Netmagic CEO on life after NTT acquisition and where datacentre business is headed

14 Nov, 2012

Sharad Sanghi is one of the pioneers in Indian datacentre business. He founded Netmagic Solutions, now one of India's largest datacentre solutions companies,  in 1998. The company later ventured into high growth niche services like disaster recovery, Cloud technology and application hosting. Nexus Venture Partners and Fidelity jointly pumped in Rs 80 crore in 2008, followed by a Rs 70 crore investment led by Nokia Growth Partners and Cisco Systems with backing from the then existing investors in 2010. Sanghi's efforts were paid off when in January this year Japanese telecom major NTT Communications acquired 74 per cent stake in it for $116 million, providing one of the largest exits for Nexus. In a video interview with VCCircle, CEO Sharad Sanghi talks on life after acquisition by NTT, global plans and mentoring startups. Edited excerpts:

Netmagic has undergone a decade of business evolution, where is the company today and what is the market like in which it is competing?

The datacentre market along with Cloud technology is one of the fastest growing markets within the IT space. Gartner has analysed this market growing north of 30 per cent, while Cloud as an Infrastructure-as-a-Service (IaaS) is growing much higher than 100 per cent. And the overall size of the datacentre market is now between $600-700 million. We see tremendous opportunity in this space and right now we are growing faster than the market. In fact, this was the major reason why NTT had done this deal with us. One point I want to make clear here is that it is NTT Communications and not NTT Data that has done the deal with us. NTT Communications is one of the largest datacentre providers across the globe and they also have a very big Cloud offering. But they didn't have a presence in India. They came here, found the market hot and vibrant. Netmagic is already the largest IaaS company in India and so it was a natural fit. For Netmagic, it gives a global footprint, and so was a very synergistic deal.

There is now a global trend where datacentres are on the decline since Cloud technology is on the rise. These are both big verticals for you. Does this trend affect your company in anyway?

Customers have traditionally opted for co-location, but at the end of the day the Cloud infrastructure has to operate from a datacentre as well. The difference now is that while initially we were packing 20 to 30 servers in a rack and each server was a separate work load. Now, because of Cloud you can have 400 to 500 virtual machines in a single rack. So the revenue per square foot and the rack density has increased. But the need for datacentres is ever growing. The second point is that not everybody has adopted the Cloud. It will take a while. So while Cloud is the fastest growing business, it will take a while before various workloads move to the Cloud. There are some concerns about Cloud security. In my belief, Cloud is more secure than even physical infrastructure. But it will take time for Cloud adoption to increase. So it would be wrong to say that the co-location business is slowing down. Going forward, Cloud will become mainstream and grow faster. But there will be customers who want physical infrastructure, which will make the datacentre business grow strong.

Gartner calculates the current market size at $ 100-150 million for the Cloud market, out of which cloud IaaS business is about 40-50 per cent. I expect this market to double for the next couple of years. We have already captured a quarter of this IaaS market.

Is it right to say that IaaS business is more of a volume game compared to the SaaS model which is value game?

Yes that's right. IaaS is at the bottom of the IT value chain, while SaaS sits at the top. So moving upwards, the margins are higher, but at the bottom there is a sizable market. So the volumes are very high. Today, one of our biggest challenges even with respect to Cloud is making sure that the customer don't run out of Cloud space and so the customer can increase space on demand. The peripheral business around datacenters and Cloud technology are immense. Disaster recovery is another vertical which is rapidly growing.

What is Netmagic doing in this space to maintain higher redundancy and curb down time?

We have been able to characterise ourselves by offering the highest amount of up time and offering the highest SLAs (Service Level Agreements). There are two main factors when operating up time for datacentres. One is power and the other is connectivity. We've designed our datacentre in a way in which there is no single point failure, so everything like a powergen or a UPS is redundant. Secondly, on connectivity, we are carrier neutral, so unlike a typical telco that uses one service provider, every datacentre has multiple carriers. Our primary operations centre is in Mumbai, while our largest disaster recovery noch is in Bangalore. So every datacenter we provide has a small noch, which means every datacenter can operate on its own but has space to be operated by either Mumbai or Bangalore. Whether it's DRS (disaster recovery systems) or network management, everything has adequate redundancy.

