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Cbeyond, Inc. (CBEY)

Q2 2008 Earnings Call

August 6, 2008 5:00 pm ET

Executives

Kurt J. Abkemeier – VP of Finance and Treasurer

James F. Geiger – Chairman, President, and Chief Executive Officer

J. Robert Fugate – Executive Vice President and Chief Financial Officer

Analysts

Frank Louthan – Raymond James

George Sutton – Craig-Hallum

James Breen – Thomas Weisel

David Dixon – FBR Capital Markets

Michael Rollins – Citi Investment Research

Jonathan Schildkraut – Jefferies

Eric Kainer – Thinkpanmure LLC

Presentation

Operator

Welcome to the Cbeyond, Inc. second quarter 2008 earnings results conference call and webcast. (Operator Instructions) At this time for opening remarks and introduction, I would like to turn the call over to Vice President, Finance and Treasury, Kurt Abkemeier.

Kurt K. Abkemeier

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 regulation or decisions by regulatory bodies that affect the company; periods of economic downturn and the impact on our results of operations and access to capital markets; the impact of certain of our customers to meet their payment obligations; the timing of the initiation, progress, and 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 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; 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.

On the call today, we have Jim Geiger, Chairman, President, and CEO, and Bob Fugate, Executive Vice President and CFO.

That said, I’ll turn it over to Jim Geiger.

James F. Geiger

Today we’re talking about the financial and operating results for the second quarter of 2008. We are very pleased with the results of our business in Q2. In the second quarter we posted record quarterly gross additions, grew customers by 23.7% year-over-year, grew revenues by 25.7% year-over-year, and I might add, 100% organic growth, posted sequential quarterly growth in revenue of $4.6 million; grew ARPU from $7.48 last quarter to $7.54 in Q2; maintained customer churn at 1.3% for the quarter while continuing to reduce bad debt expense; grew applications used per customer to 6.5, with 28% mobile penetration of the customer base; and an increased mobile attach rate of just under 50% of new sales.

We continued the ramp of recently launched markets in the San Francisco Bay area and Miami, began serving customers in our 11th market, Minneapolis; and recorded solid adjusted EBITDA margins across our markets.

I’ll just note here briefly that consolidated adjusted EBITDA was generally below analyst expectations in the quarter for two primary reasons. First, we recorded a lower than typical level of recoveries of access and other telecommunications costs that were originally billed in error by our major telecommunications vendor. We averaged $1.1 million of these credits per quarter over the last four quarters. We expect to catch up on these operating expense credits in future periods and Bob will explain this topic in detail for you later. The second point is that we planned to incur losses and did take on an additional $1.1 million of adjusted EBITDA losses from new market launches in Q2 ’08 versus Q1 ’08. As you may recall, we had five early stage markets this year versus three at this time last year.

On our last call we spoke about our execution in Q1 related to sales and receivables management. I’m pleased to report that in Q2 our execution in these two key areas improved while the economy did not appear to worsen, at least in its effect on our business.

I’ll begin my detailed comments today with the topic of churn. As mentioned previously, churn was flat with Q1 at 1.3%. Consistent with our history, our controllable churn, which includes customers leaving for service or pricing reasons, has remained at 0.4% of our customer base while uncontrollable churn, which includes customers leaving for reasons outside of our control, mainly for non-payment, was 0.9% of the base. We always strive for improvement in churn quarter-over-quarter; however, the continued poor economic climate made that goal unattainable in Q2.

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