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




Exhibit 99.1

 
FOR IMMEDIATE RELEASE

Internap Reports Second Quarter 2007 Financial Results


 
§  
Record revenues of $58.5 million, an increase of 33% over prior year period
 
§  
Adjusted EBITDA1 of $9.0 million, up 50% over the prior year period 
 
§  
Adjusted gross margin1 of 49.4%, an increase from 46.2% in the second quarter of 2006
 
§  
Added 122 net new customers during Q2 2007
 
§  
Increases 2007 guidance
§  Revenue growth to 30% - 35% over 2006
§  Adjusted EBITDA1 to $36 - $40 million
 
§  
Introduces 2008 guidance
§  Revenue growth of 25% over 2007
§  Adjusted EBITDA1margin of approximately 20% of revenues
 
ATLANTA, GA - July 31, 2007-- Internap Network Services Corporation (NASDAQ: INAP), a global provider of fast, reliable end-to-end Internet business solutions, today reported financial results for the quarter ended June 30, 2007.

For the second quarter of 2007, revenues totaled $58.5 million, an increase of 33% compared to the second quarter of 2006. Net loss (GAAP) for the second quarter of 2007 was $(1.7) million, or $(0.03) per diluted share. Net loss (GAAP) for the second quarter of 2007 compares to net income (GAAP) of $0.7 million, or $0.02 per diluted share, for the second quarter of 2006. The $(1.7) million net loss (GAAP) for the second quarter of 2007 includes an impairment charge of $1.2 million related to an investment made in 2000, as well as higher depreciation and amortization, including $0.9 million related to acquired technology, compared to the second quarter of 2006.

Normalized net income1 and normalized net income per diluted share1, which exclude the impact of stock-based compensation, was $2.3 million, or $0.05 per diluted share, respectively, for the second quarter of 2007, compared to $2.3 million or $0.06 per diluted share for the second quarter of 2006.

Adjusted gross margin1 was 49.4% for the second quarter of 2007, an increase from 46.2% in the second quarter of 2006.

The Company reported adjusted EBITDA1 of $9.0 million for the second quarter of 2007, an increase of $3.0 million, or 50%, from second quarter of 2006. The Company also reported cash, cash equivalents, investments in marketable securities and restricted cash at June 30, 2007 of $61.1 million.

“Internap delivered record revenues, strong EBITDA1 profitability and a sizable margin improvement in the second quarter,” said James P. DeBlasio, president and chief executive officer of Internap.  “Internap is uniquely positioned in the market as the only company able to offer the complete set of Internet solutions required by enterprise customers, including data center, route optimized IP, CDN, and monetization solutions.  Our second quarter results demonstrate that customers are responding to Internap’s bundled sales strategy, which also drove our margin improvement.  During the quarter, we experienced strong demand across each of our business units that resulted in robust new customer growth and increased revenue from within our existing customer base.”




Business Outlook
“Based on our first half results, additional capacity coming online from our CDN and data center investments, market demand for Internap’s solutions and the strength of our sales funnel, we are raising our revenue and EBITDA1 guidance for 2007.  We are also introducing a strong growth outlook for 2008 that includes increasing EBITDA1 as a percentage of revenue as we drive margin and leverage the operational efficiencies in our business model.  Our recently announced competitive win at QTS to provide value-added CDN and performance IP solutions to more than 350 of their enterprise customers is a strong signal that Internap is poised to capture additional opportunities in high-growth sectors of the market,” concluded Mr. DeBlasio.

Internap’s updated 2007 guidance as of July 31, 2007 is as follows:

 
§  
Full year revenue guidance of 30% - 35% over 2006, up from earlier guidance of 30% growth;
 
§  
Full year adjusted EBITDA1 is expected to be in the range of $36 - $40 million, up from prior guidance of $34 - $37 million;
 
§  
Full year expected adjusted gross margin1 is expected to be approximately 50%; and
 
§  
Capital expenditures are expected to be in the range of $45 - $55 million.

Conference Call Information:
Internap's second quarter 2007 teleconference will be held today beginning at 5:00 p.m., Eastern Time. The dial-in numbers are 800-289-0529 for domestic callers, and 913-981-5523 for international participants. A replay will be available from July 31st at 8:00 p.m., Eastern Time, through August 14th at 888-203-1112 using replay code 5492921, and at 719-457-0820 using replay code 5492921 for international participants. Alternatively, participants may connect to the simultaneous Webcast available from the investor services section of the Company's Web site at http://www.internap.com/investor/presentations/page1294.html.

