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Edited Transcript of INAP earnings conference call or presentation 1-Nov-18 12:30pm GMT

Q3 2018 Internap Corp Earnings Call

Atlanta Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Internap Corp earnings conference call or presentation Thursday, November 1, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James C. Keeley

Internap Corporation - CFO

* Peter D. Aquino

Internap Corporation - President, CEO & Director

* Richard R. Ramlall

Internap Corporation - VP of Investor & Public Relations

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Conference Call Participants

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* Daniel Louis Kurnos

The Benchmark Company, LLC, Research Division - MD

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the INAP Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference Richard Ramlall, Chief Communications Officer. Please go ahead, sir.

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Richard R. Ramlall, Internap Corporation - VP of Investor & Public Relations [2]

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Good morning, and thank you for joining us today. I'm joined by Pete Aquino, our Chief Executive Officer, and Jim Keeley, our Chief Financial Officer. Following prepared remarks, we will open up the call for your questions.

The slides we reference in the call are available on our website in the Events and Presentations section of our IR page.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in today's earnings press release.

Management believes that our presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, and 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. The earnings press release is available under the Financial Information section of our Investor Relations page under the quarterly results link.

Today's call contains forward-looking statements, as described in Page 2 of the slide presentation we reference in this call, which we urge you to read. These statements are not guarantees of future performance. Because these statements are based on certain assumptions and involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. We discuss these factors in our filings with the SEC, which are available from the SEC or on our IR website. We undertake no obligation to amend, update or clarify these statements made as of today, November 1, 2018.

Now let me turn to the call over to Peter Aquino. Pete?

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Peter D. Aquino, Internap Corporation - President, CEO & Director [3]

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Thank you, Richard. Good morning, everyone. We have a lot to cover today, so I will first provide a recap of our accomplishments to date and tie it together with our progress against our strategy to continue to grow INAP.

Let's turn to Slide 4. We ended 2017 with $281 million of revenue, and this quarter, we're guiding up, year-over-year, to $320 to $324 million for 2018, tightening our ranges with three quarters of actuals and (inaudible). This reversal back to top line growth in 2018 relative to previous years was accomplished through a multi-pronged strategy, as many of you have followed. We are at the upper end of our pre-release third quarter numbers with organic growth closer to 2% sequentially, now including Bank of America as an anchor tenant in our new Phoenix facility and netting out planned closures.

The portfolio improvement resulted from a combination of new organic growth, non-core dispositions, and tuck-in deals to improve our company's prospects for sustainable growth over the long term. I am happy to report today that our operations initiatives are on target. Through September year-to-date, we locked up several important wins that positions us well going into 2019. We recently added three Tier 3 data centers in high-demand markets, including Phoenix, London, and Atlanta, while simultaneously exiting six non-core facilities. Our operations team has skillfully migrated many of our top customers to our own flagship data centers to consolidate our footprint in Atlanta, Boston, and Dallas. They deserve a lot of credit for these complicated moves, and we're very proud of them.

The hard business decision to exit several properties over the last two years was designed to improve our data center profitability, while offering our customers the highest level of performance and reliability. This third quarter represents record levels for INAP's EBITDA of over 35%, and looking ahead, we'll continue find ways to optimize our footprint in the normal course. But for the most part, the low-hanging fruit will be captured this year.

In addition, we've made great progress in our cloud product suite, leading with our successful acquisition and integration of SingleHop. This technology upgrade enables our sales teams to offer our combined customers a large global footprint to expand their businesses. We are now purchasing equipment for new deployments in London and Canada, and earmarking some of the new capital to these projects. We also invested in a cloud network upgrade to handle increasing demand for our services. Overall, the SingleHop acquisition is doing better than expected and contributing to our organic growth.

Finally, another key capital investment in progress is the global re-engineering of both our backbone transport network and metro fiber rings. With the help of key vendors and dark fiber from Zayo, we're ensuring that all of our flagship data centers are connected in the most efficient manner to improve the customer experience. The investment in network upgrades and on-net connectivity will benefit our customers from end to end, as well as lower our operating costs. We're nearly done with phase one of this project and soon lighting six Metro rings in the United States.

