Michael Quinn, Partner QAdvisors
An Investment Banking Partnership Maximizing Value in a Consolidating Market Cloud Communications Alliance October 2014 Copyright 2014 Q Advisors LLC All Rights Reserved www.qllc.com
Deep Cloud Communications Industry Knowledge & Client Base Firm Profile Cloud Transactions Founded in 2001 to provide financial advisory services Focused on technology and communications Most active managed and cloud-based services bank in the industry, based on the number of active clients and deals closed Significant experience in structuring and negotiating M&A and financing transactions for private and public companies: - Sell-side and buy-side engagements - Debt and equity financings - Strategic financial advisory engagements November 2013 Serve clients globally Closed over 130 transactions since inception - Total transaction value approaching $8.0 billion - Average transaction size of approximately $60 million Offices in Denver and San Francisco Team of 16 professionals 1
Cloud Managed Services Recent Transaction Activity LTM M&AActivity Steady stream of managed cloud acquisitions over the past five years Though the market continues to consolidate in 2014, it still remains highly fragmented with over 100 service providers First half 2014 deal volume for the broader technology and telecom industries outpaced key growth industries - Technology focused acquirers were the most active in the U.S. market by deal volume - Traditional IT service providers and premise PBX-based vendors key acquirers Mitel acquisition of Aastra (N/A) Ricoh acquisition of MindShift (N/A) Notable deals in the last twelve months in the cloud unified communications-as-a-service ( UCaaS ) sector include: - NTT Arkadin (N/A) - GTT UNSI (0.7x Annualized Rev.) - Vonage Vocalocity (2.9x LTM Rev.) - Fusion Broadvox (1.0x LTM Rev.) - Spire Capital Partners Telekenex (6.0x LTM EBITDA) - WideOpenWest Networks Bluemile (2.2x LTM Rev.) Q4 2014 2015 M&AActivity Looking Forward Q4 2014 & 2015 Significant wave of consolidation and possible emergence of UCaaS market leaders to occur over coming year - The sheer number of current buyers and willing sellers is unprecedented - Select strategic players on the hunt for acquisitions over the following year include the following: Arkadin (NTT) is currently seeking acquisition targets post recent acquisition of a Microsoft Lync service provider GTT utilizing strategic acquisitions to expand customer base and footprint Motivating factors that will continue to fuel transactions in the UCaaS sector include: - Rising acceptance of UCaaS in SMB and enterprise market segments - Convergence of traditional service providers all seeking to be a single source solution - Expansion into new geographic territories 8x8 acquisition of VoiceNet Solutions in the UK (N/A) - Integration into vertical market segments to better serve customer needs West purchase of Reliance Comm. (2.8x LTM Rev.) 2
Public Trading Comparables Unified Communications-as-a-Service Public Trading Comparables Unified Communications-as-a-Service Trading Multiples as of 10/6/2014; (US$ in Millions) Operating Metrics Margins (LTM) Growth TEV Multiple Com parable Com panie s TEV Market Cap. Unified Communications-as-a-Service LTM CY 2014 Revenue Revenue LTM EBIT DA CY 2014 EBIT DA Gros s Profit EBITDA 1 Yr. LTM CY 2014 Revenue Revenue Revenue Citrix Systems, Inc. $11,904.0 $11,447.1 $3,047.5 $3,188.5 $724.9 $976.3 85.5% 23.8 % 12.8 % 3.9x 3.7x 16.4x 12.2x West Corporation $5,982.6 $2,431.9 $2,720.2 $2,801.1 $681.5 $714.0 52.7% 25.1 % 1.8 % 2.2x 2.1x 8.8x 8.4x j2 Global, Inc. $2,357.0 $2,421.0 $544.7 $591.9 $226.3 $258.2 82.9% 41.5 % 40.2 % 4.3x 4.0x 10.4x 9.1x Enghouse Systems Limited $845.0 $950.0 $205.1 $230.9 $46.7 $58.9 70.8% 22.8 % 25.5 % 4.1x 3.7x 18.1x 14.4x Premiere Global Services, Inc. $802.1 $581.1 $552.7 $569.1 $74.4 $103.0 57.7% 13.5 % 4.3 % 1.5x 1.4x 10.8x 7.8x Vonage Holdings Corporation $740.2 $694.1 $854.8 $872.6 $70.6 $104.9 70.9% 8.3 % (2.4)% 0.9x 0.8x 10.5x 7.1x RingCentral, Inc. $736.3 $856.5 $188.3 $214.9 ($38.6) ($21.9) 62.5% (20.5)% 40.1 % 3.9x 3.4x NM NM AmcomTelecommunications Ltd. $504.5 $512.5 $170.4 $178.4 $46.0 $49.8 37.2% 27.0 % 0.2 % 3.0x 2.8x 11.0x 10.1x 8x8 Inc. $392.1 $574.1 $137.3 $154.5 $6.4 $14.9 70.5% 4.6 % 20.4 % 2.9x 2.5x NM 26.3x LTM EBIT DA CY 2014 EBIT DA Sources:Capital IQ, SEC Filings, Press Releases and Q Advisors LLC Estimates Mean 65.6 % 16.2 % 15.9 % 3.0x 2.7x 12.3x 11.9x Median 70.5 % 22.8 % 12.8 % 3.0x 2.8x 10.8x 9.6x 3
