Internap's Earnings Show Continued Shift to Hybrid Services

Internap reported results for its fiscal 2014, a year that was quite eventful for the company. The year was a tipping point for a transition from colocation provider to hybrid services. The company moved out of the Google-owned carrier hotel at 111 8th Ave. in New York and into its brand new data center in New Jersey. Its revenue stream also widened during the year due to the acquisition of iWeb toward the end of 2013.

Full-year revenue was $335 million, up from $283.3 million in 2013. Data center services drove top-line growth, and IP services continued a slow decrease in revenue.

While IP service revenue has been flat or shrinking for a while, the company believes it to be a differentiator in the market. Ninety-five percent of data center customers use the IP service.

The acquisition and impact of hosting provider iWeb was thoroughly discussed on an earnings call. iWeb revenue growth was in the low single digits, lower than the initially projected estimate of 10 percent. Churn of two hosting customers on the large side and a modest exchange rate impact affected results. However, iWeb was more profitable this year under Internap, with very healthy EBITDA.

One big benefit of the iWeb acquisition has been the acquisition of a different route to market via iWeb's e-commerce selling capabilities. These capabilities are promising, as Internap continues the transition into a provider of hybrid services. Selling through the web has seen faster growth than traditional enterprise sales models, and it means much shorter sales cycles than traditional colo deals.

Internap had 57 percent utilization across its data center footprint. It was a bit of an odd year, given the expansions and the big migration from 111 8^th.

However, the services mix means utilization rates aren’t an apples-to-apples comparison with a pure colocation provider.

That unused space is potentially more valuable. The potential margin on that remaining footprint is higher, given the company’s growing push into cloud and hosting and the higher margin per square foot these services bring.

Another benefit of the hybrid strategy is that, if some of the colo space is unattractive to the market or goes unused for an extended period, the space can be filled and capitalized on with hosting or cloud services.

When it comes to colocation, the company is squarely in retail, so it very rarely sees any deals over 250 kilowatts. Those deals are not its sweet spot, and it is not targeting these larger deals. The company said it is typically seeing three-percent price increases on retail colocation per year.

Internap’s capital expenditures were split about evenly between colocation assets and hosting and cloud assets.