Now, disaster recovery is another fast growing space and Cloud technology has enabled that growth. While customers knew the benefits of it, now they have to do it for compliance. What used to happen is that if a customer wanted 1:1 redundancy enabled for Site A, we would have to create Site B. For such insurance, customers had to pay a 100 per cent premium. Since major disasters would occur once in two or three years, many CFOs would not make this a priority. So what they would ask for instead of 100 per cent redundancy was 50 per cent redundancy. To allocate physical infrastructure on demand for DRS is very difficult. But with Cloud technology being elastic, the customers pay per use infrastructure for DRS. So now thanks to the Cloud this disaster recovery is a space seeing lot of traction.

There are a lot of medium sized companies cropping up doing a lot of business in DRS. Is Netmagic looking to acquire or even partner such companies?

We've already partnered with Sanovi for DRS. Internet security is also a focus area in the market. We partnered with a company called Netmonastery. I am a firm believer that we are not going to be able to do everything ourselves.

What is the next step of synergy with NTT, how are you going to roll out and cater to the business for NTT's global customer base?

India offers tremendous talent at very competitive rates. And so we are looking to offer remote infrastructure management for NTT's global infrastructure from India. This is a huge market. This is where Infosys and all the Indian IT majors play. Second is we are going to be one of the major contributors to NTT's global Cloud initiative. NTT has a global Cloud of its own, but eventually NTT and Netmagic will integrate it to make it one large Cloud and a lot of the major elements of technology in terms of software for this Cloud will be contributed by us. I am confident with NTT coming in, our growth is going to hasten, because now we are in a league of MNC clients. As far as high growth areas are concerned, I see huge opportunity for us in data connectivity in peripherals like DRS and more importantly in data security. The increasing amount of cyber attacks on customers makes this a space of opportunity for companies like us. We have already started providing security services in this space. To increase our bottomline, we have to increase automation. So even with NTT coming in, it is not like we are going to start hiring in a big way. We have added employees, but more automation should be our goal.

How does entry of NTT affect the MNC client base for Netmagic in India?

We want to have a good mix of global to domestic customers. See today only customers targeting an audience in India will host in India. If you are targeting customers in the US you will host in the US. So while the bulk of our revenues are in Rupees, because we are targeting companies in India, a lot of them are MNCs like Barclays and Vodafone. So we are already operating their corporate offices in India. What NTT is bringing to us is the customers, where the decisions are made overseas. We have close to 1,200 customers with 80 per cent of them being in India. But in terms of revenues the gap would be 60-40 split.

What is the sort of ticket sizes and margins that we see in Netmagic's primary verticals?

In the Cloud business, the ticket sizes are smaller but in data co-location and datacentre business, the ticket sizes are much larger. With NTT coming in, the ticket sizes have more than doubled. In the IaaS industry, because of huge amount of depreciations, we have to consider gross margins which are close to 30- 50 per cent as compared to a SaaS model in which the margins are higher.

What is your advice to startups coming up in this space?

There are lots of ups and downs. But you need to have a clear picture. You need to provide value. If you are strong in your convictions of providing value then don't move from it. I am not saying don't adapt, but I've seen a lot of startups who move away from what they planned to come out with in the first place. So don't lose focus of what you are providing.

What is the road ahead for you as we also see you as a mentor on GSF? Are you looking to become more active as an angel investor?

I have invested in companies before along with Sanjay Gaikwad of UFO Moviez. But my philosophy is that I don't just want to invest in companies, in which I don't understand the business model. I would like to be part of it and add some value. My aim is more to mentor and add value.

(Edited by Prem Udayabhanu)