1 Reconciliations between GAAP information and non-GAAP information contained in this press release are provided in the tables below entitled “Reconciliation of Net (Loss) Income to Adjusted EBITDA,” “Reconciliation of Net (Loss) Income and Basic and Diluted Net (Loss) Income Per Share to Normalized Net Income and Basic and Diluted Normalized Net Income 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 3,400 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:

Investor Contact
Andrew Albrecht
(404) 302-9841
albrecht@internap.com


2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
   
Three months ended June 30,
  
Six months ended June 30,
  
   
2007
  
2006
  
2007
  
2006
  
Revenues:
                          
Internet protocol (IP) services
  
$
29,345
  
$
27,073
  
$
58,382
 
$
54,119
  
Data center services
    
19,927
   
13,512
    
38,230
   
25,237
  
Content delivery network (CDN) services
    
5,235
    
--
    
7,287
    
--
  
Other
    
3,987
    
3,320
    
8,129
    
7,174
  
                           
Total revenues
    
58,494
    
43,905
    
112,028
    
86,530
  
Operating expenses:
                          
Direct cost of network, sales and services, exclusive of depreciation and amortization shown below:
                          
IP services
    
10,516
    
10,192
    
20,738
    
19,371
  
Data center services
    
14,095
    
10,723
    
28,400
    
21,098
  
CDN services
    
1,958
    
--
    
2,621
    
--
  
Other
    
3,048
    
2,691
    
6,486
    
5,354
  
Direct cost of amortization of acquired technology
    
1,054
    
138
    
1,708
    
275
  
Direct cost of customer support
    
4,330
   
2,769
    
7,718
    
5,666
  
Product development
    
1,747
   
1,158
   
3,002
    
2,383
 
Sales and marketing
    
8,341
    
7,072
    
14,531
    
14,042
  
General and administrative
    
8,333
    
5,080
    
16,165
    
10,270
  
Restructuring and asset impairment
    
1,178
    
--
    
12,527
    
--
  
Acquired in-process research and development
    
--
    
--
    
450
    
--
  
Depreciation and amortization
    
5,912
    
3,849
   
10,824
    
7,643
 
(Gain) on disposals of property and equipment
    
--
    
(117
)
  
(4
)
  
(114
)
Total operating costs and expenses
    
60,512
   
43,555
   
125,166
   
85,988
 
(Loss) income from operations
    
(2,018
)
  
350
    
(13,138
)
  
542
  
 
                  
Non-operating (income) expense:
                          
Interest income
    
(671
)
  
(520
)
  
(1,364
)
  
(944
)
Interest expense
    
267
   
232
   
490
    
483
 
Other, net
    
(20
)
  
(18
)
  
(19
)
  
(147
)
Total non-operating income
    
(424
)
  
(306
)
  
(893
)
  
(608
)
 
                          
(Loss) income before income taxes and equity in earnings of unconsolidated subsidiary
    
(1,594
)
  
656
   
(12,245
)
  
1,150
 
Provision for income taxes
    
106
    
--
   
156
   
--
 
Equity in earnings of equity-method investment, net of taxes
    
(17
)
  
(57
)
  
(24
)
  
(104
)
Net (loss) income
  
$
(1,683
)
$
713
  
$
(12,377
)
$
1,254
  
 
                  
Net (loss) income per share:
                  
Basic
  
$
(0.03
)
$
0.02
 
$
(0.28
)
$
0.04
 
Diluted
  
$
(0.03
)
$
0.02
  
$
(0.28
)
$
0.04
  
 
                          
Weighted average shares used in per share calculations:
                          
Basic
    
48,515
    
34,465
    
44,932
    
34,384
  
Diluted
    
48,515
    
35,787
    
44,932
    
35,003
  
 
                  


3


INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 
 
   
June 30, 2007
  
December 31, 2006
  
ASSETS
  
 
  
 
  
Current assets:
          
Cash and cash equivalents
  
$
40,575
  
$
45,591
  
Short-term investments in marketable securities
    
19,646
    
13,291
  
Accounts receivable, net of allowance of $1,840 and $888, respectively
    
26,641
    
20,282
  
Inventory
    
375
    
474
  
Prepaid expenses and other assets
    
6,456
    
3,818
  
 
            
Total current assets
    
93,693
    
83,456
  
 
          
Property and equipment, net of accumulated depreciation of $157,145 and $151,269, respectively
    
62,974
    
47,493
  
Investments
    
919
    
2,135
  
Intangible assets, net of accumulated amortization of $20,799 and $18,644, respectively
    
46,130
    
1,785
  
Goodwill
   
191,100
    
36,314
  
Restricted cash
    
903
    
--
  
Deposits and other assets
    
1,644
    
2,519
  
 
            
Total assets
  
$
397,363
  
$
173,702
  
 
          
LIABILITIES AND STOCKHOLDERS' EQUITY
          
Current liabilities:
          
