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Cbeyond (CBEY)

Q4 2012 Earnings Call

February 27, 2013 5:00 pm ET


T.C. Robillard

James F. Geiger - Co-Founder, Chairman, Chief Executive Officer and President

J. Robert Fugate - Co-Founder, Chief Financial Officer, Executive Vice President and Secretary


Barry McCarver - Stephens Inc., Research Division

Brett Feldman - Deutsche Bank AG, Research Division

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Michael Rollins - Citigroup Inc, Research Division

James D. Breen - William Blair & Company L.L.C., Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division



Good day, ladies and gentlemen, and welcome to the Cbeyond Fourth Quarter 2012 Conference Call and Webcast. [Operator Instructions]

I would now like to introduce your host for today's program, Mr. T.C. Robillard, Vice President of Investor Relations. Please go ahead.

T.C. Robillard

Thank you, operator, and thank you, call participants, for joining us today. I would like to begin today's call by reminding you that this call contains forward-looking statements that include words such as believe, expect, anticipate, intend, project and similar expressions. Actual results may differ from our forward-looking statements. For specific factors that might cause future results to differ, we refer you to the forward-looking statements discussion in our most recent press release and the risk factors and other disclosures in our periodic reports that we file with the SEC.

On the call today, we have Jim Geiger, Chairman, President and CEO; and Bob Fugate, Executive Vice President and CFO. With that said, I'll turn it over to Jim Geiger.

James F. Geiger

Thank you, T.C., and thanks for joining us on the call today. Today we're discussing the financial and operating results for the fourth quarter of 2012. Well, it's been a year since we provided with you the details of our plan to evolve our business model to more cloud-centric offerings. With the tremendous amount of change that has taken place, I feel this is a good time for us to put the past year in perspective. And more importantly, provide you with our thoughts on the year ahead as we continue to build on our progress.

In short, 2012 was a historic year for Cbeyond. Our 2.0 vision went from a strategy to being fully implemented in every one of our 14 markets. Over the past 12 months, we put in place agreements to secure fiber assets, we began lighting buildings with our own fiber, we significantly increased the Metro Ethernet reach within our markets through a combination of owned and leased fiber as well as Ethernet-over-copper, we launched new cloud products, we retooled our sales force to more effectively address our new target market opportunities, we made significant investments in people, processes and technology to become more proactive in addressing the emerging needs of our customers. All while driving improving overall customer satisfaction and Net Promoter Scores. And as a result, our 2.0 platform is built. We will have 200 lit fiber buildings by the end of this week. And we expect to have 1,000 by year end. We have Metro Ethernet coverage in over 150,000 buildings in our 14 markets where we can provide 10 megs or higher of symmetric bandwidth at market rates. We have a full suite of cloud, network and professional services offerings that address the technology needs of tech-dependent small and midsize businesses. We have a fully staffed sales force that is focused on delivering this full suite of services, and we have a go-to-market approach that focuses on selling directly into buildings where we have network advantage.

Our 2.0 strategy is working right now and there is plenty of evidence to support this. We added over 1,600 2.0 customers in 2012. Our 2.0 ARPU continues to trend in the right direction and is now 60% higher than our total ARPU. 2.0 revenue represented 10% of December's revenue. In January, 2.0 services were 30% of new monthly revenue, which is more than double the levels we were seeing only 6 months ago and of the decisions made in our pipeline of monthly $5,000 plus revenue opportunities, we delivered a 10% win rate. Now to put that in perspective, that's up from 0 a couple of quarters ago. Now this is not to say our transition has gone precisely to plan or has been without certain challenges. As we mentioned last quarter, we expected Q4 to be our most inefficient quarter with respect to sales force productivity. And the reason for that was a combination of one, tenure. A majority of the new sales personnel came on board late last year. Two, new products. Our new cloud offerings have only been in the market since November. And three, longer sales cycles. The 2.0 products generally involve a more technical, solutions-oriented discussion than our traditional products and thus carry a longer sales cycle.

The net result of these challenges is that in Q4, our average monthly revenue productivity per rep was flat with Q4 last year, which is down from plus 6% last quarter. Clearly, we are not satisfied with our current rep productivity. However, when we take into account the variables of rep tenure and the availability of our 2.0 product offerings, we believe the statistic is a reflection of timing. And we expect to see improvement in this metric as we move through the year with our recently launched bundled cloud offerings get traction in the market, and the tenure of our newly hired reps increases. So as I sit here today looking at the significant progress and accomplishments we have made in driving our 2.0 strategy to market, I'm even more confident that our strategy is the right one. More importantly, I believe we can deliver a return to revenue and EBITDA growth in the coming years on the back of our 2.0 business.

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