Cbeyond Reports Third Quarter 2008 Results
Revenues Grew by 24.6% and Adjusted EBITDA Increased 25.5% Over Prior Year
ATLANTA, Oct 30, 2008 (BUSINESS WIRE) -- Cbeyond, Inc. (NASDAQ: CBEY), ("Cbeyond"), a managed services provider that delivers integrated packages of voice, broadband, and mobile services to small businesses, today announced its results for the third quarter ended September 30, 2008.
Recent financial and operating highlights include the following:
-- Strong third quarter revenue growth with revenues of $90.2 million, up 24.6% over the third quarter of 2007;
-- Total adjusted EBITDA of $16.9 million during the third quarter of 2008, an increase of 25.5% from the third quarter of 2007 (see Schedule 1 for reconciliation to net income), which includes a positive revenue adjustment of $0.4 million and higher than typical expense credits to Cost of Service in the amount of $3.5 million (see discussion of Revenue and ARPU and Cost of Service and Gross Margin);
-- Net income of $1.7 million in the third quarter of 2008 compared with $3.4 million in the third quarter of 2007 (see Net Income discussion for factors affecting the comparability of income tax expense between the periods);
-- Total customers in Cbeyond's eleven operating markets of 40,569, reflecting net customer additions of 1,993 in the quarter;
-- Average monthly revenue per customer location (ARPU) of $760 during the third quarter of 2008, or $756 excluding the effect of a positive revenue adjustment (see Revenue and ARPU discussion), compared to $754 in the second quarter of 2008 and $749 in the third quarter of 2007; and
-- Monthly customer churn of 1.3% in the third quarter of 2008 as compared to 1.3% in the second quarter of 2008.
Financial Overview and Key Operating Metrics
Financial and operating metrics, which include non-GAAP financial measures, for the three and nine months ended September 30, 2007 and 2008, include the following:
For the Three Months Ended September 30,
2007 2008 Change % Change
Selected Financial Data (dollars in thousands)
Revenue $ 72,416 $ 90,243 $ 17,827 24.6 %
Operating expenses $ 69,450 $ 87,076 $ 17,626 25.4 %
Operating income $ 2,966 $ 3,167 $ 201 6.8 %
Net income $ 3,380 $ 1,664 $ (1,716 ) (50.8 %)
Capital expenditures $ 12,733 $ 13,835 $ 1,102 8.7 %
Key Operating Metrics and Non-GAAP Financial Measures
Customers at end of period 33,287 40,569 7,282 21.9 %
Net additions 2,112 1,993 (119 ) (5.6 %)
Average monthly churn rate 1.1 % 1.3 % 0.2 % 18.2 %
Average monthly revenue per customer location $ 749 $ 760 $ 11 1.5 %
Adjusted EBITDA (in thousands) $ 13,463 $ 16,901 $ 3,438 25.5 %
For the Nine Months Ended September 30,
2007 2008 Change % Change
Selected Financial Data (dollars in thousands)
Revenue $ 203,157 $ 255,828 $ 52,671 25.9 %
Operating expenses $ 194,791 $ 248,858 $ 54,067 27.8 %
Operating income $ 8,366 $ 6,970 $ (1,396 ) (16.7 %)
Net income $ 9,005 $ 3,163 $ (5,842 ) (64.9 %)
Capital expenditures $ 39,417 $ 47,583 $ 8,166 20.7 %
Key Operating Metrics and Non-GAAP Financial Measures
Customers at end of period 33,287 40,569 7,282 21.9 %
Net additions 5,944 5,528 (416 ) (7.0 %)
Average monthly churn rate 1.1 % 1.3 % 0.2 % 18.2 %
Average monthly revenue per customer location $ 745 $ 752 $ 7 0.9 %
Adjusted EBITDA (in thousands) $ 38,133 $ 45,052 $ 6,919 18.1 %
Management Comments
"I am pleased to report that Cbeyond recorded another quarter of significant growth and profitability, with approximately 25% year-over-year growth in revenue and 26% year-over-year growth in adjusted EBITDA," said Jim Geiger, chief executive officer of Cbeyond. "These strong financial results were supported by continued growth in ARPU, increased applications used per customer of 6.8 from 5.9 in the corresponding quarter of 2007, increased mobile penetration at 31% of our customer base, and reaching positive adjusted EBITDA in our San Diego market."
