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Cbeyond Inc. (CBEY)

Q1 2008 Earnings Call Transcript

May 1, 2008 5:00 pm ET

Executives

Kurt Abkemeier – VP of Finance and Treasurer

Jim Geiger – Chairman and CEO

Bob Fugate – EVP and CFO

Analysts

George Sutton – Craig-Hallum

Frank Louthan – Raymond James

Jonathan Chaplin – JPMorgan Securities

Jurgan Usman – Wachovia

James Breen – Thomas Weisel

Eric Kainer – ThinkEquity

Erin Schmitz – Citigroup

David Dixon – FBR Capital Markets

Donna Jaegers – Janco Partners

Jonathan Schildkraut – Jefferies

Presentation

Operator

Good day, everyone, and welcome to the Cbeyond Inc. first quarter 2008 earnings results conference call and webcast. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Vice President of Finance and Treasurer, Mr. Kurt Abkemeier. Please go ahead, sir.

Kurt Abkemeier

Thank you, operator, and thank you, call participants, for joining us today. I'd 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 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 regulations or decisions by regulatory bodies that affect the company, periods of economic downturn and 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, competitive factors, our ability to recruit and maintain experienced management and personnel, rapid technological change and the timing and amount of startup costs incurred in connection with the introduction of new services or 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. That discussion 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'll turn it over to Jim Geiger.

Jim Geiger

Thank you, Kurt. And I'd also like to welcome you and thank you for joining us today. The purpose of the call today, as Kurt mentioned, is to review financial and operating results for the first quarter of 2008. I know that investors are paying close attention to the remarks of companies as to the effect of the economy on their business. In our case, while we wouldn't want to overstate the significance of the economic downturn, we have certainly felt some impact, mainly in the areas of receivables and churn last quarter, and to a lesser degree, in the areas of churn as well as customer additions this quarter. Despite the economic pressures, I believe that our business has performed very well, and I am pleased with our performance and as optimistic as to any time in our history about our continued organic growth.

In the first quarter, we grew customers by 25.7% year over year, revenues by 27.7%, adjusted EBITDA by 20.1%. We recorded strong adjusted EBITDA margins across our markets, turned Los Angeles free cash flow positive on schedule–our sixth market to become free cash flow generating–saw concrete results in our efforts at reducing both customer churn and bad debt expense; maintained stable ARPU; grew applications use per customer to 6.4, with 26% mobile penetration as a customer base; and a continued mobile attach rate of over 40% of new sales. We launched hosted Microsoft Exchange to our Atlanta customers, began serving customers in our tenth market–Miami–and we also prepared our eleventh market–Minneapolis–for launch this summer.

On our last call, we spoke at length regarding the increase in customer churn and bad debt expense that we experienced in Q4. We noted that the challenging economic environment had increased the number of our existing customers who were unable to pay us, and we described the steps we were taking to address this situation. As you may recall, we tightened customer credit and flushed 300 of our weakest credit customers from our base in Q4 and forecast that we would flush another 300 in Q1, resulting in 1.4% churn for each of those two quarters.

Today I'm pleased to report that the steps we took in the customer credit area have been successful so far in improving the health of our receivables and customer base. We had anticipated that with the continued disconnect of non-paying customers, the Q1 monthly customer churn would remain at the Q4 level of 1.4%; however, we saw it reduced to 1.3%. As in the past, our elevated churn rate above historical levels is solely due to what we call uncontrollable churn, which is due to customer non-payment and other factors beyond our control. Our controllable churn rate has remained unchanged at our historical low levels of 0.4%.

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