Entries in Cloud (9)


Telcos Take to the Cloud in 2011

Data Centers and Cloud Providers Targeted Early and Often in 2011

While there were only a handful of ILEC deals to speak of in 2011, telcos of all shapes and sizes kept The Deal Advisor busy this year with ventures into data centers and cloud services. Over the past twelve months, many telcos joined a diverse group of companies ranging from Best Buy to VoIP providers to cablecos that made acquisitions in the data center and managed services space. In the deals we observed, communications providers shelled out nearly $8.2b at an average price tag of nearly 5x revenue to get a piece of these growing industries.

A trio of large publicly-traded ILECs made the biggest splashes into the data center arena in 2011, spending nearly $7.5b to acquire 3.5m square feet of data center space. Verizon got the action started with its $1.9b purchase of Terremark and its 13 data centers in January. Shortly after Verizon closed on its deal, CenturyLink picked up industry giant Savvis for $3.2b in what was the year’s largest data center deal. With the Savvis purchase under its belt, CenturyLink immediately became one of the largest data center operators in the U.S. with 48 facilities totalling 1.9m square feet. Not to be out done, Windstream announced on August 1st that it had purchased telecom services provider and data center operator PAETEC for $2.3b, picking up 7 data centers and an expansive fiber network in the deal.

While the big boys dominated the data center M&A scene, some relatively smaller, regional telcos moved into the cloud services space with a string of acquisitions in the latter half of the year. In July, New York-based Warwick Valley Telephone snatched up Philadelphia-based hosted VoIP and managed services provider Alteva for $17m. Then in November, Kansas-based telco Twin Valley Telephone acquired a majority stake in IT services and cloud computing company, ISG Technologies. Most recently, North Carolina-based ILEC North State Communications acquired a neighboring managed services provider and data center operator, DataChambers, to round out a busy year for the telcos.

While the size and scale of the data center and cloud purchases varied in 2011, the acquiring telcos shared similar motivations in making their deals. First,  the acquisitions furthered their efforts to diversify service and revenue mixes, shifting away from their reliance on traditional voice lines. Secondly, whether buying managed services providers, data centers, or both, the companies acquired portfolios of services targeted towards the higher ARPU-business customers. Lastly, through investing in data centers and cloud services, telcos are getting into businesses with attractive growth profiles.

Though projections of future growth in cloud spending and adoption range widely, all forecasts for the industry point upward. IDC estimates that spending on public cloud infrastructure will expand by a compound annual growth rate of 27.6% over the next four years, reaching $73b by 2015. Meanwhile, the Open Data Center Alliance (ODCA) expects cloud adoption amongst businesses of all sizes to triple over the next two years, with 40% of companies moving towards a cloud based computing infrastructure by the end of 2013.

The industry outlook for data centers is equally bullish, fueled at least in part by companies looking to outsource IT infrastructure to data centers. Data center industry analyst Clayton Moran expects colocation spending to increase 15%-20% in 2012, while a recent Gartner study projects that spending on data centers will hit $127b by 2015, up from $88b in 2010. 

By contrast to these rosy outlooks, telcos lost another 10% of voice access lines in 2011, and continue to face stiff competition from the cablecos, satellite providers and OTT providers for television and Internet market share. Although competition exists within cloud services and the data center space, these industries are growing. Telcos can also integrate their colocation and managed services with their traditional voice, video and Internet offerings, differentiating themselves from other communications providers.

Along with the potential for growth, moving into managed services and data centers will also bring about new challenges for telcos. The cloud services business is technology intensive and evolving rapidly, requiring providers to manage the changes in technology and to adapt quickly to clients needs. Through M&A, the phone companies have acquired the technology and expertise required to provide these cloud-based services, but managing these technologies and the business going forward is the next challenge. However, based on the flurry of M&A activity in 2011 it is a challenge that plenty of telcos are more than willing to take on.  


Twin Valley Telephone Eyes Growth in the Cloud

Independent Telco Sees Growth Potential in Managed Services

On November 1st, Miltonvale, Kansas-based Twin Valley Telephone Company (TVT) announced that it had acquired a majority stake in cloud services provider, Salina, Kansas-based ISG Technologies. While financial terms of the deal have not been disclosed, the combined company will generate around $90m per year. The purchase signals a pivot for TVT to target more small to medium-sized business customers—a shift that many telcos and communications providers of all types are making. With the increased competition in managed services, the question remains: Who is best positioned for success?  

An independent, family-owned telephone company, Twin Valley has provided telecommunications services to customers since 1947, with its company’s roots dating back to 1900. It currently serves 6.6k subscribers and 7.4k access lines over a footprint of 2.4k square miles in north-central Kansas. The telco completed a fiber build over its entire footprint in 2009, and offers IPTV, and broadband Internet in addition to its phone services.