Precedent Transactions Unified Communications-as-a-Service Precedent Transactions (2011 Present) (US$ in Millions) Operating Metrics TEV Multiple Date Buye r Tar ge t Im plied LTM LTM LTM LTM Unified Communications-as-a-Service TEV Revenue EBITDA Revenue EBITDA 04/21/2014 West Corporation Reliance Communications $75.0 $27.0 NA 2.8x NA 01/27/2014 Spire Capital Partners Telekenex NA NA NA NA 6.0x 01/15/2014 Viatek Services Pty LTD CN Group Pty LTD NA NA NA NA NA 12/31/2013 Fusion Telecommunications Broadvox $32.1 $30.9 $5.4 1.0x 5.9x 12/02/2013 8x8 Inc. VoiceNet Solutions $18.4 NA NA NA NA 11/15/2013 Vonage Holding Corporation Vocalocity Inc. $129.5 $44.5 NA 2.9x NA 09/27/2013 WideOpenWest Netw orks BlueMile $20.0 $8.9 $2.9 2.2x 6.9x 08/30/2013 Intermedia.net Telanetix $49.7 $33.9 $3.3 1.5x 14.9x 12/31/2012 Bright House Netw orks Telovations NA NA NA NA NA 07/10/2012 Masergy Communications Broadcore Communications NA NA NA 2.2x NA 07/02/2012 Consolidated Communications SureWest Communications $564.6 $248.1 $86.0 2.3x 6.6x 05/01/2013 InteliCloud, Inc. Slice Netw orks, LLC NA NA NA NA NA 03/23/2012 ShoreTel M5 Netw orks $183.9 $48.2 NM 3.8x NA 03/01/2012 j2 Global Zintel Communications $12.9 NA NA NA NA 10/13/2011 Microsof t Skype $9,082.4 $859.8 $192.9 10.6x 47.1x 09/15/2011 8x8 Inc. Contactual $27.1 $9.0 ($0.7) 3.0x -37.6x 08/23/2011 Vocalocity Aptela NA NA NA NA NA 08/05/2011 Warwick Valley Telephone Alteva $17.8 $6.4 $0.4 2.8x 44.6x 07/05/2011 Telovations FeatureTel NA NA NA NA NA 06/06/2011 West Corporation Smoothstone $120.0 $30.0 $4.6 4.0x 26.1x 05/02/2011 Shared Technologies Cross Telecom NA NA NA NA NA 03/02/2011 Earthlink STS Telecom $34.8 $22.9 $5.2 1.5x 6.7x Sources: Capital IQ, SEC Filings, P ress Releases and Q Adviso rs LLC Estimates Mean 3.1x 13.5x Median 2.8x 6.9x 4
Cloud-based Managed Services Market Observations Cloud-based managed services will continue rate of increased adoption, but are far from reaching ubiquity in terms of market penetration Though the market is growing and underpenetrated, it is increasingly crowded with additional cloud managed service providers, causing existing players to face increased challenges establishing market leading position Primary hurdles for cloud managed service providers to overcome in achieving leading market position include: - Establishing Brand Awareness - Achieving Platform and Service Automation - Reaching Inflection Point of Profitability and Scale Number of strategic buyers and willing sellers in 2014 for cloud managed services is unprecedented M&A activity and marketwide consolidation have largely been delayed as buyers must survey vast market of providers, while only attributing premium valuations for select target profile characteristics Identifying target characteristics that drive premium valuations will be key to driving growth and further establishing market share going forward in the managed cloud services market 5
Most Active Strategic Acquirers What These Acquirers Are Looking For: Scale due to difficulty of organic growth Differentiated cloud services and products to cross sell into their embedded client bases Margin enhancement Contact center solutions 6
Valuation Creation: Drivers for Premium Cloud Valuations 1. 2. 3. 4. 5. Differentiated Platform Robust Capabilities Enterprise Customer Base Quality of Service Business Model Proprietary Customization (Vertical Focus) Size (SMB, Enterprise) Network and Quality (QoS) Scalability Reseller Mobile Capabilities Integration (APIs) Product Innovation Loyalty (Churn) Automation (Self Service Portals) 7
Valuation Driver #1: Differentiated Platform Proprietary UCaaS Providers LTM TEV/Rev Multiple (RNG, 8x8, BroadSoft) vs. S&P 500 and Nasdaq 10.00x 8.00x 7.00x 6.00x 5.00x 4.00x 3.00x 2.00x 1.00x 9.00x S&P 500 Index (^SPX) NASDAQ Composite Index (^COMP) RingCentral, Inc. (NYSE:RNG) 8x8 Inc. (NasdaqGS:EGHT) BroadSoft, Inc. (NasdaqGS:BSFT) Players with a proprietary platform have continued to receive premium valuations. Additionally, Intermedia bought Telanetix at 1.7x LTM Revenue and Spire bought Telekenex at 6.0x EBITDA, in part for the Companies proprietary platforms 8
