Internap Boosting Colo Footprint, Margins

What do you think of when you hear the name Internap Network Services? The Atlanta company is best known for its network optimization and content delivery offerings. But colocation has been a growing segment of Internap's business, and is a key focus of its efforts to boost its profit margins.

Since taking over last year, President and CEO Eric Cooney has focused on an expansion of Internap's company-operated data centers, while it reduces its dependence upon space leased from third-party providers. The refocusing of the colo portfolio is among the changes that have sparked a strong recovery in shares of Internap, which traded as low as $2.27 last May but were trading at $5.80 early Tuesday.

That rebound followed a lengthy slide, as shares of INAP traded above $20 in mid-2007 before the company's 2006 acquisition of VitalStream unraveled amid performance woes and customer support snafus. Internap ultimately took a $99 million write-off on its CDN business.

Expanding in Key Markets
Last month Internap announced plans to expand its data center space in Silicon Valley and Houston. The company will spend $23 million to build new space in Santa Clara, and another $5 million in Houston.

"We see a major shift going on in 2010," said Mike Higgins, Internap's senior VP for data center services. "Internap wasn’t always a colocation and data center company. Our focus had been on IP services and content delivery networks. One very dramatic change is the focus on selling company data center space. The top-line revenue is fairly neutral on colocation, but we're significantly improving on margin and EBITDA."

Profit Margins on Colo Improving
The profit margin for Internap's colocation business improved from 25 percent in the second quarter of 20098 to 30 percent in the fourth quarter. Realizing that bottom line improvement has taken some effort, including customer migrations as Internap has pruned its network of third-party data centers and providers.

"We have a lot of customers fragmented across data center providers," said Higgins. "It’s very tedious. We have some strategic partners, like Equinix. But there are a lot of different scenarios (for transitions)."

Boosting Density
Focusing on company-owned data centers has meant additional attention to facility design to account for high-density requirements. "We’ve brought on a director of design and engineering," said Higgins. "We want the ability to scale that infrastructure up to 300 watts a square foot, if that’s what the market needs."

Internap is building its data center infrastructure so it will be able to support higher density by adding UPS units and generators to existing designs. The company has also begun offering managed hosting services in five markets, including New York, Atlanta and Los Angeles.

Even as it sharpens its focus on colocation and hosting services, Internap says the company's network optimization heritage remains plenty relevant in the transition to cloud computing.

"When people start thinking about cloud computing, everyone's forgetting about the network," said Higgins. "If I'm used to a certain performance level, it's a big difference changing from an IT closet down the hall to a data center a thousand miles away. The network becomes the critical link. We may not claim to be a cloud company, but we can definitely provide a better experience for companies getting involved in cloud computing or SaaS."