Geiger added, "Our monthly customer churn remained constant at 1.3% from the previous quarter, and we posted continued solid results in collections and receivables in the third quarter. Despite the declining economic picture and Hurricane Ike's effect on our Houston market, we had record gross customer additions of nearly 3,600 in the third quarter. Looking forward to the fourth quarter, we expect increased pressure on both churn and collections due to the carryover effect of Hurricane Ike on our Houston market, as well as the overall economic conditions across the country." Geiger concluded, "Our long-term view remains very positive as we believe customers are looking for service providers that not only offer a smart solution for their needs, but also have the staying power they require in good times and bad. Cbeyond's debt-free balance sheet, strong cash position, and market base of established, profitable cities provide assurance that we are well-situated to weather economic storms and credit crises from a position of strength -- and still grow our business."
Third Quarter Financial and Business Summary
Revenues and ARPU
Cbeyond reported revenues of $90.2 million for the third quarter of 2008, an increase of 24.6% from the third quarter of 2007. The sequential increase in revenue for the third quarter of 2008 was $5.2 million, as compared to a sequential increase of $4.6 million for the second quarter of 2008. Revenues in the third quarter of 2008 included a $0.4 million positive adjustment relating to customer promotional liabilities recorded in prior periods. These promotional obligations were recorded at their maximum amount in prior periods due to the lack of sufficient historical experience required under U.S. generally accepted accounting principles (GAAP) to estimate the amounts that would ultimately be claimed by customers. Excluding this positive adjustment to third quarter 2008 revenue, growth over the third quarter of 2007 was 24.0%.
ARPU, or average monthly revenue per customer location, was $760 in the third quarter of 2008, an increase of approximately $6, or 0.8%, as compared to $754 in the second quarter of 2008 and $749 in the third quarter of 2007. The majority of the increase in ARPU over the second quarter of 2008 was due to an increase in revenue from mobile handset and laptop card sales, growth in applications, additional mobile and landlines and the previously mentioned positive adjustment relating to customer promotional liabilities. Excluding the positive adjustment relating to customer promotional liabilities, ARPU for the third quarter of 2008 was $756.
Cost of Service and Gross Margin
Cbeyond's gross margin was 70.1% in the third quarter of 2008 as compared with 68.0% in the second quarter of 2008 and 69.9% in the third quarter of 2007. Gross margin increased in the third quarter of 2008 primarily due to higher than typical recoveries of access costs previously billed in error in the amount of $3.5 million, the majority of which were recorded to the Atlanta, Dallas, and Houston segments.
Operating Income and Total Adjusted EBITDA
Cbeyond reported operating income of $3.2 million in the third quarter of 2008 compared with operating income of $3.0 million in the third quarter of 2007. For the third quarter of 2008, total adjusted EBITDA was $16.9 million, an improvement of 25.5% over total adjusted EBITDA of $13.5 million in the third quarter of 2007. Total adjusted EBITDA for the third quarter of 2008 included $4.8 million of negative adjusted EBITDA from the planned investment in five early stage markets, while negative adjusted EBITDA for the second quarter of 2008 totaled $5.2 million from five early stage markets and for the third quarter of 2007 totaled $3.1 million from three early stage markets.
Net Income
Cbeyond reported net income of $1.7 million for the third quarter of 2008 as compared to net income of $3.4million for the third quarter of 2007. The decrease in net income versus the third quarter of 2007 is due to an increased level of depreciation and amortization expense, recording income taxes at the full corporate tax rate beginning in 2008 and an increase in the Texas state margin tax.
Cash and Cash Equivalents
Cash and cash equivalents amounted to $42.7 million at the end of the third quarter of 2008, as compared to $42.8 million at the end of the second quarter of 2008.
Capital Expenditures
Capital expenditures were $13.8 million during the third quarter of 2008, compared to $18.2 million in the second quarter of 2008 and $12.7 million in the third quarter of 2007. Capital expenditures in the third quarter of 2008 decreased from the second quarter of 2008 primarily due to reduced spending on software investment, decreases in office buildout in new markets, and lower costs associated with data center expansion.
Business Outlook for 2008 and 2009
With respect to its annual guidance for 2008, Cbeyond is updating annual guidance as follows:
2008 Guidance 2009 Guidance Revenues Approximately $350 million $420 million to $440 million Adjusted EBITDA $60 million to $61 million $62 million to $70 million Capital expenditures $69 million to $70 million $65 million to $70 million
Updated guidance for 2008 and 2009 assumes a continued challenging economy, which is expected to impact sales results and the customer churn rate. Despite the economic environment, sales volumes are expected to increase due to the increasing number of personnel selling as new markets are launched; however, higher levels of sales productivity are not assumed. The customer churn rate is assumed to remain at or above current levels. The guidance also assumes that the launch of the Greater Washington, D.C. Area market will occur in the first quarter of 2009, and the launch of the 13th market will occur later in 2009.