Case Study 8x8 Inc. (NasdaqCM:EGHT) 9 What Derives 8x8 s Valuation Premium? Proprietary platform offered Innovative recent developments emphasize APIs, supporting customer s existing business processes Targets SMB and mid-market enterprises - Moving up market - 44% of new MRR comes from mid-market and distributed enterprises Enabling self-service portals allow users to self-manage their accounts - Focus on the ease-of-use factor Offerings vary across cloud sector - Able to cross-sell to existing customers Vendor Direct Delivery Financial - Vendor Snapshot and service provider serving the same company - Key advantage of this model is agility and a direct relationship with end users In Millions ($) Mar-31-2012A Mar-31-2013A Mar-31-2014A LTM Jun-30-2014A Total Revenue 83.4 103.8 128.6 137.3 Growth Over Prior Year 18.8% 24.5% 23.9% 27.3% Gross Profit 57.6 72.1 91.0 96.8 Margin % 69.1% 69.4% 70.7% 70.5% EBITDA 11.0 13.7 8.5 6.4 Margin % 13.1% 13.2% 6.6% 4.6% EBIT 8.6 9.8 4.3 1.8 Margin % 10.4% 9.4% 3.3% 1.3% 30.00% 20.00% 10.00% -10.00% -20.00% -30.00% -40.00% -50.00% Relative Performance vs. S&P 500 0.00% Company Overview 8x8 Inc. (NasdaqCM:EGHT) develops and markets telecommunications services for IP, telephony, and video applications S&P 500 Index (^SPX) 8x8 Inc. (NasdaqGS:EGHT) Historically strong in small business market but increasing midsize and even enterprise accounts. Recently launched European support in concert with its acquisition of VoiceNet Solutions (U.K. based)
Case Study RingCentral, Inc. (NYSE:RNG) What Derives RingCentral s Valuation Premium? Relative Performance vs. S&P 500 Proprietary platform offered Off-the-shelf, preconfigured solutions, tailored to SMB markets RingCentral is aggressive in supporting APIs (to such IT applications as salesforce.com, Marketo, Google, Box and Zendesk) Offering is intuitive and well-suited to mobility and BYOD environments Lower end of SMB market 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% RingCentral, Inc. (NYSE:RNG) S&P 500 Index (^SPX) - Strategic acquisitions required to move up market - Not profitable -10.00% -20.00% -30.00% - Higher Churn -40.00% Significant portion of Operating Expense dedicated to sales and marketing Financial Snapshot In Millions ($) Dec-31-2012A Dec-31-2013A LTM Jun-30-2014A 0 1 Dec-31-2014E Total Revenue 114.5 160.5 188.3 214.89 Growth Over Prior Year 45.2% 40.1% 38.5% 33.88% Gross Profit 69.6 99.0 117.8 - Margin % 60.8% 61.7% 62.5% - EBITDA (26.5) (32.1) (38.6) (21.87) Margin % (23.2%) (20.0%) (20.5%) - EBIT (32.7) (41.0) (47.9) - Margin % (28.6%) (25.6%) (25.4%) - Company Overview Prominent cloud VoIP provider that is particularly strong in the small businesses market; Focuses on strong mobility offering to SMBs; now offers services in the U.K. RingCentral has industrialized processes for inside sales, customer support and technical support. RingCentral is one of the largest global UCaaS providers with more than 300,000 companies (many are small) supported
Valuation Driver #1: Differentiated Platform (cont.) Application Programming Interfaces 1 The most important trend in UCaaS is the adoption of APIs and the related plug-ins, connectors, and software development kits (SDKs) to integrate UCaaS with a cross section of IT services (some communications related, others not) UCaaS providers often support a core set of UC services (for example, voice, unified messaging, IM, and presence), and then tiesin with other vendors for additional capabilities APIs enable UCaaS users to "plug and play" UCaaS with the "best-of- breed" IT applications Ability to create a proprietary solution through integration of cloud UC platform into other embedded enterprise solutions drives valuation premiums (1) Gartner 11
Valuation Driver #2: Robust Capabilities Addressing Service Gaps Cloud UC Solutions Surplus Capacity, Increase in Price Excess Supply CRM 20.0% Pressure Many cloud service offerings have Content Publishing 14.8% increasingly marked adoption rates Collaboration 14.4% 10.0% As pricing pressure increases, these Renting Server HW 9.4% solutions risk becoming Invoicing commoditized 9.1% Project Management 4.1% SMB Hosted SW Platform 3.9% Supply Email Services 2.1% Demand Renting Hosted DB 2.0% Shortage in Offerings -3.2% Gap SMBs are requesting: Data Backup -3.2% - Vertical industry solutions with Web Conferencing -6.4% compliance solutions Video Conferencing -6.9% - Enhanced security -11.2% Hosted VoIP -15.2% Supply - More UC solutions offered in a cloud Audio Conferencing Security Shortage, environment, specifically, video and -22.5% Accounting Market web conferencing Industry Verticals-24.4% Opportunity Storage and Backup Many key cloud supply/demand gaps continue to exist, creating opportunity to develop unique market position 12
