Cut-price cloud stifles Macquarie Telecom

Macquarie Telecom's earnings have taken a hit as customers shift away from managed, dedicated servers toward multi-tenant and virtualised infrastructure-as-a-service (IaaS).

The publicly listed hosting provider has warned the ASX that it will miss its 2014 earnings target.

MacTel expects to generate earnings of between $25 million and $27 million, which would mark a fall of 20 percent or more from last year.

It's the second year in a row that the Australian telecommunications company will miss its forecasts; last year it revised down its earnings guidance by around $5 million.

The problem for Macquarie Telecom is that clients who signed multi-year hosting contracts on older, more expensive "dedicated managed server infrastructure" are switching to the company's newer, "lower cost virtual private cloud offering" as contracts come up for renewal.

This lower cost IaaS is cheaper to buy and operate, so Macquarie Telecom expects to regain a bit of balance thanks to lower capital costs, but there will be "a bit of a lag" before this happens, said Macquarie Telecom CFO Michael Simmonds.

Speaking to CRN, Simmonds said that a benefit of MacTel's more modern shared infrastructure is that "if one of those customers leave, that infrastructure can be repurposed to new customers, so we think the investment in this new type of technology will eventually show better returns but will take a while to show through on the results".

MacTel's virtual private cloud is based on Cisco and EMC technology. Its old infrastructure, which was a mix of different vendors and technologies, is being progressively retired.

Simmonds said that MacTel is still seeing some demand for dedicated servers, such as databases with high performance requirements, but other workloads, especially web-facing applications, are moving to the cloud offering.

"We still have clients who won't move to this and will remain on dedicated. It really depends on the application that the client has."

Macquarie does offer vanilla IaaS and co-location, but it continues to position itself as a higher-touch, premium player compared with low-cost public cloud providers.

"We are benefitting from the low infrastructure that is coming out [but] the difference between us and, for example, [Amazon Web Services] is AWS does not offer a managed service," said Simmonds. "They [public cloud providers] are there for those companies that want infrastructure they manage themselves; our managed offering is around those customers who want some support around their IT infrastructure.

"We still see that a lot of customers want to ensure that their data is kept onshore, but certainly we are benefitting from the change in technology. We are offering some of those benefits to our clients as cheaper offerings but our core business hasn't really changed... in terms of managed hosting [we are] offering a service that is better than everyone else and the technology we use is better than everyone else."