Conference Call
Cbeyond will hold a conference call to discuss this press release Thursday, October 30, 2008, at 5:00p.m.EDT. A live broadcast of the conference call will be available on-line at www.cbeyond.net. To listen to the live call, please go to the web site at least 10 minutes early to register, download, and install any necessary audio software. The conference call will also be available by dialing (877) 719-9804 (fordomestic U.S. callers) and (719) 325-4805 (for international callers). For those who cannot listen to the live broadcast, an on-line replay will be available shortly after the call and continue to be available for one year.
About Cbeyond
Cbeyond, Inc. (NASDAQ: CBEY) is a leading IP-based managed services provider that delivers integrated packages of communications and IT services to more than 40,000 small businesses throughout the United States. Cbeyond offers more than 30 productivity-enhancing applications including local and long-distance voice, broadband Internet, mobile, BlackBerry(R), broadband laptop access, voicemail, email, web hosting, fax-to-email, data backup, file-sharing and virtual private networking. Cbeyond manages these services over a private, 100-percent Voice over Internet Protocol (VoIP) facilities-based network. For more information on Cbeyond, visit www.cbeyond.net.
Forward-Looking Statements
This document 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 "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: the significant reduction in economic activity, which particularly affects our target market of small businesses; the effects on our Houston market arising from Hurricane Ike; 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 the Company; periods of economic downturn or unusual volatility in the capital markets or other negative macroeconomic conditions that could 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 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; external events outside of our control, including extreme weather, natural disasters or terrorist attacks that could adversely affect our target markets; 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.
Key Operating Metrics and Non-GAAP Financial Measures
In this press release, the Company uses several key operating metrics and non-GAAP financial measures. In ScheduleI, the Company defines each of these metrics and provides a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure. These financial measures and operating metrics are a supplement to GAAP financial information and should not be considered as an alternative to, or more meaningful than, net income, cash flow or operating income as determined in accordance with GAAP.
SCHEDULE I
Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities as determined in accordance with accounting principles generally accepted in the United States, or GAAP, as a measure of performance or liquidity. The Company defines adjusted EBITDA as net income before interest, income taxes, depreciation and amortization expenses, excluding non-cash share-based compensation, public offering expenses, loss on disposal of property and equipment and other non-operating income or expense. Information relating to total adjusted EBITDA is provided so that investors have the same data that management employs in assessing the overall operation of the Company's business.
Total adjusted EBITDA allows the chief operating decision maker to assess the performance of the Company's business on a consolidated basis that corresponds to the measure used to assess the ability of its operating segments to produce operating cash flow to fund working capital needs, to service debt obligations and to fund capital expenditures. In particular, total adjusted EBITDA permits a comparative assessment of the Company's operating performance, relative to a performance based on GAAP results, while isolating the effects of depreciation and amortization, which may vary among segments without any correlation to their underlying operating performance, and of non-cash share-based compensation, which is a non-cash expense that varies widely among similar companies. The following information includes a reconciliation of total adjusted EBITDA to net income:
