EX-99.1 2 ex99-1.htm EXHIBIT 99.1 Exhibit 99.1

Exhibit 99.1
FOR IMMEDIATE RELEASE
Internap Reports First Quarter 2007 Financial Results
Announces One-Time Restructuring and Impairment Charges

 
§
Record revenues for Q1 2007 of $53.5 million, an increase of 26% over prior year period
 
§
Net Loss (GAAP) of $10.7 million for Q1 2007 (including a one-time restructuring and impairment charge totaling $11.4 million) compared with Net Income (GAAP) of $0.5 million for Q1 2006
 
§
Adjusted EBITDA1 for Q1 2007 of $7.9 million, an increase of 36% over prior year period 
 
§
Added 106 net new customers during Q1 2007 
 
§
Reaffirms Revenue and Adjusted EBITDA Guidance for the Year 2007
 
ATLANTA, GA - May 3, 2007— Internap Network Services Corporation (NASDAQ: INAP), a provider of choice for the world's elite businesses on the Internet, today reported financial results for the quarter ended March 31, 2007.

For the first quarter of 2007, revenues totaled $53.5 million, an increase of 26% compared to the first quarter of 2006. Net loss (GAAP) for the first quarter of 2007 was $10.7 million, or $(0.26) per diluted share. This net loss includes a non-cash charge for stock-based compensation expense of $1.6 million, or $(0.04) per diluted share, pursuant to the adoption of SFAS No. 123R in the first quarter of 2006. Net loss (GAAP) for the first quarter of 2007 compares to a net income (GAAP) of $0.5 million for the first quarter of 2006.

Normalized net income1 and normalized net income per diluted share1, which exclude the impact of stock-based compensation, the restructuring and impairment charges and acquired in-process research and development, was $2.7 million, or $0.06 per diluted share, respectively, for the first quarter of 2007.

Adjusted gross margin1 was 46.5% for the first quarter of 2007, compared to 46.3% for the fourth quarter of 2006.

The Company reported adjusted EBITDA1 of $7.9 million for the first quarter of 2007, an increase of $2.1 million, or 36%, from first quarter of 2006. The Company also reported cash, cash equivalents, investments in marketable securities and restricted cash at March 31, 2007 of $67.3 million, an increase of $8.4 million from the fourth quarter of 2006.

“Internap’s record revenue and strong operational performance in the first quarter of 2007 are indicative of the robust global demand for our Internet business solutions. The quarter was highlighted by important customer wins in all areas of our business and significant progress in the integration of VitalStream, which added CDN and monetization solutions to our portfolio of services,” said James P. DeBlasio, president and chief executive officer of Internap. “The one-time restructuring charges announced today are a result of the evaluation of our recently completed VitalStream acquisition and positions us well for the future."

“As we look ahead to the balance of 2007, we see increasing global demand for enterprises to effectively manage, deliver and distribute data and rich media content over the Internet. We are scaling our Company to meet this demand and Internap now has the ability to capture revenue from the highest growth areas of the Internet economy. We are off to a strong operational start in 2007. Based on the recurring revenue nature of our business model and the quality of our sales pipeline, particularly in CDN, we believe that our results will continue to improve throughout 2007, leading to both record revenue and record profitability for the year,” concluded DeBlasio.

 
Internap ended the first quarter with 3,281 customers under contract on a net basis, adding 106 new customers during the quarter, including the addition of 54 new enterprise customers in its CDN business unit.

2007 Full Year Guidance
Internap today also reaffirmed its 2007 guidance, as follows:
 
§
Full year 2007 revenue guidance of 30% over 2006, which includes the acquisition of VitalStream Holdings, Inc.;
 
§
Full year adjusted EBITDA is expected to be in the range of $34 to $37 million;
 
§
Full year expected adjusted gross margin to be approximately 50%; and
 
§
Capital expenditures are expected to be in the range of $15 - $20 million.
 
Conference Call Information:
Internap’s first quarter 2007 teleconference will be held today beginning at 5:00 p.m., Eastern Time. The dial-in numbers are 866-510-0708 using the passcode 85751277 for domestic callers, and 617-597-5377 using the passcode 85751277 for international participants. The simultaneous web cast will be available from the Investor Relations section of the Web site at www.internap.com/investor/presentations/page1294.html.

Internap will provide a replay of the teleconference on its Web site. A replay will be available from May 3rd at 7:00 p.m., Eastern Time, through May 10th at 888-286-8010 using replay code 47902842 and at 617-801-6888 using replay code 47902842 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 leading Internet solutions provider that manages, delivers and distributes applications and content with unsurpassed performance and reliability. With a global platform of data centers, managed IP services, content delivery network, and content monetization services (CDN), Internap frees its customers to drive innovation inside their business and create new revenue opportunities. More than 3,000 companies across the globe trust Internap to help them achieve their Internet business goals. Internap is “Making Innovation Possible.” For more information visit www.internap.com.
 