From a sales perspective, our direct salesforce and renewed channel partner relationships are building a significant pipeline and signing larger deals. Our backlog of bookings yet to be installed remains over 20 million, meaning that we're replenishing installs with new sales. The recent equity raise will be helpful in accelerating these installs, as the larger wins require more capital up front, a proverbial good problem. For example, the latest multi-million wholesale colocation deal will absorb nearly 1 megawatt in Dallas. This was a gaming vertical win that was enabled by a recent expansion in Dallas. Gaming customers may require colo, or private cloud infrastructure, but would almost always require a high-performance network connection from INAP.

So given our network strength, we have a great opportunity to win these multi-product deals, as customers appreciate one-stop shop for complex or hybrid IT solutions. As many of you know, the gaming vertical is an attractive growth segment with a young and engaged audience that is driving major investments in the sector. Though latency and network reliability are table stakes, we're excited to be part of this growth trend, given our high qualifications for network performance.

So as we position the company to continue to fuel growth into 2019, we're strongly considering to refinance our debt this fall to improve our terms and flexibility for future deals and improved cash flow. We're currently at LIBOR plus 5.75%, and believe that with revenue stability achieved, increasing margins, and $40 million of new equity in the company, we can make the next incremental improvement in our capital structure. We expect to lower our interest expense, realize rent savings from exited facilities, and continue to drive margin expansion towards 40% EBITDA targets. Our progress has been very methodical, and future financings and adequate facility--excuse me, added credit flexibility--will keep up our momentum.

So let's turn to Slide 5 to preview where our capital dollars are being allocated over the next few quarters. As I mentioned, we expanded in Phoenix, Dallas, and Atlanta, which are high-absorption growth markets in our portfolio. As you can see from this JLL industry chart, through the first half of 2018, recent power demands outside of the hyper scale demand in Ashburn, Virginia, is spread across the best metros where INAP has a presence and great prospects for the future growth. We're also investing in international cloud pods to replicate our advanced cloud platform in the U.S., in Amsterdam. We are currently allocating time and capital to Canada and the U.K., with an eye towards Singapore in the back half of 2019, as we work with interested parties.

Our INAP cloud pods would typically coexist in an INAP colo footprint, along with an INAP network point of presence, or POP, to provide high-performance connectivity. This three-cushioned shot is unique to INAP in many cases and optimizes our real estate footprint. These attributes allow INAP to offer a full solution to our customers as a competitive advantage. Recent conversations with top customers support these new cloud investments as we work to anchor commitments in advance, rather than initiate pure spec construction. In many cases, expanding with INAP to other markets makes it much more efficient and consistent for customer rollouts. This collaborative effort ensures success for both parties, and it's a win-win.

Next, I'd like to point out the impact of our sales momentum in our data center portfolio, combined with significant asset shifts in certain markets. In summary, we moved from the high 50s in occupancy percentage in early 2017, before our salesforce was rebuilt, to now over 64%. This square-footage occupancy rate is a net number, after all of the moving parts, including new flagships in, and non-core assets removed. More importantly, and certainly of interest to many of our covering analysts, is that we're selling out high-density space, primarily to more tech-savvy enterprise customers who typically require more power. During service order negotiations with customers, power utilization tends to be the more important driver of contract value. So considering our power utilization, we estimated our efficiency is closer to 74%, meaning that we're selling relatively higher-powered deals than low-density deals. This is contributing to organic growth while challenging our operations team to construct augment in more power-hungry markets, typically driven by relatively lower power costs. These power augment investments are for infrastructure upgrades to handle success-based growth.

Again, we want to be in a position to capture this demand in a hot market. If we don't have the power, even though we have the square footage, the customer moves on. The new capital will help release some of this timing pressure. For example, in Santa Clara, in Northern California, we have sold lots of high-density space to Silicon Valley tech companies. We ran out of power before we ran out of square footage. The good news is that we're now engineering an expansion to add power, as well as a second floor in our Tier 3 flagship data center to keep up with this demand. We're highly confident we can sell out power and space really fast.

Another key takeaway from this chart is that we still need inventory in Ashburn and Chicago, some of the fastest growing markets in the country. Our objective is not to compete for hyper-scale projects that the REITs are fighting over, but to satisfy requirements by certain of our enterprise customers who want to co-locate there. We're working on it opportunistically while seeking additional flexibility in our credit facility to take on additional capital lease obligations.

