Big cloud Internap eats little cloud Voxel
$30m (or more) to net smaller fish
The appetite for cloudy infrastructure expertise continues apace in 2012. Managed-hosting and colocation services provider Internap has bolstered its position in the cloudy infrastructure peddling market by acquiring sometime-competitor Voxel for $30m.
Internap was founded in 1996 in Seattle, Washington, but now calls Atlanta, Georgia its home. Publicly traded on the NASDAQ, it initially focused on accelerating IP network operations for companies deploying Web sites, but eventually expanded into hosting and colocation services through acquisitions in the wake of the dot-com boom.
The company now has over 2,700 customers and approximately 370 employees, and generated $244.2m in 2010 – the last year for which data is available, since Internap has not yet reported its Q4 2011 financial results. Internap builds its own data centers and offers colocation services in Seattle, Atlanta, Santa Clara, New York, Boston, Houston, and, starting last month, Dallas-Fort Worth.
Voxel, founded in 1999 and based in New York, is privately held. The company does not build its own data centers, but rather rents space from Equinix in New York, San Jose, Amsterdam, and Singapore, and from these facilities sells dedicated hosting and cloudy infrastructure on demand services.
Interestingly, the company has over 1,000 customers, but only 50 employees supporting them.
Raj Dutt, Voxel's founder and now senior vice president of technology at Internap, said in a conference call discussing the deal that about 80 per cent of the servers deployed by Voxel are located in the New York facilities because the company's people were nearby, but with Internap being more globally distributed and running its own data centers, it would be cheaper to deploy infrastructure via Internap than Voxel could have done by itself.
Eric Cooney, president and CEO at Internap, said that Voxel would exit 2011 with an annual run rate of around $14m in sales, and is growing at 25 per cent – which is much faster than the hosting and cloud markets at large and therefore justifies the premium that Internap is paying.
Under the terms of the deal, which closed on December 30 but which was only announced on Tuesday, Internap is shelling out $30m in cash to get its hands on Voxel, and has agreed to pay out an additional $5m to Voxel's owners over the next two years if certain sales and operational targets are met.
One thing that makes Voxel attractive to Internap is its ability to mix physical and virtual server-hosting through its VoxStructure line, which includes VoxServer managed hosting and VoxCloud infrastructure as a service (IaaS). These services have homegrown tools to rapidly provision and scale infrastructure and automation to remotely manage it, which is what Internap is keen on getting its hands on.
Both Voxel and Internap are contributors to the OpenStack cloud fabric project that was started by NASA and Rackspace Hosting in July 2010. Dutt said that Voxel has been watching OpenStack to see how it's developing, and is contributing code to the project here and there. The VoxStructure management tools, by the way, are available for completely controlling physical and virtual servers through APIs, a desktop portal, or an iPhone app.
Internap, on the other hand, sells cloudy server instances based on VMware's ESXi hypervisor, but launched a storage cloud based on the "Swift" storage service portion of the OpenStack code in January 2011 called XIP Cloud Storage, and debuted a compute cloud (based on the "Nova" compute service portion of the OpenStack code) called the Open Public Cloud in October 2011. This cloud is aimed at enterprise customers, and can be thought of more like virtual server hosting or a semi-private cloud as opposed to the full-on public, utility-style cloud that Voxel, Amazon Web Services, Rackspace, and others are peddling.
Given that Internap already was neck deep in OpenStack, you might be thinking: why does Internap want or need anything from Voxel at all?
While company executives danced around this a bit in the conference call, the answer is that Voxel knows how to support customers who spend under $10,000 per month on hosting, and has built the tools to do it – perhaps profitably, perhaps not, since Voxel is not public and doesn't report its financials.
Internap, on the other hand, has customers who typically spend $10,000 to $1m per month on hosting. Internap can make Voxel more profitable by hosting in its own data centers and Voxel lets Internap go downscale and merge its OpenStack efforts for public and semi-private clouds with the expertise embodied in the VoxStructure stack that Voxel has cooked up on its own.
"This isn't about one product or one piece of code as much as it is about stitching together the right kind of fabric," Dutt explained on the call.
It is also about going global. Internap also now has presence in Amsterdam and Singapore through the Voxel deal, and – given its history of building data centers – you can bet that in the long run Equinix will lose some business as new customers are brought up inside an as-yet-unannounced data center to service customers in Europe and Asia that Internap will no doubt build as its customer base grows in these regions.
However, you don't just pick up physical and virtual servers and move them wholesale to a new data center – not if you don't want to lose a lot of customers – because things do go wrong in most server migrations.
And finally, the Voxel deal is about catching small startups and moving them from the cloudy infrastructure that they typically start on and towards the managed hosting and colocation services they tend to gravitate towards as their businesses grow and mature. Cooney said that the combination of the Internap and Voxel would allow Internap to capture those enterprise customers who are looking to move certain applications from inside their data centers to the cheaper public cloud while Internet startups are moving in the opposite direction.
Credit where credit is due
In addition to doing this deal, Internap has boosted its credit facilities with Wells Fargo, Royal Bank of Canada, Silicon Valley Bank, Fifth Third Bank, and Sun Trust Bank. As you can see from its 8K filing with the US Securities and Exchange Commission, Internap was able to bump up its credit facilities by $40m to $119m. The banks gave Internap a $59m term loan facility, which was fully drawn to make the $30m payment to acquire Voxel. Internap didn't need the loan to make the deal, since it had $34.3m in cash in the bank as its third quarter ended in September. But Internap didn't want to burn its cash.
Internap's data center services and IP services business grew steadily in the early 2000s, but were impacted by the Great Recession. Internap grew 29 per cent to $234.1m in sales in 2007, but booked a $5.6m loss. The following year, sales were only up 8.5 per cent to $254m, and losses expanded to a whopping $105m after Internap booked a $101.4m charge for "unusual expense."
In 2009, sales were only up nine-tenths of a point to $256.3m, and the company had another of those unusual expense charges weighing in at $54.7m, pushing the company to a $69.7m loss. These charges are related to goodwill impairments against its content delivery network (CDN) and IP networking services businesses. Internap paid $214m to buy the VitalStream CDN business in February 2007, originally valued it at $154.7m, and has written most of that off. In 2010, sales dropped by 4.7 per cent to $244.2m, but Internap cut costs enough to only book a $3.6m loss.
In 2011, the numbers for Internap have not been much better.
The company's data-center services business fell by 6 per cent in Q1 to $31.5, and IP services fell 6 per cent as well to $27.9m. Total sales came to $60.3m, and the company had a net loss of $1.5m. In Q2, Internap's data center biz grew 4 per cent to $32.5m, IP services fell 5 per cent to $27.9m, and the company booked a net loss of $2.6m on that $60.4m in revenues. Q3 was quite a bit better on the revenue, with data-center services up 8 per cent to $34.1m and IP services off 3 per cent to $27.9m; total sales rose 3 per cent to $62.4m, but the company had a net loss of $1.8m.
The question now is will Voxel help Internap's profits over the short haul as well as the long haul? Internap, like many hosting providers, thinks that the cloud is the answer to its problems. It makes sense on some level, given that clouds mean getting people to share more infrastructure than they otherwise might not have.
But as far as profits go, it all depends on if the savings go to the hosting provider turned cloud fluffer or to customers who simply want to pay less for a place to run their apps. ®