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 capital expenditures, 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 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. 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 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; the ability to successfully integrate the operations of Internap and VitalStream; and our ability to protect our intellectual property.

 
Our Annual Report on Form 10-K/A, 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 statements made in 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 any forward-looking statement for any reason.

Contacts:

Media Contact
  
Investor Contact
L.A. Campbell
  
Andrew Albrecht
(404) 302-9721
  
(404) 302-9841
lcampbell@internap.com
  
albrecht@internap.com


INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
     
Three Months Ended
  
     
March 31,
  
     
2007
    
2006
  
Revenues:
          
Internet protocol (IP) services
  
$
29,037
  
$
27,046
  
Data center services
    
18,304
    
11,726
  
Content delivery network (CDN) services
    
1,813
    
--
  
Other
    
4,380
    
3,853
  
Total revenues
    
53,534
    
42,625
  
               
Operating expenses:
              
Direct cost of network, sales and services, exclusive of depreciation and amortization shown below:
              
IP services
    
10,113
    
9,180
  
Data center services
    
14,298
    
10,375
  
CDN services
    
799
    
--
  
Other
    
3,437
    
2,662
  
Direct cost of amortization of acquired technology
    
653
    
137
  
Direct cost of customer support
    
3,391
    
2,897
  
Product development
    
1,307
    
1,225
  
Sales and marketing
    
6,179
    
6,970
  
General and administrative
    
7,769
    
5,190
  
Restructuring and asset impairment
    
11,349
    
--
  
Acquired in-process research and development
    
450
    
--
  
Depreciation and amortization
    
4,912
    
3,795
  
(Gain) loss on disposals of property and equipment
    
(4
)
  
2
  
Total operating costs and expenses
    
64,653
    
42,433
  
(Loss) income from operations
    
(11,119
)
  
192
  
               
Non-operating (income) expense:
              
Interest income
    
(693
)
  
(424
)
Interest expense
    
223
    
251
  
Other, net
    
2
    
(129
)
Total non-operating (income)
    
(468
)
  
(302
)
               
Loss income before income taxes and equity in earnings of unconsolidated subsidiary
              
Provision for income taxes
    
50
    
--
  
Equity in (earnings) of equity-method investment, net of taxes
    
(6
)
  
(47
)
Net (loss) income
  
$
(10,695
)
$
541
  
               
Net (loss) income per share:
              
Basic
  
$
(0.26
)
$
0.02
  
Diluted
  
$
(0.26
)
$
0.01
  
 
          
Weighted average shares used in per share calculations:
          
Basic
    
40,997
    
34,293
  
Diluted
    
40,997
    
34,457
  


INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 
 
  
March 31, 2007
  
December 31, 2006
  
ASSETS
          
Current assets:
              
Cash and cash equivalents
  
$
52,172
  
$
45,591
  
Short-term investments in marketable securities
    
14,203
    
13,291
  
Accounts receivable, net of allowance of $1,248 and $888, respectively
    
24,437
    
20,282
  
Inventory
    
463
    
474
  
Prepaid expenses and other assets
    
3,252
    
3,818
  
 
            
Total current assets
    
94,527
    
83,456
  
 
            
Property and equipment, net of accumulated depreciation of $151,780 and $151,269, respectively
   
55,347
    
47,493
  
Investments
    
2,091
    
2,135
  
Intangible assets, net of accumulated amortization of $19,443 and $18,644, respectively
   
47,486
    
1,785
  
Goodwill
    
192,308
    
36,314
  
Restricted cash
    
903
    
--
  
Deposits and other assets
    
7,489
    
2,519
  
 
            
Total assets
  
$
400,151
  
$
173,702
  
 
            
LIABILITIES AND STOCKHOLDERS' EQUITY
            
Current liabilities:
            
Notes payable, current portion
  
$
7,871
  
$
4,375
  
Accounts payable
    
16,772
    
8,776
  
Accrued liabilities
    
10,591
    
8,689
  
Deferred revenue, current portion
    
3,704
    
3,260
  
Capital lease obligations, current portion
    
1,316
    
347
  
Restructuring liability, current portion
    
5,602
    
1,400
  
Other current liabilities
    
99
    
84
  
 
            
Total current liabilities
    
45,955
    
26,931
  
 
            
Notes payable, less current portion
    
2,188
    
3,281
  
Deferred revenue, less current portion
    
1,332
    
1,080
  
Capital lease obligations, less current portion
    
963
    
83
  
Restructuring liability, less current portion
    
8,765
    
3,384
  
Deferred rent
    
10,431
    
11,432
  
Other long-term liabilities
    
959
    
986
  
 
            