We dedicate lots of time to corporate development to come up with creative ways to optimize our portfolio and looking to partner to drive new growth. Adding value-added cloud and network products that bundle into our premier data center footprint gives us many options to solve customer needs in our target markets.

So at this point, let me turn it over to Jim Keeley, our CFO. Jim?

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James C. Keeley, Internap Corporation - CFO [4]

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Thanks, Pete. Good morning, everyone. As I close out my first full quarter with the company, I'm very excited about INAP's growth opportunities. The numbers increasingly reflect the improvements made in our asset portfolio, our value proposition, and our cost efficiency. We are well positioned to take advantage of the momentum generated within our organization, within our existing customer base, and throughout the internet infrastructure market in general.

Now let's walk through the third quarter results. As previously disclosed, effective in the first quarter 2018, we realigned our segments geographically. We decided to make this change in conjunction with the SingleHop acquisition to better align and manage our global data center operations and assets. The new reporting segments and historical comparisons are presented in the release we issued this morning.

Now let's turn to the consolidated earnings summary, Slide 6. Total revenue, as reported, was $83 million for the third quarter of 2018, an increase of 1.2% sequentially and 20.4% year-over-year. The sequential increase was primarily due to colocation growth, offset in part by churn associated with planned data centers. Excluding the revenue from exited data centers, recurring revenues increased close to 2% sequentially, representing the second straight quarter of recurring revenue growth from continuing assets. Non-recurring revenues were 2% of the total revenue this quarter, slightly higher than the [1%] average over the last year.

Net loss in the third quarter was $15.1 million, including $3.9 million of other expenses, such as $2.4 million from exit restructuring activities, $1.3 million from stock-based compensation, and $200,000 for other non-recurring costs. On a normalized, non-GAAP basis, third quarter 2018 net loss increased by $1 million to $11.2 million from a net loss of $10.2 million in the prior quarter, and increased $1 million (inaudible) versus $10.1 million in the prior year. Sequentially, the increase was due primarily to higher interest and depreciation, offset by cost savings from exited data centers and operating expenses. The year-over-year increase is primarily due to higher depreciation and amortization, and higher interest expense.

Adjusted EBITDA in the third quarter was $29.4 million, with an adjusted EBITDA margin of $35.4%. Adjusted EBITDA increased $1 million versus the prior quarter and $6.1 million year-over-year. Adjusted EBITDA margin expanded 80 basis point sequentially and 160 basis points compared to the third quarter of 2017. This positive EBITDA performance was driven by revenue growth, including the SingleHop acquisition, cost reductions associated with the exited data centers.

Capital expenditures in the third quarter were $12 million, compared to $11.1 million last quarter and [$11] million in the third quarter of 2017. The third quarter spend was more in line with our historical mix of growth versus maintenance, at 70% versus 30% respectively. Third quarter 2018 adjusted EBITDA less CapEx was $17.4 million, flat sequentially and an increase of $5.1 million versus the third quarter of 2017, resulting primarily from the SingleHop acquisition.

Now let's turn to Slide 7, our INAP U.S. business unit. U.S. revenue totaled $65.7 million in the third quarter of 2018, a decrease of 2.5% sequentially and an increase of 24% year-over-year. The sequential revenue increase was primarily due to higher colocation revenues and non-recurring revenues, offset by lower network revenues. Year-over-year increase was primarily due to the addition of SingleHop and colocation revenues, and higher non-recurring revenues offset in part by lower network revenues.

U.S. business unit's third quarter 2018 contribution was $29.8 million, resulting in a 45.4% contribution margin, which was relatively flat compared to the second quarter, and 130 basis points higher than the prior year. The year-over-year increase was primarily due to a combination of cost reductions and exits of underperforming data centers. By year-end, we expect planned exits of the six identified underperforming data centers to be near completion, positioning the company to enter the new year relatively clean.

