X5 Solutions Acquires Its Way To National Scale

NewSpring Growth

X5 Solutions, a privately-owned network service provider based in Seattle, is tripling its size with the acquisition of CornerStone Telephone, announced last month. Based in upstate New York, with operations extending into Massachusetts and down to New York City, the addition of CornerStone will give X5 a 10,000-strong customer base that stretches from New England in the Northeast, to Miami and Texas in the South, and Seattle and Los Angeles in the West. X5’s strategy is to build a nationwide network delivering cloud services to mid-sized businesses. Backed by private equity investor NewSpring Capital, X5 CEO Greg Forrest is moving aggressively to leverage what he sees as a big opportunity to convert old-fashioned telcos into modern providers of unified communications (UC) services.

“CornerStone brings us a strong client base, very talented leadership, a new geography, and a strong hosted voice practice,” CEO Forrest told the Daily Cloud. “Voice is just one application in the UC stack. You can take a hosted voice seat and convert it to a UC seat. This is a beautiful opportunity for our extension efforts.”

As CEO of Xeta Technologies for seven years, Forrest built up that publicly quoted managed services provider as one of the leading consultants on Nortel and Avaya PBX deployments, and then sold it to PAETEC (now Windstream) for $61 million in 2011. He went on to found X5 Solutions with backing from NewSpring. At X5, “the thesis is to consolidate network service providers and evolve them from telcos to providers of cloud offerings,” he explains. “It is leveraging the network we own and creating higher value services on top.”

Unified communications technology providers, especially those pursuing the software-as-a-service (SaaS) model get a lot of attention, partly because Wall Street investors love the growth potential of the SaaS model. But in unified communications, network service providers (NSPs) often have a more powerful platform to win customers than a newly-minted SaaS provider. NSPs start off with existing relationships with large numbers of enterprise customers, and because they own the network, they have are in a better position to guarantee reliable service than a SaaS provider who might be delivering service from a faraway data center over the unpredictable Internet.

Once the CornerStone acquisition is complete, X5’s 10,000 business customers will be concentrated in Seattle, Los Angeles, Miami, San Antonio, and New York, with a European data center in Amsterdam. Forrest says the revenue run rate post-acquisition will be in the $75 million to $100 million range.

X5 has physical networks in each of the cities where it offers services, based on technology from Metaswitch, a well-established startup whose technology supports 1,000 network service providers worldwide. According to Forrest, Metaswitch technology is ideal for serving small and mid-sized businesses. X5’s sweet spot is mid-sized businesses seeking service for 25 to 2500 seats per customer. Unified communications services worked best for small customers a few years ago, but as the price of service per seat has come down, and the quality, reliability, and familiarity with the service has risen, more medium-sized businesses are now embracing the advantages of an all-IP service that requires no equipment on the customer’s premises. “Our growth plans are growth through consolidation and growth through transformation,” Forrest says. Transformation means moving customers from traditional telephone services to the newer, IP-based services. “We go to a customer that may have a $20,000 a month spend on his network and offer him unified communications service, or video as a service, or security as a service, and we make that $20,000 figure grow.”

Revenue from traditional telephony services tends to decline with price compression, but the newer services generate the growth. The net result is an underlying growth in mid-single-digits, Forrest says. That growth rate can be boosted quickly through acquisitions. X5’s financial backer, NewSpring Holdings, is committed to long-term business growth. “NewSpring is run by experienced operators and bankers. It’s important to have the right financial partner,” Forrest says.

X5 wins business through high-touch customer service, a high level of network uptime, and good redundancy to ensure quality service. “Our goal is to continue to add value to our customers through technology, and to transform our business from a legacy telco to a communications company that leans more towards technology.

“We want to be the Verizon at the mid-market level.”

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