Internap CEO details expansion, turnaround strategy

Last week, Eric Cooney, who in January was named chief executive officer of Internap (NASDAQ: INAP), spoke with us about the company’s plans to reboot its content delivery networks (CDN) business. In part two of that interview, below, Cooney detailed plans to reinvigorate Internap’s two underperforming core businesses, colocation and IP transit, starting with a self-funded $50-million expansion that’s part of a drive to reduce the company’s reliance on data centers owned by other companies.

On how to spend $50 million: Over the next 18 months, we’ll acquire, build or buy Internap-controlled space in two or three markets. There will probably be at least one expansion of an existing Internap market and probably one new market. If average costs per square foot are $1100, $1500 -- whatever numbers you choose -- getting reasonable quantities of space, meaning 10,000 square feet and up, you can only break $50 million into two or three chunks.

On the current market for data center assets: Some peer-group data-center providers need to offload assets to reduce their leverage, so it’s essentially a balance-sheet restructuring exercise [for them] that has nothing to do with the market, and they probably would prefer not to be selling those assets. And some telecom operators that have made investments over the years in data center assets have decided that designing, building and operating data centers is not their core competency. We’d be remiss if we didn’t consider the cost benefit of those assets and the markets they’re in. But the starting point for this entire discussion and the critical dimension is the selection of the local market in which you’re building the asset.

On the impact of the expansion: It clearly will move our mix [of data centers] to [become] predominantly company-controlled assets. It’s about 50-50 [today]. Just throwing rough numbers at you, $20 million dollars [or more] in incremental revenue on an annualized basis could likely come from a $50-million buildout. Twenty million dollars in incremental revenue on a data center business that today is generating roughly $120 million in annual revenue and a 50-50 split [between company-controlled and resold data centers], we go to 80-60, rough-split. That’s the impact, orders of magnitude, of this incremental investment. The more important point is, from a strategic direction, the future dollars of data center revenue our sales force sells will be predominantly company-controlled data centers, which is a significant divergence from our historic approach. The margins we derive from our company-controlled assets are in the same ballpark as [those in] our peer group -- in the 50s. The market leader, Equinix, delivers [more than] 60%. Reselling somebody else’s data center space, the margins are relatively thin. You can see [that] in the gross margins of our data center business – 25% in Q2.

On how to raise $50 million today: We chose to fund it under our own steam, our own cash-flow-generating capabilities. We’ve made a strategic decision: We’re in the data center business, and we’re going to stay. Staying means company-controlled, not reselling. And that’s capital-intensive. But I feel obligated to demonstrate to the markets that we can deliver profitable growth in our core businesses ahead of any going to the markets and seeking extra funds to invest in anything, data center or otherwise. We’re underperforming market expectations and peer group companies in both of [our core] segments. It’s my and our management team’s responsibility to turn that around.

On the long-term vision: I joined the company because I perceived Internap as a diamond in the rough. I look at the macro-market trends of virtualization of computing resources and enterprises moving servers and storage into the cloud. Two of the key assets necessary to make that happen are data centers and IP connectivity; to move servers, you need a place to put them, and you need to be able to communicate with them. Those are the two fundamental assets Internap is bringing to market today. We ought to be able to drive profitable growth from both of those businesses.