Now let's go to Slide 8 to discuss our INAP International business unit. International's third quarter revenue totaled $17.3 million, a decrease of $600,000 or 3.4% sequentially, and an increase of $1.4 million, or 8.5% year-over-year. The sequential decrease was primarily due to lower cloud revenue resulting from lower bookings, higher churn resulting from a cyclical reduction from one of our customers. The year-over-year increase was driven primarily by the financial consolidation of INAP Japan and the addition of SingleHop. International business unit contribution of $5.8 million decreased $200,000 sequentially and $300,000 year-over-year. The third quarter International contribution margin was relatively flat sequentially and decreased 440 basis points year-over-year. The sequential decrease in margin was primarily due to the revenue decrease; the year-over-year decrease was largely due to the exclusion of INAP Japan last year and early 2017 revenue declines and churn.

Moving to Slide 9, titled Cash Flow and Balance Summary. Free cash flow, defined as cash generated from operations less capital expenditures, was a negative [$20.7] million in the third quarter of 2018, a decrease of $6 million from the prior quarter, and an increase of $6 million from the prior year. The sequential decrease was due primarily to higher capital expenditures, higher interest, and working capital timing. As I mentioned previously, capital expenditures were $12 million in the current quarter, comprised of $8.4 million of growth-related spend and $3.6 million of maintenance. The majority of the growth CapEx was success-based, driven by new customer contracts.

Cash interest was $15.8 million in the third quarter. This brings our unlevered free cash flow to $14.1 million compared to $19.8 million in the previous quarter and $3.3 million last year. Cash and cash equivalents were $11.8 million at the end of the third quarter of 2018 versus $14.7 million in the prior quarter. The decrease of $2.9 million was primarily driven by a $2.5 million increase in accounts receivable due to timing, higher capital expenditures of $1 million, and working capital fluctuations.

Remaining lease commitments for our closed data centers will begin to roll off by year-end and continue through the second quarter of 2019, resulting in a nice increase to free cash flow. Total debt of $696.2 million includes $262 million of capital lease obligations. Capital lease obligations increased $32 million for the addition of the new Phoenix facility. $157.9 million of these capital lease obligations are excluded from debt for our bank covenant purposes, and they were operating leases at the time of the refinancing.

Our covenant-based leverage ratio was 5.5 in the third quarter of 2018, 5.2 in the second quarter of 2018, and 4.2 in the third quarter of last year. We've seen a growing pipeline of the larger deals, which may lead to accelerated or higher capital requirements for both success-based capital and additional build-outs of existing facilities. We believe that it was important to position our balance sheet to fund these types of opportunities, should they arise, and not restrict growth. Therefore, in August, we increased the amount available on our (inaudible) by $10 million. Then, subsequent to the third quarter, on October 23, we completed an underwritten public offering of approximately 4.2 million shares of common stock, for gross proceeds of $40 million. These actions give us the runway necessary to take full advantage of significant growth opportunities in the coming year.

Turning to Slide 10, Third Quarter 2018 Financial Guidance. With the third quarter closed and only two months left in the year, we're comfortable narrowing within the current range our financial guidance for 2018. We expect revenue to be in the range of $320 million to $324 million, adjusted EBITDA in the range of $111 million to $114 million, and CapEx somewhere between $40 million and $43 million for the year.

Now let's turn the call back to Pete.

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Peter D. Aquino, Internap Corporation - President, CEO & Director [5]

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Thanks, Jim. So the takeaway for today's call is that we're investing in growth and on target with our operating objectives for 2018. We're marching on a path to make INAP's portfolio more attractive to customers and strategic partners well into 2019 and beyond. While high volatility continues in the equity markets, we are quietly swapping out non-core facilities, replacing them with future INAP flagship data centers. This will make our portfolio much more valuable down the road, as we enter discussions with customers who want to expand into new markets, partners who want to access our footprint to grow their business, and ultimately, industry players who are also seeking out strategic alternatives to gain scale that maximizes value for shareholders.

So as the quarters progress under INAP 2.0, we are focused on improving our business and executing on a strategy that increases free cash flow over the long term. The theme for 2018 is to optimize our global portfolio to grow our company and improve profitability while exceeding customer expectations for quality and service. This management effort is establishing a new foundation that can absorb and integrate new tuck-ins and M&A successfully. If you consider the summative parts of INAP, our work in 2018 to improve the overall portfolio and return the company to growth was made possible by all three valuable parts of our company, colo, cloud, and network.