CBEYOND, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2008 2007 2008
Revenue:
Customer revenue $ 70,835 $ 88,500 $ 198,640 $ 250,688
Terminating access revenue 1,581 1,743 4,517 5,140
Total revenue 72,416 90,243 203,157 255,828
Operating expenses:
Cost of revenue 21,788 27,023 60,730 79,263
Selling, general and administrative 39,899 49,781 111,619 140,788
Public offering expenses - - 2 -
Depreciation and amortization 7,763 10,272 22,440 28,807
Total operating expenses 69,450 87,076 194,791 248,858
Operating income 2,966 3,167 8,366 6,970
Other income (expense):
Interest income 749 197 2,012 795
Interest expense (100 ) (25 ) (193 ) (168 )
Loss on disposal of property and equipment (219 ) (319 ) (794 ) (1,657 )
Total other income (expense) 430 (147 ) 1,025 (1,030 )
Income before income taxes 3,396 3,020 9,391 5,940
Income tax expense (16 ) (1,356 ) (386 ) (2,777 )
Net income $ 3,380 $ 1,664 $ 9,005 $ 3,163
Earnings per common share
Basic $ 0.12 $ 0.06 $ 0.32 $ 0.11
Diluted $ 0.11 $ 0.06 $ 0.30 $ 0.11
Weighted average number of common shares outstanding
Basic 27,980 28,412 27,734 28,309
Diluted 30,133 29,503 29,898 29,668
CBEYOND, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
December 31, September 30,
2007 2008
ASSETS
Current assets
Cash and cash equivalents $ 56,174 $ 42,727
Accounts receivable, gross 26,149 28,881
Less: Allowance for doubtful accounts (2,983 ) (2,062 )
Accounts receivable, net 23,166 26,819
Other assets 12,181 14,261
Total current assets 91,521 83,807
Property and equipment, gross 236,254 279,012
Less: Accumulated depreciation and amortization (137,900 ) (163,565 )
Property and equipment, net 98,354 115,447
Other assets 8,487 7,856
Total assets $ 198,362 $ 207,110
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 12,983 $ 11,506
Other accrued liabilities 57,467 54,465
Total current liabilities 70,450 65,971
Other non-current liabilities 594 559
Stockholders' equity
Common stock 282 284
Additional paid-in capital 253,534 263,631
Accumulated deficit (126,498 ) (123,335 )
Total stockholders' equity 127,318 140,580
Total liabilities and stockholders' equity $ 198,362 $ 207,110
CBEYOND, INC. AND SUBSIDIARY
Selected Financial Data and Operating Metrics
(Dollars in thousands, except for Other Operating Data)
(Unaudited)
Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30
2007 2007 2008 2008 2008
Revenues
Atlanta $ 18,555 $ 19,044 $ 19,412 $ 20,088 $ 20,641
Dallas 15,652 16,165 16,607 17,097 17,733
Denver 16,453 16,793 17,155 17,596 17,999
Houston 10,147 10,813 11,069 11,587 11,963
Chicago 7,143 7,913 8,406 8,957 9,410
Los Angeles 3,522 4,372 4,945 5,503 6,250
San Diego 818 1,288 1,796 2,363 3,030
Detroit 126 450 851 1,194 1,567
San Francisco Bay Area - 39 239 558 1,045
Miami - - 13 138 407
Minneapolis - - - 11 198
Total revenues $ 72,416 $ 76,877 $ 80,493 $ 85,092 $ 90,243
Adjusted EBITDA
Atlanta $ 10,779 $ 10,865 $ 11,221 $ 10,865 $ 11,659
Dallas 7,683 8,283 8,353 8,482 10,367
Denver 8,823 8,646 9,085 9,652 9,508
Houston 4,513 4,634 5,245 5,540 6,304
Chicago 2,001 2,336 2,690 3,033 3,229
Los Angeles (283 ) 432 950 1,141 1,346
San Diego (1,289 ) (1,182 ) (938 ) (513 ) (162 )
Detroit (1,239 ) (1,451 ) (1,154 ) (1,142 ) (812 )
San Francisco Bay Area (322 ) (1,141 ) (1,219 ) (1,516 ) (1,323 )
Miami (8 ) (58 ) (781 ) (1,163 ) (1,425 )
Minneapolis - (2 ) (66 ) (877 ) (1,115 )
Washington, D.C. - - - (37 ) (88 )
Corporate (17,195 ) (17,387 ) (18,898 ) (19,802 ) (20,587 )
Total adjusted EBITDA $ 13,463 $ 13,975 $ 14,488 $ 13,663 $ 16,901
Adjusted EBITDA margin (market-level)
Atlanta 58.1 % 57.1 % 57.8 % 54.1 % 56.5 %
Dallas 49.1 % 51.2 % 50.3 % 49.6 % 58.5 %
Denver 53.6 % 51.5 % 53.0 % 54.9 % 52.8 %
Houston 44.5 % 42.9 % 47.4 % 47.8 % 52.7 %
Chicago 28.0 % 29.5 % 32.0 % 33.9 % 34.3 %
Los Angeles (8.0 %) 9.9 % 19.2 % 20.7 % 21.5 %
San Diego (157.6 %) (91.8 %) (52.2 %) (21.7 %) (5.3 %)
