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With cloud computing on the rise and companies warming to the idea of outsourcing their data management needs, TeraGo Inc. wants to take the familiar idea of the “bundle” to the enterprise space.

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With cloud computing on the rise and companies warming to the idea of outsourcing their data management needs, TeraGo Inc. wants to take the familiar idea of the "bundle" to the enterprise space.

The Thornhill, Ont.-based telecom, which provides Internet and telephone services to small and medium-sized businesses, has been pursuing an expansion into the data centre business and last week announced a $33-million deal to buy national cloud services and co-location company RackForce Networks Inc.

TeraGo launched cloud services – offering customers remote hosting for their computing platforms as well as data backup and storage – in October, an area CEO Stewart Lyons said gives the company the ability to offer a bundle of four key services.

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"We liken it to the 2015 business-to-business version of the consumer quad play – wireless, Internet, home phone and cable television – of the early 2000s," he said in an interview. On the enterprise side, the "quad play bundle" includes cloud, networking, and voice services as well as co-location, which entails renting data centre space and power to clients who manage their own servers on site.

Bundling is a common concept in the retail-focused telecom world but still relatively novel in the enterprise space in Canada, Mr. Lyons said, noting that although customers that take all four services still account for less than 10 per cent of TeraGo's client base of 4,100 (pre-RackForce acquisition), growth on that front is "happening faster than we expected."

Larger Canadian telecom providers are also pursuing the opportunity, with a wave of consolidation in recent years as both national and regional players have bought data centres or invested in building their own and placed greater emphasis on enterprise services divisions.

Offering all four services together allows for cross-subsidization, Mr. Lyons said, plus, it can help customers transition away from managing their own data. Clients might be willing to use cloud services for certain functions – such as their e-mail server – but want more control over "mission critical" applications and co-location gives them that option.

"There's still a fascination with being able to see the blinking lights and being nearby their boxes," Mr. Lyons said, adding that over time, customers can become more comfortable moving even more sensitive functions to the cloud.

Comfort with information technology (IT) outsourcing is growing, said Mark Schrutt, research vice-president of services and enterprise applications at consultancy IDC Canada.

"IT buyers – chief information officers and chief technology officers – are much more open to the concept of using third-party providers for data centres," he said, adding that many prefer to work with providers in the same city or province as their business.

The Canadian data centre services business in 2014 was worth $4.7-billion, according to IDC, which estimates there are 4,000 data centres covering 8 million square feet of space or the equivalent of 3,400 hockey rinks. Many companies still run their own in-house data centre services and only 3 per cent of those data centres are commercially run by third parties, but those equate to half of the total square footage covered.

Although several analysts noted the high multiple of 9.9 times adjusted annualized fourth quarter earnings TeraGo paid, reaction to the RackForce deal was generally positive. The Kelowna, B.C.-based company has been generating free cash flow and has a combined annual growth rate of 22 per cent over the last three years. It is the fifth data-centre business TeraGo has acquired as it has pursued a shift in strategy aimed at targeting the range of enterprise services and data centre and cloud services will soon make up almost a quarter of its revenue.

"TeraGo has seen solid demand across most of its data centres thanks to the effective cross-selling strategy," said Macquarie Capital Markets Canada's Greg MacDonald. "We see cross-selling data centre and cloud services as a key driver in 2015 and beyond."

The company had total revenue of $51.2-million in 2014 and posted a net loss of $3.9-million for the year.

TeraGo conducted a strategic review after the government announced new rules in 2012 permitting foreign ownership of small telecom companies but eventually decided not to proceed with a sale. Mr. Lyons, formerly the CEO of wireless carrier Mobilicity, has been spearheading the new strategy since joining TeraGo in January, 2014.

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