As a competitive telco for over 60 years, Twin Valley has gone through many transformations in its day. It got into the cable television business in 1983, and amid increasing access line losses in the 1990’s and early 2000’s it turned to IPTV as a revenue replacement growth strategy in 2003. In March 2006, it nearly tripled its size, purchasing 5,200 access lines in 13 Kansas exchanges from Sprint.

In acquiring ISG Technologies, TVT adds a portfolio of managed services and data center solutions along with an established based of 2,500 SMB clients. While the term “cloud services company” can conjure up the image of a crew of 5 to 10 people operating out of a basement somewhere, ISG is an experienced IT company with 28 years in the business and 140 employees. Like many IT companies, ISG has found a niche in “cloud services”—which it admits is essentially a metaphor for utilizing the Internet for your computing and communications needs.

Twin Valley had its own experiences in “the cloud” which led to its interest in ISG. According to ceo Ben Foster, TVT realized the potential of selling cloud services after the company itself moved over to a virtualized server infrastructure.

“Our realization that a business-focused cloud strategy was going to be our growth opportunity outside of our footprint occurred just after we went to a virtualized server infrastructure.  We began to save significant amounts of money by reducing the number of servers that vendors were selling us and charging us to maintain. It became evident that what we really had was a mini-data center that could be leveraged to sell hosted services and disaster recovery.”

TVT experienced first hand the economic benefit that cloud services could provide to small businesses, and saw a potential revenue stream for its own business. It decided to offer services such as web hosting and disaster recovery, which it offers along with its hosted VoIP services. With the ASG acquisition, TVT is doubling down on the cloud. 

TVT however is not alone. In addition to regional telcos like Warwick Valley Telephone (Alteva) and TVT moving into managed services, massive corporations like Amazon and Google are getting into the same space. Best Buy just acquired IT services firm mindSHIFT for $167m, commenting that the combined companies are looking to capture a greater share of the $40b small and mid-sized business MSP market.  While bigger doesn’t necessarily mean better, a company like Best Buy, armed with its strong distribution channels and Geek Squad service expertise appears to be well positioned for success as an MSP. 

Despite the growing competition, Foster believes there is plenty of room on the cloud for the giant companies and smaller providers alike. Specifically, he feels Twin Valley and ISG are better suited to provide quality service that meets the business needs of small to mid-sized companies.

“In our market research, we identified a gap in the type of support these corporations provide business customers versus what they expect for the investment they are making.  If you are a fellow Fortune 500 company, Amazon and Google would be happy and probably better-equipped to support you.  If your company is smaller than that, you aren’t really hitting their radar screen.  Companies of all sizes can’t operate without an efficient, capable IT partner and infrastructure. We are far better equipped to handle that next tier of companies’ needs and will do so aggressively.”  

That LECs are competing in similar areas to an Internet search giant like Google, and retail companies like Best Buy lends more credence to what we already know: the telecommunications landscape is changing rapidly, and media providers of all shapes and sizes are a part of this giant shake up. 

As this convergence in telecommunications is taking place, some providers are content to maintain a strategy that has worked for them for years--focusing on their core businesses: telephone, cable television, and Internet. Others are taking a more proactive approach to their future. With its acquisition of ISG Technologies and its move to the cloud, Twin Valley is proving that it is the latter.


Data Center M&A Heats Up as Global Demand Rises

Spending on Data Centers to Reach $99b in 2011

The data center market has heated up over the past two weeks, with the announcement of a pair of acquisitions.  The deals come at a time when the demand for data storage continues to rise.  According to a report released Thursday by technology research firm, Gartner, spending on data center servers, storage and networking equipment will rise 13% to $99b in 2011, above pre-recession levels.

In a deal announced on October 6th, global data center provider Digital Realty Trust (NYSE:DLR) acquired a data center located in Sacramento Country from Seattle-based Telecom Real Estate Services for $30m. The property is located at 11085 Sun Center Drive in Rancho Cordova, and measures 69,000 square feet.  The center has a history of use by some large players in telecom—first MCI, then Verizon (NYSE:VZ).  Both providers used the data center as a telecom switch.

With the acquisition, Digital Realty expands its California footprint, more than doubling its presence in the Sacramento market.  The company owns and operates a 63,000 square foot property on Gold Camp Drive, also located in the city of Rancho Cordova.  The purchase however is just a drop in the bucket compared to Digital Realty Trust’s overall portfolio. The data center giant owns 98 properties throughout Europe, North America, Singapore and Australia.  Its real estate holdings combine to measure 17.3m square feet.