Total liabilities
    
70,593
    
47,177
  
 
          
Commitments and Contingencies
          
 
          
Stockholders' equity:
          
Preferred stock, $0.001 par value, 200,000 shares authorized, no shares issued or outstanding
    
--
    
--
  
Common stock, $0.001 par value, 60,000 shares authorized, 48,966 and 35,901 shares issued and outstanding, respectively
    
49
    
36
  
Additional paid-in capital
    
1,196,294
    
982,624
  
Accumulated deficit
    
(867,150
)
  
(856,455
)
Accumulated items of other comprehensive income
    
365
    
320
  
 
            
Total stockholders' equity
    
334,579
    
126,525
  
 
            
Total liabilities and stockholders' equity
  
$
400,151
  
$
173,702
  



INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
  
Three months ended
March 31,
  
 
  
2007
  
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net (loss) income
  
$
(10,695
)
$
541
  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
              
Asset impairment
    
2,454
    
--
  
Acquired in-process research and development
    
450
    
--
  
Depreciation and amortization
    
5,565
    
3,932
  
(Gain) loss on disposal of assets
    
(4
)
  
2
  
Provision for doubtful accounts
    
189
    
(23
)
(Income) loss from equity method investment
    
(6
)
  
(47
)
Non-cash changes in deferred rent
    
(1,133
)
  
1,116
  
Stock-based compensation expense
    
1,625
    
1,511
  
Other, net
    
14
    
--
  
Changes in operating assets and liabilities, excluding effects of acquisition:
              
Accounts receivable
    
(2,281
)
  
2,002
  
Inventory
   
(41
)
  
169
  
Prepaid expenses, deposits and other assets
    
(2,343
)
  
(928
)
Accounts payable
    
4,884
    
(1,369
)
Accrued expense and other liabilities
    
(2,580
)
  
(897
)
Deferred revenue
    
456
    
(120
)
Accrued restructuring charge
    
9,584
    
(344
)
 
              
Net cash provided by operating activities
    
6,138
    
5,545
  
 
              
CASH FLOWS FROM INVESTING ACTIVITIES
              
Purchases of property and equipment
    
(3,786
)
  
(1,391
)
Purchases of short-term investments in marketable securities
    
(6,367
)
  
(2,996
)
Maturities of short-term investments in marketable securities
    
5,536
    
4,704
  
Proceeds from disposal of property and equipment
     --    
15
  
Cash received from acquisition
    
3,203
    
--
  
Net cash (used in) provided by investing activities
    
(1,414
)
  
332
  
 
            
Subtotal carried forward
    
4,724
    
5,877
  

 



INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)

 
  
Three months ended
March 31,
  
 
  
2007
  
2006
  
 
       
 
  
Subtotal carried forward
    
4,724
    
5,877
  
 
            
CASH FLOWS FROM FINANCING ACTIVITIES
            
Principal payments on notes payable
    
(1,260
)
  
(1,094
)
Payments on capital lease obligations
    
(594
)
  
(135
)
Proceeds from exercise of stock options, employee stock purchase plan, and
exercise of warrants
    
3,723
    
906
  
Other, net
    
(12
)
  
19
  
               
Net cash provided by (used in) financing activities
    
1,857
    
(304
)
Net increase in cash and cash equivalents
    
6,581
    
5,573
  
Cash and cash equivalents at beginning of period
    
45,591
    
24,434
  
 
              
Cash and cash equivalents at end of period
  
$
52,172
  
$
30,007
  













INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
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 (loss) income, adjusted gross margin and normalized diluted shares. The most directly comparable GAAP equivalent to adjusted EBITDA and normalized net (loss) income is net (loss) income. 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 (loss) income plus stock based compensation expense, depreciation and amortization, restructuring and asset impairment, acquired in-process research and development, income taxes and interest expense less interest income
 
·
Normalized net (loss) income is net (loss) income plus restructuring and asset impairment, acquired in-process research and development and stock-based compensation expense
 
·
Normalized diluted shares are diluted common shares outstanding used in GAAP net (loss) income per share calculation, excluding the effect of SFAS No. 123R under the treasury stock method
 
·
Normalized net income per share is normalized net income 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 and 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 asset impairment and acquired in-process research and development 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 primarily to the Company’s decision to exit leases for duplicative and excess space that we do not intend to build out now or in the future and one-time severance costs paid to terminated employees. Impairment costs relate to the Company’s write-down of certain costs that were capitalized during the development of software to be used internally and leasehold improvements in restructured facilities. Management believes that such restructuring and impairment charges and acquired in-process research and development 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. 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.

 
Stock-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that supplementing GAAP net (loss) income and net (loss) income per share information by providing normalized net income and normalized net income per share, excluding the effect of restructuring and asset impairment, acquired in-process research and development and 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, asset impairment 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, sales and services 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, sales and services. 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.
 