Valuation Driver #2: Robust Capabilities Addressing Service Gaps Expertise and solutions tailored across verticals Addressing Service Gaps Through Differentiation VERTICAL EXPERTISE LEAD WITH MOBILE STRATEGY CLOUD INNOVATION Highly attractive to large enterprises Increases customer stickiness Highly distributed organizations in professional verticals demand outsourced provider to manage compliance related to (i.e. FISMA, HIPAA, and PCI) industry Users expect full UC functionality across all mobile platforms True mobile cloud services are device and OS neutral Consumerization of IT (BYOD) Multi-tenant PBX platforms designed specifically for mobile carriers (i.e. RingCentral and AT&T) No current UCaaS market leader who offers a full, scalable UC capability In addition to the basic integrated UC offerings, innovative additional solutions include, but are not limited to: - Mobile client - APIs for integration - Social networking - WebRTC - GPS or other location information - Storage Both end-users and ultimately strategic acquirers are paying premiums for vertical solutions that are mobile enabled (1) RapidScale 13
Valuation Driver #3: Enterprise Customer Base Ability to move up market driving premium valuations Large Enterprise MRR (>$5,000) Middle Market Enterprise (MRR >$1,000) SMB (<$1,000 MRR) Channel & Direct Focus Direct Channel Focus Pros: Multi-location enterprise customers - High ARPU - Increased upsell potential and customer stickiness Tap channel partners embedded base of large enterprise customers - White-labeled solutions Cons: - Exclusive cloud partner status Increased time/bandwidth to provision multilocation enterprise Requires proper resources to manage/monitor customers - Strong network and OSS/BSS Pros: SMB Market - High Growth - Little ongoing support costs Cons: - Scale is ultimate differentiator High churn, low customer stickiness High sales and marketing expense 14
Valuation Driver #4: Quality of Service and Automation Quality of Service - Cloud-enabled MPLS network ensures QoS and security - Enables expansion of services to broad network of users and entities in large multi-location environments Self-Service Portals - Three-tiered, Partnerole portal based (channel relationship driver) Customer/User portal Enterprise Self-Service Capabilities Increase with Cloud Maturity 1 Cloud Focused Cloud Exporers Cloud Beginners Cloud Watchers 18% 21% 32% 40% 39% 35% 71% 68% Internal/IT administrator portal - Advanced enterprise cloud users demand highly automated, self-serve solutions Role-based, highly automated and intuitive self-service portals, integrated with back office systems create value for the end user and service provider (1) RightScale Provision to Cloud in < 1 Hour Have Self Service Portals 15
Valuation Driver #5: Business Model Ability to reach inflection point of profitability and scale business model key to driving enhanced value Track and measure KPIs over time and gauge impact of incremental investments - Customer acquisition costs ( CAC ) Months to recover CAC (cloud-based services should be < three years) - Lifetime value of customer ( LTV ) Moving up market to larger enterprise base increases ARPU and returns higher LTV than SMB 8x8 recently highlighted that mid-market customers have ~40x return as that of SMB customers - Customer churn % MRR Churn (Churned MRR/Previous Months MRR) % Customer Churn (# Customers Churned/Total # Customers) - Renewal Rate Improve customer onboarding and operational process to provision new customer - Involves migration of large amounts of data from legacy systems - Highly automated back office systems increase efficiency and speed from ink to install - Outsourced providers (i.e. VOSS Software) can take inputs from legacy PBXs and then initiate an automated mass migration to cloud service 16
Winter is coming don t get caught out in the snow. 17