451 Research LogoToday, 451 Research released their latest Analyst Report on Tuangru:
“Tuangru is adding customers quickly based on the quality of the value proposition it presents to the hosting business. The ability of the service to directly reduce the cost of hardware potentially has a direct impact on the per-megawatt profitability of companies in a business where consolidation looms large, and owners are acutely aware of factors that could impact valuation. Its increased focus on analytics tools presents a new avenue for generating revenue, and is likely to increase the company’s attractiveness as a supplier to larger hosting businesses able to negotiate significant discounts on their own.”


 

Tuangru expands its group-buying service for hosting hardware

Analyst: Liam Eagle
30 Jun, 2014

Just over a year since launching, Tuangru, a group-buying business that aggregates the resources of its mid-tier hosting customers to cut capex costs, is expanding its business along several dimensions. The company indicates it is rapidly adding new customers while also expanding its vendor partnerships and available products, its geographic reach, and the feature set of its end-user platform. The company’s core business model is based on the VAR role of distributor for the large hardware vendors, with the fairly unique addition of the group-buying and discounting premise. However, Tuangru says that this year, it intends to build additional business intelligence functions into its purchasing dashboard. This will enable hosting providers to run more of their logistics through the platform and represent a potential new source of revenue for the company.

The 451 Take

Tuangru is adding customers quickly based on the quality of the value proposition it presents to the hosting business. The ability of the service to directly reduce the cost of hardware potentially has a direct impact on the per-megawatt profitability of companies in a business where consolidation looms large, and owners are acutely aware of factors that could impact valuation (in the hosting space, valuation is typically a multiple of EBITDA). Its increased focus on analytics tools presents a new avenue for generating revenue, and is likely to increase the company’s attractiveness as a supplier to larger hosting businesses able to negotiate significant discounts on their own.

Context

Tuangru started up in February 2013 with a small number of hosting provider customers and hardware supplier partners. When the company spoke to us in September, it had grown its customer count to 12 hosting businesses. At the time, management indicated the company was on track to generate $8-10m in overall revenue for 2013, and expected to generate close to $40m in 2014. The company is now reluctant to share specifics about financials but says it has more than tripled its customer count. This may not translate directly to a tripling in revenue because of the large potential for variance in the size and hardware spending of individual customers. It has expanded its staff from six to 10 in that same time period, and expects to reach 15 employees by the end of 2014.

About two months ago, the company established a presence in Amsterdam to serve the European market. It works with the same vendors, usually to supply customers based in the US and Canada that are expanding into Europe. Tuangru suggests that it can alleviate a large logistical challenge associated with sourcing hardware internationally for these clients.

Product and technology

Tuangru’s offering spans the sourcing of the hardware itself, the discounted pricing based on the aggregation of buying power, a reverse logistics program for selling hardware late in its lifecycle, and the additional management and analytical features delivered through its user portal. The core of the service is the sale of hardware to support the Web hosting environment. While it focused initially on servers (supplied by Dell and Supermicro), it has, over the last eight months, extended into storage, networking and other datacenter infrastructure, as well as established partnerships with a list of vendors that includes EMC, Nutanix, SolidFire, Juniper, Arista Networks and APC.

Tuangru believes that a large portion of the value it delivers to customers comes from the logistical controls built into its purchasing and management portal. Another key is the consultative approach the company takes in helping its customers optimize their infrastructure on a profitability-per-megawatt basis (a nicely unifying metric across a variety of single- and multi-tenant, managed and unmanaged service models).

The company is expanding its services by continuously adding new features surrounding that optimization effort. Currently, the tool includes a function that enables customers to import information about their hardware leases into the system, and to track the status of those leases from a central location. This enables them to better plan for upcoming buyout costs and identify opportunities to improve and optimize infrastructure (the company says all its customers have imported their lease information). It also includes the ability to tag orders so customers can conduct deeper analysis into their spending, tracking capex related to growth and maintenance separately, for instance.

Tuangru issues updates to its portal on a nearly monthly basis, driven mostly by customer demand. It is adding tools for creating standardized hardware configurations that can make ordering new gear a one-click process. In Q4, the company expects to add a more complex set of business intelligence functions it says will enable customers to better understand profitability, revenue growth, churn and other key metrics. While the user portal is free to use for customers, Tuangru expects to charge for the deeper BI functions at an as-yet-undetermined per-seat rate that would remain far more affordable than building an in-house BI system. Even further out, the company is considering developing features that would enable customers to use its platform to handle purchasing outside of what they’re buying from Tuangru.

Business model

Tuangru gains a relatively small margin on the gear purchased from its partners by its customers; however, its business model enables it to operate with a relatively small staff and to keep its operating costs to a minimum. The company’s growth comes from the growth of its customer base and increased customer spending (which is affected by both the customer’s size and the breadth of products Tuangru offers).

The company says the nature of its service lends itself nicely to acquiring customers through word of mouth. Adding customers increases its aggregate buying power, thereby increasing the discount Tuangru is able to achieve for all customers. As a result, its customers tend to recommend the business to their peers in the hosting space. Management says this is producing traction among smaller hosting providers that don’t have the scale to negotiate much of a discount on their own.

Competition

Tuangru is a somewhat unique proposition in the hosting space. As a reseller of hardware to service providers, it competes with the large VARs that distribute similar products, such as Ingram Micro, Tech Data, Arrow Electronics and SYNNEX. However, as its user base grows, the company believes its group-buying discount premise represents a key differentiator. Although it is moving toward offering business intelligence tools via its own platform, those tools represent an add-on to its hardware sales, and target customers that currently are not doing deep analysis of their spending. Those tools do not likely put Tuangru in direct competition with the BI software vendors.