Founded in 2001, and backed by private equity firm LDC since 2017, Babble provides a range of cloud-based services across three main areas – Babble Comms, Babble Contact and Babble Cyber. The company already has an annual turnover of £22 million, but, with the backing of private equity firm LDC, is targeting revenues of £100 million by the end of 2023. It plans to get there through a combination of organic growth and an ambitious ‘buy and build’ strategy that has already seen it swallow up Arden Group and Direct Response Plus in 2018 and Diva Telecom and, now, Lakeside Technologies in 2020. The backing of LDC is clearly fundamental to Babble’s success, so we started by asking CEO Matt Parker about the relationship between the two firms.
As we go to press, Babble has just announced its third acquisition of 2020, that of Corporate Management Telecom Ltd (CMT), a Braintree-based provider of business telephony and cloud-based ser vices. See our website for more details.
Technology Reseller (TR): Babble has thrived since it secured the backing of LDC in 2017. How did that relationship come about?
Matt Parker (MP): I joined cloud comms reseller IP Solutions, which was backed by Livingbridge, on February 1, 2016 after the mid-market private equity investment firm had a falling out with the company founders and wanted someone to come in and run the business. I stayed 18 months with the intention of getting the business from £6 million revenue to £20 million revenue through a combination of organic growth and a couple of acquisitions.
It became clear relatively quickly that Livingbridge’s experience of the business and the dispute left them disinclined to continue to invest and, quite reasonably, they decided to take the business to market. I persuaded them to let us do a management buy-out, which was backed by LDC, in October 2017.
We are now just over two and a half years into our life with LDC. It was always our plan to follow an aggressive ‘buy and build’ strategy and so far we’ve done four acquisitions – two in 2018 and two this year – and put in place the bulk of a dedicated M&A team focused on sourcing deals, doing due diligence on opportunities, putting integration plans together and actually delivering the integration. Material investment in that resource will allow us to grow our business through acquisition by 50% every year. We entered this year as a £20 million run rate revenue business, and we will exit it as a £30 million run rate revenue business; 2021 will get us from £30 million to £50 million; and 2022 from £50 million to £80 million. It is then a relatively small step to get from £80 million to £100 million.
This will be the third time I have been involved in growing a relatively small operation into a £100 million business. I did it first at Stepstone, then at Lumesse. Babble will be my third £100 million business and my first in telecoms.
TR: Do you see the telecoms market as particularly ripe for a buy and build approach?
MP: One thing that struck me when I got involved in the sector was the fragmented nature of the reseller market. There are literally thousands of telecoms resellers in the UK and lots of them are run by people who have been at the helm for a long time and are starting to think about what to do next or how to get out – Pete Dobson founded Lake Technologies 26 years ago and the founder of Diva Telecom, which we also acquired this year, had been in telecoms for 30-odd years.
So, yes, the market lends itself to a buy and build approach. You can name half a dozen businesses that are doing something not dissimilar to what we are doing that are already two to three times our size – Southern Comms, Wavenet and others.
What’s different about Babble is that with us it’s all about next gen tech; it’s all about cloud-based solutions; and it’s all about recurring revenue – we are 95% recurring revenue. I come from a SaaS background and taking the reseller model and applying SasaS principles to it is what we think differentiates us.
TR: And that recurring revenue is particularly attractive at a time like this…
MP:Yes, absolutely. I speak to other private equity CEOs on a regular basis and I have never felt more blessed in my business career than I do now. I would love to be able to say it was a conscious decision to have something that was robust and resilient, but nobody could have foreseen the situation we find ourselves in. Someone said to me a long time ago, when I was getting involved in my first SaaS start-up, ‘If you can find a way of running a business that makes you money when you are asleep, you are going to be in a good place when things get tough’. That’s exactly what we have been trying to do with Babble over the last four and half years.
TR: When you take over a company, do you maintain relationships with the existing suppliers or do you move everyone over to the Babble cloud offering?
MP: What we do is somewhere between the two. In this industry, there are two or three suppliers most people work with –Daisy, Gamma, some of the connectivity providers, Virtual1, people like that. Most people we look at are doing something with one or more of those.
We have five businesses we spend a lot of money with and if there’s any revenue with one of them, we leave it where it is, because that is the simplest, most efficient and most sensible thing to do. However, when we buy businesses that have legacy PBX bases – and for us to do an acquisition that has to be a non-material part of the revenue that’s coming out of that business – one of the first things we do is migrate those 100 or 150 customers onto one of our cloud-based UCaaS solutions.
