Acquisition of RackForce Networks Inc.: The Largest Canadian Enterprise Cloud Service Provider March 19, 2015
Forward Looking Statements This presentation includes certain forward-looking statements that are made as of the date hereof and are based upon current expectations, which involve risks and uncertainties associated with our business and the economic environment in which the business operates. All such statements are made pursuant to the safe harbour provisions of, and are intended to be forward-looking statements under applicable Canadian securities laws. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, the words anticipate, believe, plan, estimate, expect, intend, should, may, could, objective and similar expressions are intended to identify forward-looking statements. This presentation includes, but is not limited to, forward looking statements regarding the acquisition by the Company of RackForce Networks Inc., TeraGo s growth strategy, transition of the Company to a multi-product IT services company, cross selling opportunities, revenue growth, and growth of the global cloud and data center markets. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed with the forwardlooking statements. When relying on forward-looking statements, whether written or oral, to make decisions with respect to the Company, investors and others should carefully consider the risks, uncertainties and assumptions, including the risk that the acquisition of RackForce Networks Inc. may not be complementary to the Company s existing business, cross-selling of TeraGo s products and services may not succeed, revenue growth strategies may not materialize, trends in the global cloud and data center markets may not be accurately projected, transition to a multi-product IT services company will not generate the results intended by management, the assumption that all closing conditions set out in the share purchase agreement for the acquisition of RackForce Networks Inc. will be satisfied or waived by the applicable party or parties at the time of closing, the assumption that recent revenue trends of RackForce Networks Inc. will not materially change after its acquisition by the Company, those risks set forth in the Risk Factors section in our annual MD&A for the year ended December 31, 2014 available on www.sedar.com and other uncertainties and potential events. In particular, if any of the risks materialize, the expectations, and the predictions based on them, of the Company may need to be re-evaluated. Consequently, all of the forwardlooking statements in this presentation are expressly qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences for the Company. Except as may be required by applicable Canadian securities laws, the Company does not intend, and disclaims any obligation to update or revise any forward-looking statements, whether oral or written as a result of new information, future events or otherwise. 2
Transaction Highlights o TeraGo has entered into an agreement to acquire RackForce Networks Inc. Largest Canadian enterprise cloud service provider Enterprise value of $33.0 million o Expands access to attractive $155 billion global cloud services industry (1) RackForce services include: Managed Cloud (infrastructure-as-a-service), Cloud Applications (platform-as-a-service), Colocation and Managed Network Ability to attract and retain customers from SMB to Enterprise with end-to-end solutions o Transformative acquisition accelerates TeraGo s growth in cloud and data center services Cloud and data center services revenues >20% of pro forma 2014 total revenues Approximately 58,000 square feet of data center space with ~13MW of power (1) Source: Technology Business Research Inc. Creates Canada s Premier Enterprise Class Network, Data, Voice and Cloud Services Provider 3
RackForce Highlights o Largest Canadian enterprise cloud service provider Founded in 2001; Cloud launched in 2010 Proven expertise serving enterprise clients running mission-critical applications (e-commerce, government, financial) o Robust suite of solutions Providing managed cloud (IaaS), cloud applications (PaaS), hybrid cloud and colocation o Diversified, highly valuable customer base Over 60% of revenues generated from cloud and managed services Top 25 customers monthly ARPU of over $17,000 Contracted customer churn of <0.8% o Significant growth potential within existing infrastructure Utilization of <40% on square footage and <30% on utility power o Attractive and proven financial model ~22% revenue CAGR between 2011 and 2014 Q4 14 LQA Adjusted EBITDA of $3.3 million Recurring revenue model with average customer tenure of 31 months o Strong management team with significant expertise 4
