Cbeyond Reports Third Quarter 2013 Results

ATLANTA, Nov. 6, 2013 (GLOBE NEWSWIRE) — Cbeyond, Inc. (CBEY), (“Cbeyond”), the technology ally for small and mid-sized businesses, today announced its results for the third quarter ended September 30, 2013.

Recent financial and operating highlights include:

• Third quarter 2013 total revenue of $113.7 million compared with $121.5 million in the third quarter of 2012 and $118.2 million in the second quarter of 2013;
• Cbeyond 2.0 revenue was $17.8 million, or 15.7% of total revenue in the third quarter of 2013, an increase of 87% from the third quarter of 2012 and an increase of 11% from the second quarter of 2013;
• Average monthly revenue per customer (ARPU) of $653 during the third quarter of 2013 compared with $640 in the third quarter of 2012 and $662 in the second quarter of 2013 (see selected quarterly operating metrics table for ARPU definition);
• Adjusted EBITDA of $18.0 million in the third quarter of 2013 compared with $25.2 million in the third quarter of 2012 and $21.9 million in the second quarter of 2013 (see reconciliation tables for reconciliation to net loss);
• Free cash flow (defined as adjusted EBITDA less cash capital expenditures) of $3.2 million in the third quarter of 2013 compared with $7.7 million in the third quarter of 2012 and $7.1 million in the second quarter of 2013;
• Net loss of $5.3 million in the third quarter of 2013, which includes a $2.0 million charge to depreciation related to certain fiber assets, compared with net income of $2.0 million in the third quarter of 2012 and a net loss of less than $0.1 million in the second quarter of 2013; and,
• Board of Directors forms Strategy Committee to explore ways to accelerate Cbeyond 2.0 growth and explore strategic alternatives (see “Strategy Committee” section below).

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, 2013, include:

Management Comments

“I am pleased with the progress we are continuing to make with our 2.0 business, but the third quarter was challenging from a revenue perspective given increased pricing pressure on our 1.0 customer base,” said Jim Geiger, chief executive officer of Cbeyond, Inc.

Geiger added, “We are making additional changes within our business to accelerate our transformation as we better align our sales and distribution channels with each customer segment and move our customer acquisition efforts to focus on 2.0 opportunities. Our efforts on our 1.0 customer base are focused on identifying, retaining, and upselling the more profitable accounts.”

Third Quarter Financial and Business Summary

Revenue and ARPU

Cbeyond reported total revenue of $113.7 million for the third quarter of 2013, a decrease of 6.4% from the third quarter of 2012 and a decrease of 3.8% from the second quarter of 2013. Revenue decreases were largely the result of increased customer churn, pricing pressure on our 1.0 customer base, mobile revenue decreases, and lower than expected sales productivity. Total 2.0 revenue grew 87% year-over-year during the quarter to $17.8 million, with Managed Hosting and Cloud revenue of $7.6 million, an increase of 20.6% year-over-year. ARPU was $653 in the third quarter of 2013 compared with $640 in the third quarter of 2012 and $662 in the second quarter of 2013.

Cost of Service and Gross Margin

Cbeyond’s gross margin was 66.7% in the third quarter of 2013, a decrease of roughly 150 basis points from the 68.2% in the third quarter of 2012 and a roughly 10 basis point increase from the 66.6% in the second quarter of 2013.

Adjusted EBITDA and Net Loss

Adjusted EBITDA for the third quarter of 2013 was $18.0 million compared with adjusted EBITDA of $25.2 million in the third quarter of 2012 and $21.9 million in the second quarter of 2013.

Cbeyond reported a net loss of $5.3 million in the third quarter of 2013 compared with net income of $2.0 million in the third quarter of 2012 and a net loss of less than $0.1 million in the second quarter of 2013.

During the quarter, we incurred a $2.0 million charge related to the write-off of certain fiber network assets in connection with our litigation with a fiber construction partner in one geographic area.

Cash, Cash Equivalents, and Borrowings

Cash and cash equivalents amounted to $24.0 million at the end of the third quarter of 2013 compared with $27.5 million at the end of the second quarter of 2013. The Company currently has $2.0 million outstanding on its fiber loan and has no outstanding borrowings under its $75.0 million revolving credit facility. The Company also has $14.5 million in outstanding capital lease obligations on its balance sheet at September 30, 2013, primarily incurred in connection with the construction of its fiber network.

Capital Expenditures

Total capital expenditures were $17.4 million during the third quarter of 2013, of which $14.9 million were cash capital expenditures. The Company incurred $2.5 million in non-cash capital expenditures during the third quarter, consisting mainly of capital lease obligations related to its fiber assets. In the second quarter of 2013, total capital expenditures were $20.1 million, of which $14.8 million were cash capital expenditures.

Free Cash Flow

Free cash flow, defined as adjusted EBITDA less cash capital expenditures, was $3.2 million in the third quarter of 2013 compared with $7.7 million in the third quarter of 2012 and $7.1 million in the second quarter of 2013.

Share Repurchase Plan

During the quarter, we repurchased approximately 778,000 shares for $5.3 million.

Business Outlook for 2013

• Expect revenue to be slightly below the previously reported range of $464 million to $471 million;
• Expect adjusted EBITDA to be in the middle of the previously reported range of $76 million to $80 million;
• Expect cash capital expenditures to be on the low end of the previously reported range of $56 million to $60 million; Cbeyond has already and may continue to enter into agreements for fiber network assets and data center equipment involving long-term capital leases that will create additional non-cash capital expenditures this year not included in the guidance range provided above. The assets acquired under these agreements are excluded from the Company’s definition of cash capital expenditures because they do not require upfront outlays of cash; and,
• Expect free cash flow to be on the high end of the previously reported range of $18 million to $22 million.