Detroit N/M N/M (135.6 %) (95.6 %) (51.8 %)
San Francisco Bay Area N/M N/M N/M N/M (126.6 %)
Miami N/M N/M N/M N/M N/M
Minneapolis N/M N/M N/M N/M N/M
Washington, D.C. N/M N/M N/M N/M N/M
Adjusted EBITDA margin (as % of total revenue)
Corporate (23.7 %) (22.6 %) (23.5 %) (23.3 %) (22.8 %)
Total 18.6 % 18.2 % 18.0 % 16.1 % 18.7 %
CBEYOND, INC. AND SUBSIDIARY
Selected Operating Statistics
(Dollars in thousands, except for Other Operating Data)
(Unaudited)
Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30
2007 2007 2008 2008 2008
Operating income (loss)
Atlanta $ 9,723 $ 9,807 $ 10,164 $ 9,854 $ 10,621
Dallas 6,575 7,242 7,359 7,567 9,439
Denver 7,945 7,777 8,215 8,835 8,667
Houston 3,658 3,718 4,310 4,668 5,425
Chicago 1,307 1,583 1,860 2,284 2,403
Los Angeles (682 ) (63 ) 398 579 730
San Diego (1,500 ) (1,330 ) (1,181 ) (794 ) (487 )
Detroit (1,410 ) (1,657 ) (1,413 ) (1,366 ) (1,108 )
San Francisco Bay Area (328 ) (1,211 ) (1,387 ) (1,741 ) (1,598 )
Miami (8 ) (63 ) (809 ) (1,296 ) (1,613 )
Minneapolis - (2 ) (71 ) (890 ) (1,270 )
Washington, D.C. - - - (37 ) (90 )
Corporate (22,314 ) (22,856 ) (24,984 ) (26,321 ) (27,952 )
Total operating income $ 2,966 $ 2,945 $ 2,461 $ 1,342 $ 3,167
Capital expenditures
Atlanta $ 1,059 $ 2,163 $ 677 $ 1,160 $ 1,272
Dallas 586 738 683 925 586
Denver 847 1,230 959 886 631
Houston 889 689 778 649 280
Chicago 907 947 580 908 437
Los Angeles 1,014 791 785 502 429
San Diego 653 609 710 690 364
Detroit 550 464 832 533 264
San Francisco Bay Area 1,363 1,301 1,146 672 330
Miami 54 1,095 1,977 594 627
Minneapolis 47 288 1,098 1,037 309
Washington, D.C. - 164 78 570 1,878
Corporate 4,764 7,638 5,251 9,068 6,428
Total capital expenditures $ 12,733 $ 18,117 $ 15,554 $ 18,194 $ 13,835
Other Operating Data
Customers (at period end) 33,287 35,041 36,674 38,576 40,569
Net additions 2,112 1,754 1,633 1,902 1,993
Average monthly churn rate(1) 1.1 % 1.4 % 1.3 % 1.3 % 1.3 %
Average monthly revenue per customer location(2) $ 749 $ 750 $ 748 $ 754 $ 760
(1) Calculated for each period as the average of monthly churn,
which is defined for a given month as the number of customer
locations disconnected in that month divided by the number of
customer locations on our network at the beginning of that month.
(2) Calculated as the revenue for a period divided by the average
of the number of customer locations at the beginning of the period
and the number of customer locations at the end of the period,
divided by the number of months in the period.
CBEYOND, INC. AND SUBSIDIARY
Reconciliation of Non-GAAP Financial Measure to GAAP Financial
Measure
(In thousands)
(Unaudited)
Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30
2007 2007 2008 2008 2008
Reconciliation of Adjusted EBITDA to Net income:
Total Adjusted EBITDA for reportable segments $ 13,463 $ 13,975 $ 14,488 $ 13,663 $ 16,901
Depreciation and amortization (7,763 ) (8,366 ) (9,012 ) (9,523 ) (10,272 )
Non-cash share-based compensation (2,734 ) (2,664 ) (3,015 ) (2,798 ) (3,462 )
Interest income 749 688 380 218 197
Interest expense (100 ) (59 ) (56 ) (87 ) (25 )
Loss on disposal of property and equipment (219 ) (370 ) (742 ) (596 ) (319 )
Income tax benefit (expense) (16 ) 9,289 (1,040 ) (381 ) (1,356 )
Net income $ 3,380 $ 12,493 $ 1,003 $ 496 $ 1,664
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2008 2007 2008
Reconciliation of Adjusted EBITDA to Net income:
Total Adjusted EBITDA for reportable segments $ 13,463 $ 16,901 $ 38,133 $ 45,052
Depreciation and amortization (7,763 ) (10,272 ) (22,440 ) (28,807 )
Non-cash share-based compensation (2,734 ) (3,462 ) (7,325 ) (9,275 )
Public offering expenses - - (2 ) -
Interest income 749 197 2,012 795
Interest expense (100 ) (25 ) (193 ) (168 )
Loss on disposal of property and equipment (219 ) (319 ) (794 ) (1,657 )
Income tax benefit (expense) (16 ) (1,356 ) (386 ) (2,777 )
Net income $ 3,380 $ 1,664 $ 9,005 $ 3,163
CBEY-F CBEY-G
SOURCE: Cbeyond, Inc.
Cbeyond, Inc. Investor Contact: Kurt Abkemeier Vice President, Finance and Treasurer 678-370-2887
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