Cbeyond Inc : Cbeyond Reports Second Quarter 2007 Results

August 02, 2007 at 04:01 pm EDT

MarketScreener.com By

Cbeyond, Inc. (NASDAQ: CBEY), (?Cbeyond?), a managed services provider that delivers integrated packages of voice, broadband, and mobile services to small businesses, today announced its results for the second quarter ended June 30, 2007.

Recent financial and operating highlights include the following:

Strong second quarter revenue growth with revenues of $67.7 million, up 28.9% over the second quarter of 2006. The second quarter of 2006 included a $0.9 million positive adjustment relating to customer promotional liabilities recorded in prior periods. Excluding this benefit to second quarter 2006 revenue, growth over the second quarter of 2006 was 31.1%;
Net income of $2.9 million in the second quarter of 2007 compared to $1.4 million in the second quarter of 2006;
Total adjusted EBITDA of $12.6 million during the second quarter of 2007, an increase of 34.3% from the second quarter of 2006 (see Schedule 1 for reconciliation to net income);
Rapid growth in customers with 2,009 net customer additions for the quarter, bringing the total customers in Cbeyond's seven operating markets to 31,175; and
Average monthly revenue per customer (ARPU) of $748 during the second quarter of 2007 compared to $744 in the first quarter of 2007.

Financial Overview and Key Operating Metrics

Financial and operating metrics, which include non-GAAP financial measures, for the three and six months ended June 30, 2006 and 2007, include the following:

	For the Three Months Ended June 30,
	2006		2007		Change		% Change
Selected Financial Data (dollars in thousands)
Revenue	$ 52,534		$ 67,715		$ 15,181		28.9	%
Operating expenses	$ 51,269		$ 65,147		$ 13,878		27.1	%
Operating income	$ 1,265		$ 2,568		$ 1,303		103.0	%
Net income	$ 1,406		$ 2,892		$ 1,486		105.7	%
Capital expenditures	$ 11,534		$ 12,802		$ 1,268		11.0	%

Key Operating Metrics and Non-GAAP Financial Measures
Customers	23,714		31,175		7,461		31.5	%
Net additions	1,805		2,009		204		11.3	%
Average monthly churn rate	1.0	%	1.0	%	0.0	%	0.0	%
Average monthly revenue per customer(1)	$ 768		$ 748		$ (20	)	(2.6	%)
Adjusted EBITDA (in thousands)	$ 9,393		$ 12,611		$ 3,218		34.3	%

(1) The June 30, 2006 figure includes $13 in average monthly revenue per customer attributable to a $0.9 million adjustment relating to customer promotional liabilities recorded in prior periods.

	For the Six Months Ended June 30,
	2006		2007		Change		% Change
Selected Financial Data (dollars in thousands)
Revenue	$ 100,112		$ 130,741		$ 30,629		30.6	%
Operating expenses	$ 99,021		$ 125,341		$ 26,320		26.6	%
Operating income	$ 1,091		$ 5,400		$ 4,309		395.0	%
Net income	$ 1,426		$ 5,625		$ 4,199		294.5	%
Capital expenditures	$ 22,545		$ 26,684		$ 4,139		18.4	%

Key Operating Metrics and Non-GAAP Financial Measures
Customers	23,714		31,175		7,461		31.5	%
Net additions	3,367		3,832		465		13.8	%
Average monthly churn rate	1.0	%	1.0	%	0.0	%	0.0	%
Average monthly revenue per customer(2)	$ 757		$ 745		$ (12	)	(1.6	%)
Adjusted EBITDA (in thousands)	$ 16,578		$ 24,670		$ 8,092		48.8	%

(2) The June 30, 2006 figure includes $7 in average monthly revenue per customer attributable to a $0.9 million adjustment relating to customer promotional liabilities recorded in prior periods.

Management Comments

?The second quarter of 2007 was our first period with greater than 2,000 net additions and our second consecutive quarter of moderately increasing ARPU. Our strong results in the quarter also included stable churn of 1% per month and applications used per customer of 5.9. Our mobile offering continues to be a popular feature of our package with an adoption rate of over 40% for new customer sales, which is consistent with the last quarter,? said Jim Geiger, chief executive officer of Cbeyond. ?We are highly focused on growing our business rapidly, both today and longer term, and have made investments in growth not only with our market launches in San Diego and Detroit, but also by beginning to expand our sales force in some of our larger markets, such as Los Angeles and Chicago.?