Notes payable, current portion
  
$
7,372
  
$
4,375
  
Accounts payable
    
13,388
    
8,776
  
Accrued liabilities
    
10,648
    
8,689
  
Deferred revenue, current portion
    
3,401
    
3,260
  
Capital lease obligations, current portion
    
765
    
347
  
Restructuring liability, current portion
    
4,484
    
1,400
  
Other current liabilities
    
105
    
84
  
 
            
Total current liabilities
    
40,163
    
26,931
  
 
          
Notes payable, less current portion
    
1,094
    
3,281
  
Deferred revenue, less current portion
    
1,427
    
1,080
  
Capital lease obligations, less current portion
    
868
    
83
  
Restructuring liability, less current portion
    
8,449
    
3,384
  
Deferred rent
    
10,529
    
11,432
  
Other long-term liabilities
    
933
    
986
  
 
            
Total liabilities
    
63,463
    
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, 49,507 and 35,873 shares issued and outstanding, respectively
    
50
    
36
  
Additional paid-in capital
    
1,202,137
    
982,624
  
Accumulated deficit
    
(868,832
)
  
(856,455
)
Accumulated items of other comprehensive income
    
545
    
320
  
 
          
Total stockholders' equity
    
333,900
    
126,525
  
 
          
Total liabilities and stockholders' equity
  
$
397,363
  
$
173,702
  


4

INTERNAP NETWORK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
Six months ended
June 30,
  
   
2007
  
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES
          
Net (loss) income
  
$
(12,377
)
$
1,254
  
Adjustments to reconcile net (loss) income to net cash provided in operating activities:
          
Asset impairments
    
3,632
    
--
  
Acquired in-process research and development
    
450
    
--
  
Depreciation and amortization
    
12,532
    
7,918
  
(Gain) on disposal of assets, net
    
--
    
(114
)
Provision for doubtful accounts
    
626
    
(119
)
Income from equity method investment
    
(24
)
  
(104
)
Non-cash changes in deferred rent
    
(1,035
)
  
1,603
  
Stock-based compensation expense
    
4,414
    
3,079
  
Other, net
    
78
    
--
  
Changes in operating assets and liabilities, excluding effects of acquisition:
            
Accounts receivable
    
(3,824
)
  
(375
)
Inventory
    
46
    
199
  
Prepaid expenses, deposits and other assets
    
278
 
  
(725
)
Accounts payable
    
1,500
    
1,931
  
Accrued expense and other liabilities
    
(2,560
)
  
(1,086
)
Deferred revenue
    
375
    
64
  
Accrued restructuring charge
    
8,149
    
(742
)
 
          
Net cash provided by operating activities
    
12,260
    
12,783
  
 
          
CASH FLOWS FROM INVESTING ACTIVITIES
          
Purchases of property and equipment
    
(17,024
)
  
(5,543
)
Purchases of short-term investments in marketable securities
    
(17,141
)
  
(4,215
)
Maturities of short-term investments in marketable securities
    
10,992
    
10,956
  
Proceeds from disposal of property and equipment
    
--
    
127
  
Cash received from acquisition, net of costs incurred for the transaction
    
3,203
    
--
  
Other, net
    
--
    
82
  
Net cash (used in) provided by investing activities
    
(19,970
)
  
1,407
  
 
CASH FLOWS FROM FINANCING ACTIVITIES
          
Principal payments on notes payable
    
(2,852
)
  
(2,187
)
Payments on capital lease obligations
    
(1,240
)
  
(277
)
Proceeds from exercise of stock options, employee stock purchase plan, and exercise of warrants
    
6,819
    
2,149
  
Other, net
    
(33
)
  
30
  
 
            
Net cash provided by (used in) financing activities
    
2,694
    
(285
)
Net (decrease) increase in cash and cash equivalents
    
(5,016
)
  
13,905
  
Cash and cash equivalents at beginning of period
    
45,591
    
24,434
  
 
            
Cash and cash equivalents at end of period
  
$
40,575
  
$
38,339
  
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
              
Common stock issued and stock options assumed for acquisition of VitalSream
  
$
208,293
  
$
--
  


5

 
NON-GAAP (ADJUSTED) FINANCIAL MEASURES

In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), Internap has historically provided additional financial measures that are not prepared in accordance with GAAP (non-GAAP), including adjusted EBITDA, normalized net income, adjusted gross margin and normalized diluted shares. The most directly comparable GAAP equivalent to adjusted EBITDA and normalized net 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:

 
l
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

 
l
Normalized net income is net (loss) income plus restructuring and asset impairment, acquired in-process research and development and stock-based compensation expense

 
l
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

 
l
Normalized net income per share is normalized net income divided by basic and normalized diluted shares

 
l
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.

 
l
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, leasehold improvements in restructured facilities and the write-down of an equity investment. 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.