Our Tier 3 data centers are located in the best metro markets, and where we needed an upgrade, we were very decisive. Phoenix, Atlanta, and London were significant deals accomplished in-year, and each had a different purpose. Phoenix was an expansion opportunity to keep up with demand for INAP in that market. Atlanta was swapped out for a non-core site so we can gain control of our quality of service. And London is a partnership deal with COLT, where we didn't have any inventory in that market and our customers were asking for both colo and cloud presence. Now we have it.

The other growing part of our business is the managed services and private cloud platform that many of our customers depend on, including shared hosting customers, gaming, movie studios, ad tech, and other verticals. INAP's cloud product set has a global appeal and doesn't require as much of a colo footprint. It does, however, require a state-of-the-art network, and we're fortunate to have connectivity as a customer attraction.

Connectivity is increasingly important to our customers who are living in the hybrid environments between public and private clouds and requiring connections to multiple suppliers. INAP's 100-plus POPs are in the who's who of REITs and carrier hotels, as well as our own data centers. This network footprint, complete with high-speed intelligent routing and low-latency connections is a differentiator for INAP and is certainly coming back in vogue. As you read of other data center companies trying to connect their own locations today, we're well ahead of the game.

And so, looking at the big picture, INAP is proving solutions and data centers with multiple tenants who require combinations of products and services. This is a large, addressable market whereby enterprise customers and businesses need and demand more flexibility as they manage their own workloads. In many cases, customers do not want to purchase off the rate card but to collaborate on the best system for their operation. Customers are seeking our INAP expertise to partner with them to engineer and design a full solution that is right for their business.

With our investments pointing towards growth opportunities leading into 2019, we believe that INAP is on the right track to build valuable portfolio for the long term. We will continue corporate development to be opportunistic to improve our overall data center portfolio, and we will work towards gaining additional flexibility in our credit facilities to give us room to maneuver.

At this point, this concludes our prepared remarks. Operator, we'd be happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Dan Kurnos from Benchmark.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [2]

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Pete or Jim, just a little clarification on the growth. You mentioned the sequential number. I don't know if you mentioned what is was year-over-year. But obviously, on more of the topic du jour in terms of the success-based capital and the cap raised, could you just talk about--maybe to help clarify for people to understand the timing of these wins. Obviously, right now we've--you've had a lot of high profile wins. You continue to have backlog replenishment. You know, looking at the numbers, we're seeing the organic growth pick up, but it seems like there could either be, I don't know, a hockey stick is probably too aggressive, but as these things start to land and monetize and actually get booked into revenue, both from the deal you've announced and maybe even incrementally from the COLT build-out, which I think Q4 should be up and running from a revenue perspective, just help us understand the timing of these and maybe sort of the underlying churn, if you can, just so we get a better sense of the momentum we have going into and starting in 2019.

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Peter D. Aquino, Internap Corporation - President, CEO & Director [3]

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Clearly, the question is all-encompassing because, you know, we've been pushing very hard from a salesforce perspective, channel partners, you know, offering wholesale deals that we didn't do before, and we caught the bus. And catching the bus means the deals are getting bigger, they're coming in faster, the capital needs to be deployed to build out that space. Usually, bigger customers want it done in phases, so it's not a hockey stick, to your point. It's more linear in nature, but the upfront capital costs are significant because these deals are seven-figure total contract values. This is what we've been pushing for.

And so, if you look at the sequential growth organically from the beginning of the year, by the first quarter, we were break even. We were pretty much replacing churn and up sequentially about 1%. Now we're pushing almost 2%, and we're getting to the point where we only have one option: Either stick with it or slow it down. And what we find is if we stick with it, we can continue to grow organically, and it may not be as linear as it has been these last three quarters, clearly, because these projects are lumpy in nature. If we can sell out big footprints in one shot, we'll do it. But they typically layer in and it's not a hockey stick. That's almost implicit in our guidance narrowing this year, which basically says look, even if we win big deals, it's more linear in nature, but it's progressively going up.

