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Technology Stocks : Internap Network Services Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Jibacoa who wrote (311)	3/9/2001 11:06:43 PM
From: Czechsinthemail	Read Replies (1) \| Respond to of 1011

There is a great divergence of opinion about InterNAP's recently lowered guidance. One view, which has led to a major drop in the stock price, is that it is a harbinger of bad times to come. More specifically, it will result in continuing losses causing a cash crunch. The fear surrounding Internet services companies running deficits is enormous, and in this case it has overwhelmed the positive fundamentals working in INAP's favor. The other view is that the lowered guidance takes a cautious view around the uncertainties in a slowing economy that has been particularly harsh on tech companies. INAP is continuing to sign up large numbers of major company clients, and they are receiving increased monthly revenues from these clients. The problem has been the segment of INAP's customers made up of weaker dot.com and ISP companies. These have generally been smaller companies providing less monthly revenue, but INAP serves many tech companies that have been suffering during the tech slowdown. The loss of these clients constitutes a customer churn that reduces the growth of net revenues by the amount of revenues lost when these clients are terminated. There doesn't seem to be much loss of clients coming from disappointment with INAP's service -- rather it is the cash crunch and slowdown of the clients' business that has forced them out. INAP management has reported that new bookings have continued at a rate that would meet or beat last quarter's record pace. These include Coors, Delta Airlines, Grenada Entertainment (U.K.), the New York Mercantile Exchange and Sun America. In fact, since they recently began a new branding campaign, INAP's new sales leads have increased by 20%. Proportionately more of these companies are large enterprise companies that become high revenue clients for INAP. INAP estimates a relatively high churn of 10-15% for this quarter and next quarter followed by a return to lower and more normal churn rates in 2H01. INAP is going through a significant cost-reduction program to slow spending during this period of slowed revenue growth. The result is expected to be no net increase in quarterly losses, but the expected time of reporting net profits has been moved back. The company noted that they would be profitable at the same revenue levels they had planned on before, but the time of realizing those levels has been deferred. Two aspects of the INAP story are often missed. First, they have a recurring revenue business. Once they sign up new clients, they receive ongoing (and usually increasing) revenues from those clients. The increased revenues come both from increased network usage and from new services INAP has added. For example, about 16% of INAP's revenues this year are expected to come from collocation services. The addition of services increases the synergies of INAP's business, allowing them greater revenues while offering their clients greater value. Second, INAP will be adding major new services early in 2H01. Virtual private network (VPN) services will allow companies to migrate their private data networks to the public Internet via INAP's network. This represents a potentially huge market. They will also be initiating high quality videoconferencing services that were recently demonstrated on CNBC. The new services allow INAP to sell to their existing client base. And though the costs of developing these new services are included in INAP's budget, revenues from them are not. This should give INAP a significant cushion in meeting their revenue and earnings projections. Finally, I think INAP has provided conservative, lowball future estimates. If this proves true, there is tremendous upside potential as the company beats the recently lowered expectations and subsequent estimates are guided higher. Right now, companies running deficits are extremely out of favor. But in much the same way that cable and fiberoptic network companies can run substantial deficits while building out their networks but then realize enormous cash flow once the network is in place, INAP's buildout of its network creates near term losses and future revenue streams. The recent downgrades of the stock have focused on increased risk as the timeline for profitability is moved back. But the extremely low stock price dramatically increases the long term potential for those with the vision, courage and patience to buy and hold.