Stanford´s View on Internap (IIP)

Posted on March 1, 2006

For those investors without access to Wall Street research reports, this post provides some notes from Stanford Financial Group´s March 1st, 2006 research report on IIP. The analyst´s target price is a bit higher than mine, primarily because I am applying a larger discount to the EV/EBITDA multiple for IIP.

Note: If you plan to link to this post or copy it in any manner, please be sure to credit: Stanford Financial Group (Rod Ratliff)

The source for the quotations in this post is: Stanford Financial Group (Rod Ratliff)

"The company’s FY06 outlook calls for sales growth of 5-7%, EBITDA of $16-$19 million, and a net profit (before FAS 123 stock compensation). The latter two data points represent SIGNIFICANT upside to consensus, and reflect the determination of new CEO Jim DeBlasio to return value to shareholders. The company undertook a minor rightsizing in the 4Q, and as well expensed a
total of $700k in severance benefits. Two-thirds of this total could have been expensed in 1Q06. "

"Our conversations with the Company last night indicate that a reverse stock split will be put before the Board within the next calendar quarter. We expectthis to be approved, and that Internap will likely seek to have its stock listed on the NASDAQ NMS. We believe that IIP shares will react favorably to the company’s execution and financial outlook, and that the potential for a reverse split and NASDAQ listing will drive demand for the shares. We are raising our opinion to a
speculative BUY. We are increasing our estimates per the table to the right, and increasing our price target to $0.65, based on 10.9x FY06 EBITDA. This multiple is a 20% discount to its peer group. "

"Overall, we believe that InterNAP has turned the corner. The Company has VERY quickly implemented a sharp focus on cost containment under new CEO Jim DeBlasio, who outlined three core business initiatives on the call, all with assigned and responsible owners within the management ranks, with target metrics that must be hit, and with time lines that measure progress versus commitment. "

"1.Focus on increasing level of new customers, accelerating customer renewals, mitigating churn, and exploring new and nontraditional revenue.
2.Drive improvements in quote-to-cash cycle; increasing focus on marketing products and services; reduce network costs and operating expenses.
3.Create and retain top-notch talent. More than 80% of Internap’s employees are customer-facing. "

"To value IIP shares, we considered EV/EBITDA multiples on a universe of infrastructure software and internet-related comps; reinforced by a 5-year DCF model (both analyses are included at the end of this report). IIP shares currently trade at a notable discount to the peer group on an EV/EBITDA basis. To arrive at our price target, we start with the median value for FY06
EV/EBITDA (13.6x), which we discount by 20% to account for the early stage of the Company’s turnaround and the inherent speculative nature therein. This yields an FY06 EV/EBITDA multiple for IIP of 10.9x, and a per share target of $0.65. "

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