Strategy Committee

Cbeyond’s Board of Directors has formed a Strategy Committee to explore ways to accelerate Cbeyond 2.0 growth and explore strategic alternatives, to enhance stockholder value more quickly than by pursuing the Company’s organic growth and transformation. The alternatives reviewed will include acquisitions designed to accelerate our 2.0 transformation and the visibility of our cloud services, joint venture and other financing and strategic arrangements, and a business combination or sale of the Company. The review may take an extended period and there is no assurance that any action or transaction will arise from the review. The Company will remain focused on its transition to Cbeyond 2.0. Cbeyond will not comment further or provide updates on the review except as it deems appropriate.

Conference Call

Cbeyond will hold a conference call to discuss this press release on Wednesday, November 6, 2013, at 8:30 a.m. EST. A live broadcast of the conference call will be available on-line athttp://ir.cbeyond.net/events.cfm. 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) 303-9219 (for domestic U.S. callers) and (760) 666-3559 (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. (CBEY), a cloud and communications services provider, is the technology ally for small and mid-sized business. Our private, proactively-managed IP network connects customers to voice, data and enterprise applications hosted in our award-winning cloud data centers. Since 1999, Cbeyond has served the unmet needs of businesses through technology and service innovation. We were the first company to build an all-IP network specifically for small businesses and among the few to offer consultative sales and service professionals onsite. Today, our expanded portfolio helps customers reduce the burden of outlaying capital and manpower to manage infrastructure. Creating an exceptional customer experience is in our DNA. For more information on Cbeyond, visit http://www.cbeyond.com and follow Cbeyond on Twitter: www.twitter.com/cbeyond.

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: finalization of operating data, the significant reduction in economic activity, which particularly affects our target market of small to mid-sized businesses; the risk that we may be unable to experience revenue growth at anticipated levels; changes in business climate or other factors affecting our customer base; the risk of unexpected increases in customer churn levels; our ability to manage competitive pricing dynamics in our markets; 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 could harm our business, including our access to capital markets and the impact on 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; regulatory action relating to our compliance with customer proprietary network information; the possibility that economic benefits of future opportunities in an emerging industry may never materialize, including unexpected variations in market growth and demand for products and technologies; unfamiliarity with the economic characteristics of new geographic markets; ongoing personnel and logistical challenges of managing a larger organization; external events outside of our control, including extreme weather, natural disasters, pandemics or terrorist attacks that could adversely affect our target markets; our ability to implement and execute successfully our new strategic focus; our ability to expand fiber availability; the extent to which small and mid-sized businesses continue to spend on cloud, network and security services; our ability to recruit, maintain and grow a sales force focused exclusively on technology-dependent customers; our ability to integrate new products into our existing infrastructure; the effects of realignment activities; the extent to which our customer mix becomes more technology-dependent; our ability to achieve future cost savings related to our capital expenditures and investment in Ethernet technology; 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. The Company defines each of these metrics and provides a reconciliation of non-GAAP financial measures to the most directly comparable generally accepted accounting principles in the United States, or 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.

Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities as determined in accordance with GAAP, as a measure of performance or liquidity. The Company defines EBITDA as net income (loss) before interest, income taxes, depreciation and amortization. However, we use adjusted EBITDA, also a non-GAAP financial measure, to further exclude, when applicable, non-cash share-based compensation, public offering or acquisition-related transaction costs, purchase accounting adjustments, gain or loss on asset dispositions and non-operating income or expense. Adjusted EBITDA may exclude charges for employee severances, asset or facility impairments, and other exit activity costs associated with a management directed plan (including realignment costs). Information relating to adjusted EBITDA is provided so that investors have the same data that management employs in assessing the overall operation of the Company’s business.

Adjusted EBITDA allows the chief operating decision maker to assess the performance of the Company’s business on a consolidated basis to assess the ability to produce operating cash flow to fund working capital needs, to service debt obligations and to fund capital expenditures. In particular, 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.

Free cash flow represents the cash that a company is able to generate after cash expenses and capital expenditures necessary to maintain or expand its asset base. The Company defines free cash flow as adjusted EBITDA less cash capital expenditures. Cbeyond believes that free cash flow is an important metric for investors in evaluating how a company is currently using cash generated, and may indicate its ability to generate cash that can potentially be used by the business for capital investments, acquisitions, reduction of debt, payment of dividends or share repurchases. Internally, Cbeyond has also begun to focus on free cash flow as an important operating performance metric and has designed its corporate bonus compensation plan to utilize free cash flow as a component. However, free cash flow is not a measure of financial performance under GAAP and may not be comparable to similarly titled measures reported by other companies. Additionally, the Company does not present or manage free cash flow on a segment basis.

Historically, we have defined free cash flow as adjusted EBITDA less total capital expenditures. During the second quarter of 2012, we refined our definition of capital expenditures for purposes of calculating free cash flow to distinguish capital expenditures that require the up-front outlay of cash from those where payment is deferred on a longer-term basis. This distinction is primarily driven by the significant investments we are making to lease fiber network assets that have an expected useful life of 20 years, which is substantially longer than our typical asset lives. We believe this distinction is warranted and appropriate since these investments are expected to yield meaningful positive cash flows in future periods when the debt and lease payments occur. These favorable future cash flows will result from fiber infrastructure replacing a significant portion of the access and transport circuits we currently lease from incumbent local exchange carriers (or “ILECs”). We have recast all historical disclosures of capital expenditures as well as free cash flow for all periods presented in this Current Report on Form 8-K to be consistent with this delineation between cash and non-cash capital expenditures.

Investor Contact:
Cbeyond, Inc.
Rob Clancy
Senior Vice President of Finance
678-486-8023
rob.clancy@cbeyond.com

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