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Cbeyond, Inc. (CBEY)

Q2 2009 Earnings Call Transcript

August 05, 2009 at 5:00 pm ET

Executives

Kurt J. Abkemeier - Vice President Finance & Treasurer

James F. Geiger - Chairman of the Board, President and Chief Executive Officer

J. Robert Fugate - Chief Financial Officer & Executive Vice President

Analysts

Robert Dezego - Suntrust Robinson Humphrey

George Sutton - Craig-Hallum Capital

James Breen - Thomas Weisel Partners

Frank Louthan - Raymond James

Eric Kainer - Thinkequity LLC

Dave Coleman - RBC Capital Markets

Barry McCarver - Stephens, Inc.

Jonathan Schildkraut - Jefferies & Co.

Presentation

Operator

Good day ladies and gentlemen and welcome to the Cbeyond second quarter 2009 earnings results conference call and webcast. Please note that today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Kurt Abkemeier. Please go ahead sir.

Kurt J. Abkemeier

Thank you, Operator and thank you to all participants for joining us today.

I would like to begin today’s call by reminding you that this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statement include, but are not limited to statements identified by words such as expectations, guidance, 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: finalization of operating data, the significant reduction in economic activity which particularly affects our target market of small businesses, The risk that we may be unable to continue to experience revenue growth at historical or anticipated levels, the risk of unexpected increases in customer churn levels, changes in federal or state regulation or decisions by regulatory bodies that affect Cbeyond.

Periods of economic downturn or unusual volatility in the capital markets or other negative macroeconomic conditions that can harm our business including the resulting inability of certain of our customers to meet their payment obligations, 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 in to new markets, our ability to maintain or attractive sufficient customers in existing or new markets, our ability to respond to increasing competition, our ability to manage the growth of our operations, changes and estimates of taxable income or utilization of deferred tax assets which could significantly affect the Company’s effective tax rate, external events outside of our control including extreme weather, natural disasters, pandemics or terrorists attacks that could adversely affect our target markets and general economic in business conditions.

You are advised to consult any further disclosures we may make on the 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 incur 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. On the call today, we have Jim Geiger, Chairman, President and CEO and Bob Fugate, Executive Vice President and CFO. With that said, I will turn it over to Jim Geiger.

James F. Geiger

Thank you, Kurt and thanks everyone for joining us today. As mentioned, today we were discussing the financial and operating results for the second quarter of 2009. But first, let me state that I am pleased with how low our business is performing in this difficult economic environment and remained confident in our continued success. Although the small business market has been impacted directly by the current recession, it is important to remember that this remains a very large and attractive market for Cbeyond. There are over 1.5 million small businesses with between 5 and 249 employees in the top 25 markets.

While we are continuing to grow very rapidly, today we are in only 12 of the top 25 markets and our customer base represents less than 5% of the addressable market in our cities but less than 3% of the top 25. So, we expect to see significant and profitable growth in the future as we continued to attract market share.

It is also important to remember that this is a difficult market segment to penetrate. It is our so focused and we have been successful with our distribution into it, but most of our competition is in the form of incumbent phone companies but do not focus on this customer and do not offer the smart solutions we deliver.

We are seeing some challenges in this economy but I believe our business model is intact and we are responding to the current challenges but the management flexibility that will position us to meet our goals.

Now, I will address the merits of our business in more detail. We start with gross sales and customer additions. Gross sales or new contracts in the quarter were our highest ever and were 5% greater than Q1 of this year, our next highest quarter production. Gross customer additions or those customers in sold were over 4100 in the quarter well above our highest previous figure in the first quarter of approximately 3800 and 8.3% sequential increase.

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