The other thing that manifested itself this year is that every deal that we've done, including the partnership with COLT, was all designed to be in markets where customers are demanding service. So we're kind of, in some ways, being directed with customers who are already in our body to expand the markets where they need to expand their business. The deal with COLT was very smart for us because, one, it was economic. We didn't have to go out-of-pocket to buy a data center or to make a huge commitment, but we got enough space to get going in a Tier 3 facility that matches the quality of the data centers we're looking for. And with COLT, they're just a great partner, and we hope it really turns into something where it's a two-way street. Not only are we using their facilities to help our customers, but they may want to use our facilities for their customers coming to the U.S. This is all very new in its development; it's basically a few months old. But I was there last week or the week before, and they're really excited to work with us.

So I like the cards we've played. It turned into somewhat of an opportunity we've got to keep working with, and it did cause some decisive action on our part to raise the equity in the last couple weeks to keep this momentum going, because the alternative of slowing it down was not appealing. So that's the nature of the beast.

And when it comes to churn, I think your last point is that the investments we made in hardening the cloud platform and the network itself is all designed to make the customer experience better. I mean, to the extent we had outages in the past, or we had blockages or failures because of demand, that's another thing we've got to keep up with, and the work we've done on both the cloud platform with SingleHop and with the new investments we made this year, as well as the backbone network in the U.S. and the metro rings, all of that is designed to lower churn and to give our customers confidence of the reliability of our network. So those investments were made and continue to be rolled out into 2019 to keep up, again, with the growing demand for our business.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [4]

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Got it; that's super helpful. And just to be clear on the metro rollout, is there any monetization included in the Q4 guide, or is that sort of, again, also a scaling prospect?

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Peter D. Aquino, Internap Corporation - President, CEO & Director [5]

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The equipment was ordered; the equipment is installed. We're now testing it. We'll be lighting it. We're training our salesforce. So by the fourth quarter, if my team is listening, which I'm sure they are, which is I want them to sell as fast as possible. So we're not counting in the guidance that much at this point, but I'd like to surprise everyone here and actually pull that in. But the [Metro E] projects, just another situation where customers were asking for connectivity within a market, because we might have two or three assets in a footprint, connected by 200 miles of dark fiber from Zayo. We're lighting those rings so we can control the facilities so they're all--they all seem to be in a ubiquitous environment. And that makes total sense for our customers, and the next question after that is can you connect me from Seattle to New York, and the answer now is yes.

So we're putting that all together in that on-net appeal to customers who frankly try to run their business, not trying to spend their time cobbling it together, it's a great one-stop shop [answer] for us. And we did all of that, frankly, in year, starting some of it in 2017. But we did most of that work in year, and it was quite a bit of surgery to get the backbone and the rings back on track.

So, you know, looks probably to readers that, you know, we're moving very methodically and quite linearly through the year, but the amount of work we're doing across multiple fronts to get this portfolio, you know, tuned up, if you will, so we can enter discussions either with strategic partners or even with customers, that's the work we had to do. And we pushed across all those fronts, and here we are today, basically closing out the year as, basically as we said in the beginning of the year, pretty much on target and with a big list of to-dos that were crossed off the list.

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Operator [6]

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Thank you. Our next question comes from Frank Louthan from Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [7]

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Want to look at the guidance for Q4, pretty close to the end of the year here. Just curious why the range wasn't tightened a little more, and what would have to happen for you to see declining revenue and EBITDA sequentially towards the mid or lower end of the range?

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Peter D. Aquino, Internap Corporation - President, CEO & Director [8]

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Yes, there's a couple more things that are on the list, Frank, that could move that needle frankly in a better direction that we have right now. But the range is fairly tight. I think mathematically, assuming it's not a hockey stick in the fourth quarter in our favor, we've made the range wide enough, yet narrow from a 10-point range before, that gives us some flexibility to finish off one or two more things. And those are opportunistic, so what we're trying to do is hit the ball down the middle, at least from a guidance perspective. But the year is not over, and as you can imagine, our group is in the fourth quarter of the year, trying to close out some of the things that have been cooking for a while. So we try to keep it somewhat logically narrowed without signaling a hockey stick, so we narrowed the range, but it's not more narrow because we're still working on stuff.

From a down side perspective, you know, we don't expect any surprises. Everything that is planned for is--or anything that's currently in our guidance is planned for, it's known. We're working with some customers who say they're leaving, but they're not leaving, or they want to stay--they want a little bit more space. Everything is planned for, including some of the exits that are in progress. They're just, you know, taking a little bit longer. They want to stay a little bit longer. It's kind of good, but it's also bad from the standpoint that we have plans for that space.