So, where it makes sense for a customer to move, we move them. Where it makes sense for a customer to stay where they are, we leave them where they are.
TR: To date, all of your acquisitions have been in telecoms, but you also have a cyber security offering. Do you plan to diversify and expand your IT offering at any point?
MP: There are two routes to diversification through acquisition. One is on the contact centre, the CCaaS side. We are the biggest CCaaS reseller in the UK selling the Five9 product. We’ve got approaching 2,000 seats on that and we see that as a significant strategic move for the business. There are many smaller contact centre technology providers out there and we see some opportunities there to accelerate the growth of that part of the business.
Then, on the other side, I would love to be buying stuff in cyber. I think the challenge there is that that industry is moving slowly from the traditional IT support model and, while we do provide IT services and IT support to a significant number of clients, I am not sure I see that as the future of the business. What we are trying to do is replicate what we are doing in comms, in terms of being this cloud-based expert, on the cyber-side of things.
If you look at any one of 100 people that play in our space on the telecoms side, they all look as if they do the same thing. The reality is they don’t; in most cases, a really small part of their business is cloud and they still have hundreds of PBXs. It is the same in cyber and IT, which is actually slightly further behind in the evolution towards delivering or supporting cloud-based solutions.
We probably look at two or three acquisition opportunities a week and about one third of those are IT-related. When we see something we like we will pursue it, but the reality is that the good ones are really expensive.
TR: How many acquisitions do you have the capacity to complete in a year?
MP: Our aspiration is to do between 6 and 12 acquisitions next year – on average, one every six weeks. Hence the investment in our M&A team: we have put in an integration project manager; we have put in a due diligence specialist; we have put in two finance people.
We think we have a different approach to the rest of the market: we acquire; we integrate almost immediately; and we Babble-ise the acquisition’s employees, brands and contracts.
We kept looking at potential acquisitions and saying ‘I like this and this and I don’t like that and that’. About 18 months ago we realised it was a very easy win for us to take the list of things we don’t like and make sure we don’t do any of those things in our business. Things like running half a dozen different financial systems or three different CRMs or six different ticketing systems or five different brands. That’s not how we want to run our business.
So, at Direct Response Plus, Diva Telecom and Lake, it’s all now Babble – customers, staff, everything.
TR: Is that speed of acquisition normal for your type of business?
MP: The challenge we have is that businesses that meet our ideal criteria – high levels of recurring revenue; unified comms or CCaaS as part of the strategy and already a material part of the business; a minimal amount of legacy revenue; high margins; and an ability to deliver synergies rapidly – tend to be at the smaller end of the scale.
The easiest thing would be to find a business exactly like ours, acquire it and double our size overnight. The problem is there’s no one else in the £20 million to £30 million bracket that gets 95% of their business from cloud-based services. People say they do, but the reality is they have hundreds of PBXs in there and huge tranches of maintenance-based revenue. Would I rather do one deal than 12 deals next year? Yes, I would. But I don’t think there’s one business that would get us to where we want to be. I would have to compromise on too many things.
TR: Would you say your proposition has been validated by Coronavirus?
MP: Two things have been validated. One is where we are trying to get the business to and our focus on recurring revenue; and the other is the products we sell. Businesses generally realise they need continuity; they need resilience; and they need tools that allow them to improve engagement levels both internally and externally. These requirements are best served by UCaas, CCaaS and the cyber solutions that Babble sells.
TR: With the impact of COVID-19 and the UK now officially in recession, do you think there will be bargains out there for you to snap up?
MP: While there probably will be stressed assets that come to market, our strategy will still be to buy businesses we view as high quality. It’s our view that such businesses are more valuable in a difficult economic situation than a bargain: everything rises with the tide and the stuff that stays high is worth more when the tide goes down. I don’t see us buying something because it’s cheap; we would rather buy something because it fits our strategy.
If you are a 90% recurring revenue business that delivers 50% plus margin and 80% of your customers are on direct debit, you are not going to be a bargain, because the cash is coming in, you are thriving in a situation where others are struggling.
Common sense tells you there will be businesses that find it difficult – ones that pay their bills and their salaries with one-off revenue that they generate every month are going to find it difficult. So, there will be opportunities. But we are not minded to invest energy in those. We think there are enough really high quality businesses for us to deliver on our strategy without going down that route.