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.

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET (LOSS) INCOME TO ADJUSTED EBITDA

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

   
Three Months Ended
  
   
March 31,
  
December 31,
  
March 31,
  
   
2007
  
2006
  
2006
  
Net (loss) income (GAAP)
  
$
(10,695
)
$
2,209
  
$
541
  
Stock-based compensation expense
    
1,625
    
1,224
    
1,511
  
Depreciation and amortization, including depreciation and amortization included in direct
cost of network, sales and services
    
5,565
    
4,243
    
3,932
  
Restructuring and asset impairment
   
11,350
    
4
    
--
  
Acquired in-process research and development
    
450
     --     --  
Income taxes
    
50
    
45
    
--
  
Interest (income) expense, net
    
(470
)
  
(557
)
  
(173
)
Adjusted EBITDA (non-GAAP)
  
$
7,875
  
$
7,168
  
$
5,811
  
                     


INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET (LOSS) INCOME AND BASIC AND DILUTED NET (LOSS) INCOME PER SHARE TO NORMALIZED NET (LOSS) INCOME AND BASIC AND DILUTED NORMALIZED NET (LOSS) INCOME PER SHARE

Reconciliations of (1) net (loss) income, the most directly comparable GAAP measure, to normalized net (loss) income, (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 (loss) income per share, the most directly comparable GAAP measure, to normalized net (loss) income per share for each of the periods indicated is as follows (in thousands, except per share data):

   
Three Months Ended
  
   
March 31,
  
December 31,
  
March 31,
  
   
2007
  
2006
  
2006
  
Net (loss) income (GAAP)
  
$
(10,695
)
$
2,209
  
$
541
  
Restructuring and asset impairment
    
11,350
              
Acquired in-process research and development
    
450
    
--
    
--
  
Stock-based compensation expense
    
1,625
    
1,224
    
1,511
  
Normalized net (loss) income (non-GAAP)
  
$
2,730
  
$
3,433
  
$
2,052
  
 
                    
Shares used in per share calculation:
                    
Basic (GAAP)
    
40,997
    
35,375
    
34,292
  
                     
Diluted (GAAP)
    
40,997
    
36,756
    
34,456
  
Add potentially dilutive securities
    
1,705
    
--
    
--
  
Less dilutive effect of SFAS No. 123R under the treasury stock method
   
(365
)
  
(409
)
  
(164
)
Normalized diluted shares (non-GAAP)
    
42,337
    
36,347
    
34,292
  
                     
GAAP net (loss) income per share:
                    
Basic
  
$
(0.26
)
$
0.06
  
$
0.02
  
Diluted
  
$
(0.26
)
$
0.06
  
$
0.01
  
 
                    
Normalized net income per share (non-GAAP):
                    
Basic
  
$
0.07
  
$
0.10
  
$
0.06
  
Diluted
  
$
0.06
  
$
0.09
  
$
0.06
  
                     


 
INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
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
  
   
March 31,
  
December 31,
  
March 31,
  
   
2007
  
2006
  
2006
  
Revenues:
                    
Internet protocol (IP) services
    
29,037
  
$
28,265
  
$
27,046
  
Data center services
    
18,304
    
16,059
    
11,726
  
Content delivery network (CDN) services
    
1,813
    
--
    
--
  
Other
    
4,380
    
4,647
    
3,853
  
Total revenues
    
53,534
    
48,971
    
42,625
  
                     
Direct cost of network, sales and services, exclusive of depreciation and amortization shown below:
                    
IP services
    
10,113
    
10,067
    
9,180
  
Data center services
    
14,298
    
12,844
    
10,375
  
CDN services
    
799
    
--
    
--
  
Other
    
3,437
    
3,368
    
2,662
  
Direct cost of amortization of acquired technology
    
653
     104     137  
Direct cost of customer support
    
3,391
    
2,970
    
2,897
  
Depreciation and amortization associated with cost of sales
    
4,078
    
3,743
    
2,969
  
Total cost of sales
    
36,769
    
33,096
    
28,220
  
                     
Gross profit (GAAP)
  
$
16,765
  
$
15,875
  
$
14,405
  
Gross margin (GAAP)
    
31.3
%
  
32.4
%
  
33.8
%
                     
Add:
                    
Direct Cost of customer support
  
$
3,391
  
$
2,970
  
$
2,897
  
Depreciation and amortization:
                    
Included in direct cost of network, sales and services
    
653
    
104
    
138
  
Associated with cost of network, sales and services
    
4,078
    
3,743
    
2,969
  
                     
Adjusted gross profit (non-GAAP)
  
$
24,887
  
$
22,692
  
$
20,409
  
Adjusted gross margin (non-GAAP)
    
46.5
%
  
46.3
%
  
47.9
%