6


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:

 
l
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
 
l
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:

 
l
as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;

 
l
as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and

 
l
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.


7

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
  
   
June 30,
  
March 31,
  
June 30,
  
   
2007
  
2007 
  
2006 
  
Net (loss) income (GAAP)
  
$
(1,683
)
$
(10,695
)
$
713
  
Stock-based compensation expense
    
2,789
    
1,625
    
1,568
  
Depreciation and amortization, including depreciation and amortization included in direct cost of network, sales and services
    
6,966
    
5,565
    
3,987
  
Restructuring and asset impairment
    
1,178
    
11,349
    
--
  
Acquired in-process research and development
    
--
    
450
    
--
  
Income taxes
    
106
    
50
    
--
  
Interest (income) expense, net
    
(404
)
  
(470
)
  
(288
)
Adjusted EBITDA (non-GAAP)
  
$
8,952
  
$
7,874
  
$
5,980
  
 
              


8


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

Reconciliations of (1) net (loss) income, the most directly comparable GAAP measure, to normalized net 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 income per share for each of the periods indicated is as follows (in thousands, except per share data):
 
   
Three Months Ended
  
   
June 30,
  
March 31,
  
June 30,
  
   
2007
  
2007
  
2006
  
Net (loss) income (GAAP)
  
$
(1,683
)
$
(10,695
)
$
713
  
Restructuring and asset impairment
    
1,178
    
11,349
    
--
  
Acquired in-process research and development
    
--
    
450
    
--
  
Stock-based compensation expense
    
2,789
    
1,625
    
1,568
  
Normalized net income (non-GAAP)
  
$
2,284
  
$
2,729
  
$
2,281
  
 
                
Shares used in per share calculation:
                
Basic (GAAP)
    
48,515
    
40,997
    
34,465
  
 
                
Diluted (GAAP)
    
48,515
    
40,997
    
35,787
  
Add potentially dilutive securities
    
1,100
    
1,705
    
--
  
Less dilutive effect of SFAS No. 123R under the treasury stock method
    
(491
)
  
(437
)
  
(584
)
Normalized diluted shares (non-GAAP)
    
49,124
    
42,265
    
35,203
  
 
                
GAAP net (loss) income per share:
                
Basic
  
$
(0.03
)
$
(0.26
)
$
0.02
  
Diluted
  
$
(0.03
)
$
(0.26
)
$
0.02
  
 
                
Normalized net income per share (non-GAAP):
                
Basic
  
$
0.05
  
$
0.07
  
$
0.07
  
Diluted
  
$
0.05
  
$
0.06
  
$
0.06
  
 
              


9

 
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
  
   
June 30,
  
March 31,
  
June 30,
  
   
2007
  
2007
  
2006
  
Revenues:
              
Internet protocol (IP) services
  
$
29,345
  
$
29,037
  
$
27,073
  
Data center services
    
19,927
    
18,303
    
13,512
  
Content delivery network (CDN) services
    
5,235
    
2,052
    
--
  
Other
    
3,987
    
4,142
    
3,320
  
Total revenues
    
58,494
    
53,534
    
43,905
  
 
                
Direct cost of network, sales and services, exclusive of depreciation and amortization shown below:
                
IP services
    
10,516
    
10,223
    
10,192
  
Data center services
    
14,095
    
14,305
    
10,723
  
CDN services
    
1,958
    
663
    
--
  
Other
    
3,048
    
3,438
    
2,691
  
Direct cost of amortization of acquired technology
    
1,054
    
653
    
138
  
Direct cost of customer support
    
4,330
    
3,388
    
2,769
  
Depreciation and amortization associated with cost of sales
    
4,833
    
4,078
    
3,043
  
Total cost of sales
    
39,834
    
36,748
    
29,556
  
 
                
Gross profit (GAAP)
  
$
18,660
  
$
16,786
  
$
14,349
  
Gross margin (GAAP)
    
31.9
%
  
31.4
%
  
32.7
%
 
                
Add:
                
Direct cost of customer support
  
$
4,330
  
$
3,388
  
$
2,769
  
Depreciation and amortization:
                
Included in direct cost of network, sales and services
    
1,054
    
653
    
138
  
Associated with cost of network, sales and services
    
4,833
    
4,078
    
3,043
  
 
                
Adjusted gross profit (non-GAAP)
  
$
28,877
  
$
24,905
  
$
20,299
  
Adjusted gross margin (non-GAAP)
    
49.4
%
  
46.5
%
  
46.2
%
 
              
 
 
 
 
 
10