Geiger added, ?While we are committed to pursuing 30% or greater top-line growth, we are also just as focused on delivering strong adjusted EBITDA and cash flow on a consolidated basis. It is worth noting that this is the first quarter in which Cbeyond has shouldered material adjusted EBITDA losses from three early-stage markets simultaneously. Despite that added burden, we increased consolidated adjusted EBITDA year over year and sequentially. We are confident that we will be able to continue to deliver improving adjusted EBITDA and cash flow performance even while absorbing new market launches.?

Second Quarter Financial and Business Summary

Revenues and ARPU

Cbeyond reported revenues of $67.7 million for the second quarter of 2007, an increase of 28.9% from the second quarter of 2006. Revenues in the second quarter of 2006 included a $0.9 million positive adjustment relating to customer promotional liabilities recorded in prior periods. These promotional obligations were recorded at their maximum amount in prior periods due to the lack of sufficient historical experience required under U.S. generally accepted accounting principles (GAAP) to estimate the amounts that would ultimately be claimed by customers. Excluding this positive adjustment to second quarter 2006 revenue, growth over the second quarter of 2006 was 31.1%.

ARPU, or average revenue per customer location, was $748 in the second quarter of 2007, as compared to $744 in the first quarter of 2007. The modest increase in ARPU resulted from a variety of factors, both positive and negative, including the increasing number of customers on three-year contracts at lower price points and increasing levels of application use, particularly mobile. We have generally experienced small percentage changes in ARPU sequentially, and forecasting sequential changes is difficult due to the number of factors impacting ARPU. As a result, ARPU in the third quarter of 2007 may not increase at the same rate as we experienced in the second quarter.

Cost of Service and Gross Margin

Cbeyond's gross margin was 70.2% in the second quarter of 2007 as compared with 69.1% in the second quarter of 2006.

Operating Income and Total Adjusted EBITDA

Cbeyond reported operating income of $2.6 million in the second quarter of 2007 compared with operating income of $1.3 million in the second quarter of 2006. As of January 1, 2006, Cbeyond adopted SFAS No. 123(R). The operating income of $2.6 million in the second quarter of 2007 includes $2.5 million in non-cash share-based compensation expense while the operating income of $1.3 million in the second quarter of 2006 includes $1.3 million in non-cash share-based compensation.

For the second quarter of 2007, total adjusted EBITDA was $12.6 million, an improvement of 34.3% over total adjusted EBITDA of $9.4 million in the second quarter of 2006.

Net Income

Cbeyond reported net income of $2.9 million for the second quarter of 2007 as compared to net income of $1.4 million for the second quarter of 2006.

Cash and Marketable Securities

Cash, cash equivalents and marketable securities amounted to $51.2 million at the end of the second quarter of 2007, as compared to $39.4 million at the end of the first quarter of 2007. The increase in cash, cash equivalents and marketable securities of $11.8 million in the second quarter was due to a variety of factors, including increased accounts payable and other accrued liabilities, proceeds from stock option exercises and increased cash flow from operations, all of which in aggregate exceeded capital expenditures.

Capital Expenditures

Capital expenditures were $12.8 million during the second quarter of 2007, compared to $13.9 million in the first quarter of 2007 and $11.5 million in the second quarter of 2006.

Business Outlook for 2007

Cbeyond provides the following annual guidance for 2007:

	Current Guidance	Prior Guidance
Revenues	$277 million to $280 million	$275 million to $280 million
Adjusted EBITDA	$50 million to $51 million	$48 million to $50 million
Capital expenditures	$53 million to $56 million	$50 million to $55 million

Cbeyond's performance in the second quarter and its improved visibility for the rest of the year have resulted in an increase to guidance for revenue, adjusted EBITDA and capital expenditures for 2007. Revenue guidance has narrowed as the Company has realized both strong customer growth and solid quarterly sequential ARPU growth. Adjusted EBITDA guidance has been raised due to better than planned expense management. Guidance for capital expenditures has increased due to the anticipated acceleration of certain pre-launch investment related to our planned market launch in the first quarter of 2008 as well as the increase in revenue guidance for 2007.