Compelling Strategic Rationale Attractive Industry Fundamentals o Access to large and growing global cloud market of $155 billion o IT outsourcing increasing as businesses require security, stability and scalability for their applications and data o Significant growth in traffic drives connectivity growth o Loyal customer base with high switching costs Largest Canadian Enterprise Cloud Service Provider o Largest Canadian enterprise cloud service provider o Proven expertise serving enterprise clients running mission-critical applications (ecommerce, government, financial services) o Strategic relationships Cisco, VMware, IBM, Kaltura, Mitel and many others Strong Financial Performance o Recurring revenue model with average customer tenure of 31 months o ~22% revenue CAGR between 2011 and 2014 o Significant capacity within existing facilities with utilization of <40% on square footage and <30% on utility power 5
Compelling Strategic Rationale Best-in-Class Infrastructure o Tier 3 configured facility with 6MW of power and 18,000 square feet of raised floor space capable of delivering power densities of 25kW per rack o 10Gbps multi-homed internet and Wide Area Network services that include point-topoint connectivity o Canadian domicile provides data sovereignty advantage for international customers Strong Management Team o Superior track record with enterprise cloud services as well as data center development and management o Proven reputation of operational excellence o Highly experienced management team with 90+ years experience Accelerates Transition to End-to-End Data Solution Provider o Positions TeraGo as Canada s premier enterprise class provider of network, data voice and cloud services o Accelerates growth and diversifies TeraGo into high growth cloud and data center services which now represent over 20% of pro forma 2014 total revenues o Leverage TeraGo s existing customer base 6
Strong Industry Fundamentals o Attractive growth prospects Access to large and growing global cloud market of $155 billion in 2015, growing to $210 billion by 2018 IaaS segment forecast to achieve a CAGR of 41.3% through 2016 (1) Increased IT outsourcing Significant growth in mobile software, hybrid IT and open cloud ecosystems driving demand o Strong financial model Recurring revenues with contracted customer base Optimized cash flow with OPEX model Success-based capital investment o Loyal customer base Mission critical applications High switching costs Global Cloud Services Market (US$ billions) (2) $210 $191 $170 $155 $118 $131 $104 $110 $91 $80 $85 $68 $55 $37 $75 $79 $87 $92 $48 $55 $63 2012 2013 2014 2015 2016 2017 2018 (1) Gartner. (2) Technology Business Research Inc. 7
RackForce Overview o Largest Canadian enterprise cloud service provider o ~$10.9 million of revenue in 2014 o Founded in 2001; Cloud launched in 2010 o VMware s largest Canadian Service Provider Strategic Technology Partners 8
RackForce Capabilities Hybrid Infrastructure Service Secure & Reliable Solutions for Enterprises Colocation Public & Private Cloud Storage Services Backup & Recovery Managed IT Services Network Services Unified Communications Security Services Disaster Recovery The Largest Canadian Enterprise Cloud Service Provider 9
Accelerates Transition Standalone % of Total Revenue 94% Pro Forma % of Total Revenue 77% 6% 23% Access DC & Cloud Access DC & Cloud May 2013 Data Centers Canada Acquires first data center in Vaughan, ON April 2014 2 nd Vancouver Data Center Acquires additional Vancouver data center October 2014 4 th Data Center Acquires former Blackberry data center February 2014 Vancouver Data Center Acquires first Vancouver data center October 2014 Cloud Services Launch Cloud storage and cloud compute offered to customers March 2015 Acquisition of RackForce The leading Canadian enterprise cloud service provider 10
Key Transaction Terms Transaction Value $33.0 million Transaction Multiple 9.9x Q4 14 LQA Adjusted EBITDA of $3.3 million (1) 3.0x 2014 Revenue of $10.9 million (1) Transaction Financing $31.0 million funded through existing credit facilities $2.0 million fundedthrough the issuance of TeraGo common shares to RackForce shareholders (2) Expected Close LateMarch 2015, subject to satisfactionof customary closing conditions (1) EBITDA adjusted to include mid-quarter installs, backlog and other normalization adjustments. (2) Issue price of $6.0838 based on 20-day volume weighted average price ( VWAP ). 11
Amended Credit Facilities o Cash portion of purchase price to be financed with $31.0 million committed bank financing Pro forma leverage of 2.7x based on LTM EBITDA as at December 31, 2014 o Amended facilities total $85.0 million with $50.0 million to be drawn at closing Drawn $50.0 million term facility Undrawn Refinance existing indebtedness $31.0 million for RackForce acquisition $10.0 million revolving facility $25.0 million future acquisition facility o Amended facilities provides financial flexibility and capital for further acquisitions 12
Summary Acquisition of Canada s largest independent enterprise cloud provider Highly attractive industry dynamics Positions TeraGo as a leading end-to-end data solutions company Attractive and proven financial model Strong management team with significant expertise Creates Canada s Premier Enterprise Class Network, Data, Voice and Cloud Services Provider 13