Based on the purchase price of $30m, Digital Realty paid approximately $435 per square foot in the deal.  The property was particularly attractive based on the fact it is fully leased on a long term basis to SunGard Availability Systems Inc.  By contrast, Digital Realty is still looking for co-location tenants in its Gold Camp Drive data center. As part of its acquisition strategy, Digital Realty seeks properties that have predictable, long-term cash flows (rents), making data centers with existing tenants locked in logical targets. 

Scott Peterson, chief acquisitions officer at Digital Realty, commented on its recent purchase. “This acquisition adds a newly renovated, high quality, and fully leased operating asset to our portfolio at an attractive going in cap rate. The property is located near our 3065 Gold Camp data center facility, expanding our presence in the Sacramento market and contributing to our revenue stream with a long term, stabilized lease.”

In addition to being fully leased, the data center’s Sacramento location is increasingly attractive for companies to store their data thanks to cheaper electricity and relatively inexpensive real estate.  Twitter, among other companies, has recently leased space in the Sacramento area.

On the heels of Digital Realty’s purchase, Denver-based Hosting.com announced that it had acquired Dallas-based managed services provider and data center operator, Neo Spire.  Hosting.com offers cloud hosting and recovery services and is owned by private equity firm, Charlotte-based Pamlico Capital.  While financial terms of the Neo Spire deal were not disclosed by the company, Golub Capital recently provided a $78m loan to Hosting.com in connection with the acquisition.

Neo Spire owns and operates data centers in both Dallas and Atlanta, located in close proximity to major fiber networks.  The connection at its Atlanta-based facility, a 50,000 square foot property, sits upon on a main fiber backbone in the city.  With its acquisition, Hosting.com’s total data center space now totals 131k square feet with a footprint in Dallas, Denver, Irvine, Louisville, Newark (DE) and San Francisco.  

While the Digital Realty purchase was more of a straight forward data center deal, there is a large managed services piece to Hosting.com’s acquisition.  Neo Spire offers a full range of hosting solutions: fully managed hosting, dedicated server hosting, private cloud hosting and colocation services. In addition, Neo Spire offers a compliance based approach to network and data security framed around the PCI Security Standards that helps companies navigate complex industry and government regulations.

Hosting.com has suggested that it will look to cross-sell its new Neo Spire clients with its own portfolio of cloud services, specifically its cloud replication solution that provides offsite data protection and disaster recovery. In late August, Hosting.com launched its new data loss prevention service that utilizes VMware to enable automated replication of a customer’s virtualized data from a Hosting.com data center, to a recovery site.

Looking back at the M&A in data centers this year to date, 121 properties measuring near 4.4m square feet have been dealt in selected transactions. While price tags were not disclosed on a number of the acquisitions, the priced deals have totaled near $5.5b. Based on these numbers, Gartner’s bullish outlook for the data center market is reinforced.  


8x8 Makes Second Cloud Buy This Year

Paying $29m+ for Contactual, Inc.

After years of existing largely as a Vonage-like VoIP voice service provider, Sunnyvale, Calif.-based 8x8, Inc. (Nasdaq:EGHT) is moving aggressively this year into cloud-based services and focusing more directly on business customers.  Earlier this summer it announced the $2.3m acquisition of Zerigo, Inc,, which provides virtual private servers, managed DNS services, and monitoring tools for cloud-based server operations. And on September 12, 8x8 announced it will issue more than $29m in stock to acquire hosted customer call center service provider Contactual, Inc.

Contactual, based in Redwood City, Calif., offers a Software As A Service (SaaS) solution that augments or takes the place of facilities-based call centers; presumably the virtual nature of the service makes it less expensive to deploy and more readily scalable.  The company has customers ranging from Fortune 500 companies to small and medium sized businesses.  In late July Contactual issued a press release boasting of strong second quarter growth:

"The continuation of our growth trend through the second quarter demonstrates the attractiveness and value of not only our solutions, but also our unique distribution model that is capitalizing on the increased demand for cloud-based solutions to simplify customer interaction management,” said Chris Brennan, president and ceo of Contactual. “This quarter we experienced significantly higher than market growth rates in our direct channel. Combined with the rapid increase reported earlier in our indirect channels, more and more organizations are improving customer satisfaction, increasing retention rates, and realizing the many additional benefits of cloud-based customer communications."

8x8 said that Contactual’s revenue in calendar year 2010 was $8.3m, including approximately $8m (10%) that came from 8x8.  8x8 has been reselling the Contactual service as part of its larger service mix since 2007. Based on trailing revenue, 8x8’s closing price before the announcement and the maximum  number of shares to be issued (6.7m shares), the deal multiple comes in at 3.5x. 