Conference Call

Cbeyond will hold a conference call to discuss this press release Thursday, August 2, 2007, at 5:00 p.m. EDT. A live broadcast of the conference call will be available on-line at www.cbeyond.net. To listen to the live call, please go to the Web site at least 10 minutes early to register, download, and install any necessary audio software. The conference call will also be available by dialing (877) 704-5381 (for domestic U.S. callers) and (913) 312-1295 (for international callers). For those who cannot listen to the live broadcast, an on-line replay will be available shortly after the call and continue to be available for a year.

About Cbeyond

Cbeyond, Inc. (NASDAQ: CBEY) is a leading IP-based managed services provider that delivers integrated packages of communications and IT services to more than 31,000 small businesses in Atlanta, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles and San Diego. Cbeyond offers more than 20 productivity-enhancing applications including local and long-distance voice, broadband Internet, mobile, BlackBerry®, broadband laptop access, voicemail, email, web hosting, fax-to-email, data backup, file-sharing and virtual private networking. Cbeyond manages these services over a private, 100-percent Voice over Internet Protocol (VoIP) facilities-based network. For more information on Cbeyond, visit www.cbeyond.net.

Forward-Looking Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to statements identified by words such as ?believes,? ?expects,? ?anticipates,? ?estimates,? ?intends,? ?plans,? ?targets,? ?projects? and similar expressions. Such statements are based upon the current beliefs and expectations of Cbeyond's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that might cause future results to differ include, but are not limited to, the following: the risk that we may be unable to continue to experience revenue growth at historical levels; changes in federal or state regulation or decisions by regulatory bodies that affect the Company; the timing of the initiation, progress or cancellation of significant contracts or arrangements; the mix and timing of services sold in a particular period; our ability to recruit and maintain experienced management and personnel; rapid technological change and the timing and amount of start-up costs incurred in connection with the introduction of new services or the entrance into new markets; our ability to maintain or attract sufficient customers in existing or new markets; our ability to respond to increasing competition; our ability to manage the growth of our operations; changes in estimates of taxable income or utilization of deferred tax assets which could significantly affect the Company's effective tax rate; pending regulatory action relating to our compliance with customer proprietary network information; and general economic and business conditions. You are advised to consult any further disclosures we make on related subjects in the reports we file with the SEC, including the ?Risk Factors? in our most recent annual report on Form 10-K, together with updates that may occur in our quarterly reports on Form 10-Q and Current Reports on Form 8-K. Such disclosure covers certain risks, uncertainties and possibly inaccurate assumptions that could cause our actual results to differ materially from expected and historical results. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise.

Key Operating Metrics and Non-GAAP Financial Measures

In this press release, the Company uses several key operating metrics and non-GAAP financial measures. In Schedule I, the Company defines each of these metrics and provides a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure. These financial measures and operating metrics are a supplement to GAAP financial information and should not be considered as an alternative to, or more meaningful than, net income, cash flow or operating income as determined in accordance with GAAP.

SCHEDULE I

Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities as determined in accordance with accounting principles generally accepted in the United States, or GAAP, as a measure of performance or liquidity. The Company defines adjusted EBITDA as net income before interest, income taxes, depreciation and amortization expenses, excluding non-cash share-based compensation, public offering expenses, loss on disposal of property and equipment and other non-operating income or expense. Information relating to total adjusted EBITDA is provided so that investors have the same data that management employs in assessing the overall operation of the Company's business.

Total adjusted EBITDA allows the chief operating decision maker to assess the performance of the Company's business on a consolidated basis that corresponds to the measure used to assess the ability of its operating segments to produce operating cash flow to fund working capital needs, to service debt obligations and to fund capital expenditures. In particular, total adjusted EBITDA permits a comparative assessment of the Company's operating performance, relative to a performance based on GAAP results, while isolating the effects of depreciation and amortization, which may vary among segments without any correlation to their underlying operating performance, and of non-cash share-based compensation, which is a non-cash expense that varies widely among similar companies. The following information includes a reconciliation of total adjusted EBITDA to net income:

CBEYOND, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

2006

2007

2006

2007

Revenue: