Cbeyond Sees Green

How the Company’s “Inch Wide and Mile Deep” Strategy Is Paying Off

Many companies are transitioning to IP networks and talking about introducing value-added services to grow revenue and create customer stickiness. Cbeyond Inc., an IP competitive service provider from the get-go, already has done all that.

Jim Geiger, Chairman and CEO

The company today offers SMB customers in select domestic markets feature-rich local and long-distance voice, cellular, and broadband Internet services as well as application-focused offerings including fax-to-e-mail and managed firewall. And software-as-a-service (Saas) is anticipated to become an even larger part of Cbeyond’s business down the road.

Chris Gatch, CTO

This broad portfolio of services, along with the company’s “an inch wide and a mile deep” strategy, through which it focuses on getting a nice chunk of market share in the areas in which it does business, has served Cbeyond well. In its first markets, the company has a 12 percent share. Its monthly churn is just 1 percent. And the company, which reported 2006 revenue of $214 million (with 2007 guidance in the $275 million to $280 million range), expects to see 30 percent annual revenue growth along with flat-to-increasing EBITDA going forward.

“I believe they can do that because they put lots of direct sales guys, who are consultative, aggressive, young and extremely well-trained [into each new market] and close about two accounts per month,” says Jonathan Hoopes, managing director and next-generation computing and communications analyst at ThinkEquity Partners LLC, which offers research, investment banking and asset management services.

“It’s my favorite company,” adds Hoopes. “Cbeyond has been a phenomenal performer.” Since ThinkEquity initiated coverage on the Cbeyond stock in December of 2005, the per-share price has gone from $12.99 into the mid-$30 range (as this article was being written May 25, the stock was trading at just under $35). ThinkEquity has realized a 171.6 percent return on its investments in Cbeyond, notes Hoopes.

If he had just one word to describe Cbeyond, Hoopes says, it would be “predictable” because the company has an easily repeatable business strategy that has worked in every market it goes after.

Brooks Robinson, CMO

In a conference call in May announcing Cbeyond’s first-quarter results, Chairman and CEO Jim Geiger said employing 55 to 60 sales reps per market at full ramp allows the company to have a predictable business, but that the managed services provider is putting as many as 70 reps in its newer, larger markets like Chicago and Los Angeles. (The company also does indirect sales through VARs and others.) He also mentioned that Cbeyond saw 22 percent revenue growth in the first quarter of 2007 in its first four markets.

Atlanta, where Cbeyond is based, was the company’s first market. It launched service there in March 2001, a year after raising one of the largest-ever A series private equity offers, which provided the company $141 million in funding. The other three of the first four launches were in Dallas, Denver and Houston. Cbeyond, which is focused exclusively on serving businesses with four to around 250 employees, also now provides services in Chicago, Los Angeles and San Diego. It goes live this month in Detroit, a market in which large business contraction is releasing folks with rich compensation packages who are starting smaller businesses with that money, says Geiger. And San Francisco is expected to come online later this year. The company reported it had 29,166 customers as of the end of the first quarter of this year. That represents 33.1 percent year-over-year growth for this measure. With the launch of Detroit and San Francisco, the company will have 672,000 addressable businesses within its reach. In choosing its markets, Cbeyond looks for states with pro-competition regulatory environments (given it leases T1s from incumbents to deliver its services), and tries to combine growing markets with more established locales so it has a good cross-section of geographies represented, says Brooks Robinson, the company’s chief marketing officer.

The company’s goal is to add two markets per year. But beyond just growth through new geographical expansion, Cbeyond is building revenue organically.

For example, the company in January of 2006 added wireless to the mix through an MVNO deal with a large national carrier, which the company declines to name.

Robinson says landline is just 50 percent to 60 percent of the telecom spend for SMBs; the remainder is mobile. So, to add “wallet share,” the company added BeyondMobile as an option to its BeyondVoice package, he says.

As of March 31, 14 percent of the Cbeyond customer base was using the company’s mobile services. If this rate is sustained, a quarter of the company’s customers will use BeyondMobile by year end, putting Cbeyond ahead of its one-thirds goal by 2008, said Geiger in the earnings call for the first quarter of 2007, at which time the average revenue per user was $744, up slightly from $742 in the the fourth quarter of 2006.

BeyondVoice One, the company’s basic service package that all customers get for $495 per month, includes six phone lines (which can be a mix of wireline and mobile), 1,500 minutes of long-distance phone service (which can be used for mobile if desired), a T1 for Internet access, and “a little bit of a number of applications,” says Robinson. That includes, at no extra charge, features like voice mail, e-mail, caller ID, public IP addresses, VPN, Web hosting and home access.

These added features are priming users for what’s to come at Cbeyond, which proudly reports that the number of applications used per customer at the company is 5.8. Down the road, Cbeyond expects to offer SaaS services such as human resource management, accounting applications, antivirus and collaboration tools, says Robinson.

Of course, Cbeyond got its start by embracing VoIP, and later, services related to the IP PBX.

Company founder Geiger, who formerly had been head of marketing with CLEC Intermedia Communications, got revved up about VoIP after attending the Fall 1999 VON show, says Robinson. At that point, Geiger decided to create a company to bring VoIP solutions to the SMB market, which at the time was vastly underserved given the CLECs couldn’t afford to target customers with just 5 to 100 employees and the ILECs didn’t care to, Robinson says.

The company dedicated itself to IP PBX in late 2004, Robinson explains, adding that Cbeyond doesn’t offer IP Centrex and doesn’t plan to. In early February the company formally announced it had enhanced its BeyondVoice packages to support direct IP peering with IP PBXs using the SIPconnect Interface Specification, allowing Cbeyond’s small-business customers to connect an IP-based key system or PBX directly to Cbeyond’s VoIP network via SIP without investing in VoIP gateways or facing the recurring expense of traditional TDM voice services such as analog lines or PRI circuits.

Cbeyond doesn’t sell the PBXs itself, however; instead, it partners with PBX manufacturers and interconnects, which serve as a great sales referral mechanism for the service provider. The company now is interoperable with 15 different PBXs using SIPconnect, says Cbeyond’s CTO Chris Gatch. As of the first quarter, Cbeyond reported having 29,166 customers in the seven markets in which it offers services; 27,000 of those customers used its IP PBX services. While IP PBX is a small part of Cbeyond’s business today, it is the fastest-growing piece of the company’s business, says Robinson, and a technology with which Cbeyond heavily is associated.

Gatch, also a former Intermedia guy, authored SIPconnect — an interface specification based on IETF standards that defines a reference architecture, required protocols and features, and implementation rules necessary for seamless IP peering between IP PBXs and VoIP service provider networks. Along with Avaya Inc., BroadSoft Inc., Cisco Systems Inc., Mitel Networks Corp. and TalkSwitch, he submitted it as a working draft to the SIP Forum, which resulted in a proposed recommendation. Just last month, before this article went to press, the SIP Forum was expected to launch a certification mark for SIPconnect.

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