CBEY

Cbeyond, Inc. (CBEY)

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Cbeyond (CBEY)

Q1 2013 Earnings Call

May 01, 2013 5:00 pm ET

Executives

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

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

Robert Morrice

Analysts

Barry McCarver - Stephens Inc., Research Division

Barry M. Sine - Drexel Hamilton, LLC, Research Division

Brett Feldman - Deutsche Bank AG, Research Division

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

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

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

Jennifer M. Fritzsche - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Cbeyond First Quarter 2013 Conference Call and Webcast. [Operator Instructions] As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Mr. Bob Fugate, Executive Vice President and CFO. Please go ahead.

J. Robert Fugate

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 myself, Bob Fugate, Executive Vice President and CFO. In addition, I'm pleased to announce a new executive who will be helping us on the investor front going forward, Rob Clancy, who many of you already know.

With that said, I'll turn it over to Jim Geiger.

James F. Geiger

Thank you, Bob, and thanks for joining us on the call today. Today, we're discussing the financial and operating results for the first quarter of 2013. On our call last quarter, I spent some time putting our 2012 accomplishments in perspective as we continue to push aggressively through our transformation into a company that provides a full suite of IT infrastructure and services at the intersection of cloud, network and security. I'd like to start today by touching on a couple of financial notes that Bob will go into in more detail later.

First, I'm happy to say we are reiterating our guidance for the year and are on track versus our plan. However, I think it's important to clarify some of the numbers in our Q1 results. You'll notice that our ARPU increased this quarter. While we are pleased that our ARPU went up, it was driven by an increase in prices via a fee that allows us to recover the cost of complying with our industry's regulations. We began charging these fees in 2011 and have been gradually increasing the fees over time. We believe this new increase brought our federal cost recovery practices in line with our competitors'. As a result of the regulatory fee, we achieved an increase in ARPU in Q1. But real inflection in ARPU that we've been anticipating is still due to occur probably later this year when the higher ARPU arising from our 2.0 customers outweighs the sales of legacy products in our traditional business. When this ARPU inflection occurs, we will highlight the event.

Revenue was up 0.9% over Q4 due to the increased regulatory recovery fee. The more exciting fact is that we are building momentum in our 2.0 business, and that's where I want to focus us today.

Simply, we believe that our 2.0 platform, which is fully available in all 14 of our markets, is unmatched by our competitors. We have enterprise-class cloud products. Our TotalCloud Data Center is built on Cisco routers and servers, EMC storage and uses F5 server load balancing. Our TotalCloud Phone System is built on Cisco routers and servers, coupled with software from Broadsoft. We believe we have one of the largest Metro Ethernet footprints in our 14 markets outside of the ILEC as our total network offering provides 10 megs or more of symmetric bandwidth to over 190,000 buildings.

Finally, we have a new professional servicing -- services offering called TotalAssist that allows us to migrate our customers seamlessly to our TotalCloud family of services as well as address the lion's share of our ongoing technology needs.

Why we focused on dramatically expanding our product offering? We believe that the convergence to cloud, network and security is the next enterprise wave making its way downstream to the small and midsized business markets. We are solidly positioned to benefit from this trend over the next several years. In fact, we are the only provider with an integrated offering that can deliver this convergence to small and midsized businesses, combined with cloud enablement services that they need to take advantage of the cloud. These services are anything but commoditized. We believe that this market position will result in significant differentiation.

In support of our strategy, we have invested heavily in our new products, platforms and processes to realize our 2.0 strategy. The current state of our new capabilities are where we expected them to be at this point in our transformation. Let's review some of the highlights and then discuss the remaining area of improvement.

The revenue coming from our Cbeyond 2.0 customers was 11.4% of our total revenue in Q1, up from 9.5% in Q4, a 20% increase in the last quarter alone. The percentage of our customers who are 2.0 climbed from 4.5% in Q4 to 5.7% in Q1, a 27% increase. Based on these increases, I'd like to elaborate on our ARPU trends. Since we are getting 11.4% of our revenue from just 5.7% of our customers who are 2.0, we are clearly securing a higher ARPU from this segment.

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