So we have--you know, we have a day job. It's a little bit more complicated, but you know, two more months left to go this year, our guys have a big list of things to do that we're still trying to get accomplished.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [9]

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Okay, and at what point, once you've gotten all the churn and stuff flushed out, do you think you'll be in a position to give out some other operating metrics like some of your peers, like megawatts in capacity and bookings and churn numbers, and things like that? Is that a Q1, post-Q4 kind of into Q1 sort of thing, or when can we expect to see some of those other metrics?

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Peter D. Aquino, Internap Corporation - President, CEO & Director [10]

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I think we made one good step today, where we're giving you an overlay of the power utilization and our square footage footprint. So as we talked about in the past, 64% occupancy on data center floor space, but we're running hot on power, so we're about 74% estimated effective usable space, which means we're selling a lot of power in high-density deals. That was one of the first attempts at giving the Street a little bit more information on our power and our power utilization.

I think we'll also be able to provide more detail on bookings and backlog as the pipeline gets bigger. I think right now, the consistency of being over 20 three quarters in a row basically suggests whatever we're selling, we're deploying, and then we're re-filling the bucket, so to speak. I think that could get better over time as well, as we start scoring some of these bigger deals.

But we're cognizant of giving you more information as we have it. But today's the first step in that direction to give you a power utilization reference point.

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Operator [11]

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Thank you, and our next question comes from George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [12]

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First, I'd like to echo the importance of Frank's last question from an investor perspective. So, I did like Slide 5, and I did like the addition of the power utilization piece, but it does beget the question of the opportunity as you fill up these facilities, given the power limitations would suggest a little more limited potential upside filling the data centers. Am I missing anything in that characterization?

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Peter D. Aquino, Internap Corporation - President, CEO & Director [13]

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Well, it's correct if we do nothing. For example, in Santa Clara, in the example in the script today is we're doing something about that limitation. So your observation is correct, where you'll be capped out. But the capital program in Santa Clara is going to allow us to add that power to free that up. So we were signaling that the new capital coming in and the capital program for next year is going to be targeted for all those constraints, so it does require a proactive move on our part to free it up, and also, driven by customer demand. We know by building where that is, and today, the most important area to fix is Montreal and Santa Clara, and we're doing that as we speak.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [14]

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Got you. Okay, that's helpful. And I'm just curious, the $15 million of wins that you talk about in your press release, can you just give us a sense of what is the incremental spend for those wins? What's the ultimate return from an incremental margin perspective, or incremental return on capital? Just so we have some perspective, I think that'd be helpful.

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Peter D. Aquino, Internap Corporation - President, CEO & Director [15]

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Yes, these deployments are going into existing buildings, so the margin that we get from this customer deployment is very, very high. Most of the capital spend is for, you know, cages and cable and racks, so the capital spend goes to the balance sheet, and the EBITDA margin throw-off from those deals is significant, as it would be in any data center model. So the returns are high, and to the extent we're trading off some retail pricing for wholesale pricing, it's slightly less in terms of returns. I don't want to give out the exact number for these deals; it's very specific. But you can imagine, you know, anywhere between 50% and 80% contribution margin from an expansion project in a data center that exists for these types of deals.

We're really excited about these deals because it's--you know, it has a big impact on top line and EBITDA in one shot. And to the extent we've done some pre-work on critical infrastructure, we're just using incremental power as opposed to building new power, that's excellent.

In the case of Dallas, you may recall last year we put in almost $10 million expanding Dallas, and I think it was a 3 megawatt project, plus or minus. And this customer that we just sold took one of it, and that's just to get started. So we didn't see those deals, at least since I've been here since the end of 2016, and now we're seeing more of them in the pipeline, and I'm really excited about that.

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Operator [16]

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Thank you. This does conclude today's question-and-answer session. I would now like to turn the call back to Mr. Aquino for any further questions--I mean further remarks; I'm sorry.

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Peter D. Aquino, Internap Corporation - President, CEO & Director [17]

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Thank you, Operator. Well, thank you all for your attention this morning, and we look forward to our next report. Thank you very much. Have a great day.

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Operator [18]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program; you may all disconnect. Everyone have a great day.