Shares in 8x8 have enjoyed a surge in popularity in recent months, and news of the Contactual deal pushed prices even higher. Based on the closing price of the stock before the acquisition was announced, 8x8 was trading for more than 4x run-rate revenue. The stock rose nearly 7% on the deal news today to close at $4.69/ share, or 4x pro forma estimated revenue.  The stock had briefly traded above $5/ share back in July, but YTD investors have enjoyed a near double.

In addition to the enterprise market, 8x8 is targeting the public sector. In late August it announced that it had appointed Vance Raeside as its Washington DC-based Director, Federal Sales, responsible for overseeing direct and indirect sales activity with federal, state and local government agencies. Raeside previously worked in public sector sales for Shoretel and Nortel. 8x8 also announced at that time that it has been selected selected by the City of Garden Grove, California to provide cloud-based disaster recovery services.

Raeside noted the growth potential expected in public-sector cloud services: "I'm thrilled to be joining a company as nimble and highly regarded as 8x8, especially in light of the Federal Government CIO's statement earlier this year that an estimated $20b of its $80b in IT spending is a potential for migration to cloud computing solutions."


Warwick Valley Acquisition Expands Web-Based Services

Alteva Sells for 3.1x Revenue

Recently I wrote a piece for The Deal Advisor detailing M&A activity in the cloud. June was a busy month for cloud-based acquisitions, and thus far two ILECs have carried that momentum into July.  Last Thursday, Warwick Valley Telephone Company (Nasdaq:WWVY) announced it will acquire Philadelphia-based Unified Communications provider Alteva for $11m cash, $4m common stock, and $2m in performance-based payments; this news came on the heels of TDS' announced plan to buy OneNeck IT Services. Warwick Valley says the Alteva acquisition is an important part of its CLEC expansion strategy, and compliments its US Datanet business which it acquired in 2009.

Alteva started up in 1996 as a tech consulting firm with two people and later began offering managed services for Microsoft products. In 2003, Alteva launched its hosted VoIP services business and today is North America's largest enterprise provider of hosted VoIP. Its hosted VoIP services are similar to those provided by US Datanet, and both target the same small business and enterprise markets.

Given the strong performance of US Datanet relative to its ILEC segment, WVT’s strategy to expand its web-based communications and business customer base comes as no surprise. US Datanet has grown its VoIP customer base 32% annually for the past two years, and its wholesale and conference service revenues were up 81%.  

Growth from US Datanet, while strong, has not made up for the declines at Warwick Valley’s ILEC segment, leading WVT to grow its CLEC business through acquisition.  “Organic CLEC revenue growth is just not sufficient to replace ILEC revenue loss,” stated Duane Albro, WVT president and ceo.  In addition to the revenue that Alteva will provide, Albro added that “the anticipated synergies and complementary attributes of the combined CLEC businesses (US Datanet and Alteva) will provide cost saving and operational benefits.”

Time will tell exactly how much incremental revenue and cost savings Alteva will generate. Given that it was a private company, there is no public record of its revenues. Albro however provided a glimpse at Alteva’s past performance, allowing us to make some future projections. 

First, we know that Alteva was purchased for $17m in cash and stock.  Albro during the conference call offered that Alteva was acquired at 3.1x revenue, and that he expected revenue growth to drive the run-rate multiple much lower.  A deal at 3.1x implies TTM revenue for Alteva at $5.5m. Albro went on to note that Alteva has grown its top line 60% annually since 2008. If business grows at a similar rate in 2011, estimated revenue may come in at near $9m, implying a run-rate multiple of 1.9x revenue.

Given Alteva's growth profile, the price tag of the deal seems very low. Although the TDS purchase of OneNeck came in lower at 2.6x 2010 revenue, its projected 2011 revenue multiple of 2.2x is higher than the possible 1.9x in the Alteva deal. Granted the companies are not perfect comparisons, but both offer managed cloud services to business customers. 

Overall, WVT stated that the acquisition will increase its annual consolidated revenue by 30%, to around $32m.  While these revenue projections are healthy, some perspective on the company’s current financial position and the overall impact of its cloud strategy to date is of value.

Warwick Valley's operating revenues have suffered despite the 2009 US Datanet purchase. WVT’s ILEC and CLEC segments operated at combined losses of $4.7m in 2009, and $8.7m in 2010. Purchasing Alteva will aid WVT’s financial position, but will not cure all that ails it.

After buying US Datanet in 2009, WVT called it “a step in the execution of our business beyond our regulated franchise area.”  The purchase of Alteva marks a bigger step in the same direction, as Warwick Valley increasingly targets business customers with cloud-based communications services. Past performance and revenue estimates suggest that Alteva will help fight help the tide of ILEC revenue losses, but the verdict is still out on WVT's growth strategy.