.0% 42.0% 42.0% 42.0% Customer Support (8,500) (8,500) (8,500) (8,500) (34,000) Sales & Marketing (8,800) (8,800) (8,800) (8,878) (35,278) General & Administrative (9,500) (9,500) (9,600) (9,638) (38,238) Total Operating Costs (26,800) (26,800) (26,900) (27,016) (107,516) Pct. of Revenue 32.3% 32.1% 32.0% 32.0% 32.1% EBITDA 22,620 22,926 23,132 23,322 92,000 Yr.-Yr. Pct. Change 26.2% 20.0% 17.1% -4.3% 15.0% EBITDA Margin 27.3% 27.5% 27.5% 27.6% 27.5% Depreciation & Amortization (24,049) (24,249) (24,449) (24,649) (97,396) Stock Compensation Expense (2,000) (2,000) (2,000) (2,000) (8,000) One-Time Costs Operating Income (3,429) (3,323) (3,317) (3,327) (13,396) Interest Income, Net (Expense) (7,000) (7,100) (7,200) (7,300) (28,600) Other, net Pretax Income (Loss) (10,429) (10,423) (10,517) (10,627) (41,996) Tax Benefit and Equity Investment Net income (Loss) (10,429) (10,423) (10,517) (10,627) (41,996) Diluted Shares 51,900 52,000 52,100 52,200 52,050 EPS ($0.20) ($0.20) ($0.20) ($0.20) ($0.81) Total Shares 56,600 56,700 56,800 56,900 56,750 FFO $0.28 $0.28 $0.28 $0.28 $1.12 AFFO $0.20 $0.20 $0.20 $0.20 $0.80 Free Cash Flow (FCF) EBITDA 22,620 22,926 23,132 23,322 92,000 Cash Interest & Taxes (7,000) (7,100) (7,200) (7,300) (28,600) Maintenance Capital Expenditures (4,500) (4,500) (4,500) (4,500) (18,000) Recurring FCF 11,120 11,326 11,432 11,522 45,400 Recurring FCF/Share $0.20 $0.20 $0.20 $0.20 $0.80 Expansion Capital Expenditures (12,000) (12,000) (12,000) (12,000) (48,000) FCF (880) (674) (568) (478) (2,600) FCF Per Diluted Share ($0.02) ($0.01) ($0.01) ($0.01) ($0.05) Source: Company reports and Burke & Quick Partners estimates. Internap Network Services Corp. Page 13 of 16

14 Internap - Valuation Analysis ($ in thousands, except per share data) Fiscal Year Ending December 31, 2015E 2016E AFFO Stock Price $6.90 $6.90 AFFO $0.70 $0.80 Multiple 10x 9x Secular Growth Rate 10% 10% PEG Ratio Target Multiple PEG 1.3 Implied Price $10.41 Upside to Target 51% EBITDA Stock Price $6.90 $6.90 Diluted Shares 56,036 56,036 Market Capitalization $386,648 $386,648 Long-term debt (366,645) (366,645) Working Capital 1,198 1,198 Enterprise Value 752, ,095 EBITDA 80,000 92,000 Multiple 9x 8x Target Multiple Target Price $9.90 Upside to Target 43% Sum-of-the-Parts EBITDA Core Data Center EBITDA 67,160 Partner and IP EBITDA 24,840 Core Multiple 12x Partner & IP Multilple 5x Core Value 805,920 Partner & IP Value 124,200 Gross Asset Value 930,120 Net Asset Value 563,475 Target Price $10.06 Upside to Target 46% Recurring Free Cash Flow Recurring Free Cash Flow $38,851 $45,400 Per Share $0.70 $0.80 Multiple 10x 9x Target Multiple Implied Price $10.41 Upside to Target 51% Price Target $10.00 Upside to Target 45% Source: Company reports and Burke & Quick Partners estimates. 13x 10x 13x Internap Network Services Corp. Page 14 of 16

15 Burke & Quick Research s Data Centers Universe Data Centers Burke & Quick Partners (561) /06/2015 S&P 500 CyrusOne CoreSite DuPont Fab Digital Realty Equinix Internap QTS Realty SP50 CONE COR DFT DLR EQIX INAP QTS Average Stock Price $2, $35.14 $56.85 $32.94 $73.89 $ $6.90 $ Week High 2, Low 1, % Change YTD 2% 28% 46% -1% 11% 30% -13% 28% 18% Relative 26% 44% -3% 9% 28% -15% 26% 16% Dividend $1.26 $1.68 $1.68 $3.40 $6.76 $1.28 Yield 3.6% 3.0% 5.1% 4.6% 2.3% 2.9% 3.6% Capitalization Fully Diluted Shares 72,593 47,411 81, ,192 57,713 56,036 48,733 Market Capitalization $2,550,909 $2,695,315 $2,670,336 $10,284,897 $17,071,640 $386,648 $2,117,954 Long-Term Debt (982,700) (475,250) (1,566,250) (6,083,579) (4,752,939) (366,645) (820,938) Working Capital 5,100 (33,301) 82,533 (332,563) (222,091) 1,198 (39,139) Enterprise Value $3,528,509 $3,203,866 $4,154,053 $16,701,039 $22,046,670 $752,095 $2,978,031 AFFO/Share AFFO/Share 2016 $ $2.55 $2.90 $2.75 $4.30 $15.90 $0.80 $2.55 Multiple AFFO/Share Multiple AFFO/Share EBITDA EBITDA 2016 $260,000 $196,000 $292,540 $1,024,792 $1,394,063 $92,000 $180,000 Multiple EBITDA , , , ,698 $1,268,653 80, ,000 Multiple EBITDA , , , ,198 $1,113,891 78, ,025 Target Multiple 2016E AFFO Price Target $41.00 $64.00 $38.00 $73.00 $ $10.00 $51.00 Upside to Target 17% 13% 15% -1% 3% 45% 17% Rating: Outperform Outperform Outperform Marketperf Outperform Outperform Outperform Source: Company reports; Burke & Quick Research estimates Internap Network Services Corp. Page 15 of 16

16 DISCLOSURES: ANALYST CERTIFICATION I,, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. DISCLOSURES Additional information available upon request. This report was prepared by (BQP) BQP is a Member of FINRA and SIPC. RATINGS INFORMATION Rating and Price Target Change History 3 Year Rating Change History 3 Year Price Change History Source: Burke & Quick Partners Created by: Blue-Compass.net Burke and Quick Partners LLC Stock Ratings and Definitions Outperform (O) Market Perform (MP) Underperform (U) Covered Not Rated (CNR) % of Companies Under Coverage With This Rating % of Companies for which Burke & Quick Partners LLC has performed services for in the last 12 months Investment Banking Brokerage The stock s total return is expected to outperform the S&P 500 over the next 12 months % 20.00% 0.00% The stock s total return is expected to be in line with the S&P 500 over the next 12 months % 0.00% 0.00% The stock s total return is expected to underperform the S&P 500 over the next 12 months. 0.00% 0.00% 0.00% The stock is covered by the firm but ratings and estimates are not issued. Internap Network Services Corp. Page 16 of 16