Cbeyond Communications, Inc. (Nasdaq: CBEY),
("Cbeyond"), a managed services provider that delivers integrated
packages of voice and broadband services to small businesses, today
announced its fourth quarter 2005 results and its business outlook for
2006.
Financial and operating highlights in the fourth quarter of 2005 include the following:
-- Strong fourth quarter revenue growth with net revenues of $44.3 million, up 38.0% over the fourth quarter of 2004
-- Positive net income before dividends of $5.3 million during the fourth quarter of 2005, including a gain on early retirement of debt of $4.1 million, compared to a net loss of $3.3 million in the fourth quarter of 2004
-- Adjusted EBITDA (a non-GAAP measure) of $7.8 million, an increase of 53.0% from the fourth quarter of 2004. Adjusted EBITDA margin of 17.7%, up from 16.0% in the fourth quarter of 2004
For the full year, Cbeyond's revenues in 2005 grew by 40.4% over 2004, and its adjusted EBITDA grew by 53.6% over the prior year.
Financial Overview and Key Operating Metrics
Financial and operating metrics, which include non-GAAP financial measures, for the three months and twelve months ended December 31, 2005, and 2004 include the following: -0- For the Three Months Ended December 31, --------------------------------------- 2005 2004 Change % Change -------- -------- -------- --------- Selected Financial Data (unaudited) (dollars in thousands) Revenue $ 44,336 $ 32,127 $ 12,209 38.0% Operating expenses $ 42,987 $ 33,955 $ 9,032 26.6% Operating income (loss) $ 1,349 $ (1,828) $ 3,177 N/M Net income (loss) before dividends $ 5,316 $ (3,317) $ 8,633 N/M Capital expenditures $ 12,594 $ 6,043 $ 6,551 108.4% Key Operating Metrics and Non- GAAP Financial Measures Customers 20,347 14,713 5,634 38.3% Net additions 1,450 1,307 143 10.9% Average monthly churn rate 0.9% 1.0% (0.1%) (10.0%) Average monthly revenue per customer location $ 753 $ 762 $ (9) (1.2%) Adjusted EBITDA (in thousands) $ 7,844 $ 5,126 $ 2,718 53.0% For the Twelve Months Ended December 31, ---------------------------------------- 2005 2004 Change % Change -------- -------- -------- --------- Selected Financial Data (unaudited) (dollars in thousands) Revenue $159,097 $113,311 $ 45,786 40.4% Operating expenses $157,774 $120,634 $ 37,140 30.8% Operating income (loss) $ 1,323 $ (7,323) $ 8,646 N/M Net income (loss) before dividends $ 3,736 $(11,456) $ 15,192 N/M Capital expenditures $ 29,766 $ 23,741 $ 6,025 25.4% Key Operating Metrics and Non- GAAP Financial Measures Customers 20,347 14,713 5,634 38.3% Net additions 5,634 5,026 608 12.1% Average monthly churn rate 1.0% 1.0% 0.0% 0.0% Average monthly revenue per customer location $ 756 $ 774 $ (18) (2.3%) Adjusted EBITDA (in thousands) $ 25,807 $ 16,802 $ 9,005 53.6%
Management Comments
"We were pleased with our continued rapid growth in revenue and adjusted EBITDA during 2005. We believe the profitability of our underlying business model is even more clearly demonstrated in the performance of our individual markets," said Jim Geiger, chief executive officer of Cbeyond. "Our three oldest markets as a group contributed adjusted EBITDA, unburdened by centralized costs, of $73.7 million in 2005, while growing revenue in these markets at over 30% and reaching target market shares of 9% to 14%.
"In 2006, we are excited by the launch of our operation in Los Angeles, the largest market in the U.S. for small business, and we are equally enthusiastic about the launch of BeyondMobile, our new nationwide, privately-branded mobile service offering for BeyondVoice customers," added Geiger.
Fourth Quarter Financial and Business Summary
Revenues and ARPU
Cbeyond reported revenues of $44.3 million for the fourth quarter of 2005, an increase of 38.0% from the fourth quarter of 2004. ARPU, or average revenue per user, was $753 in the fourth quarter, a decline of 1.2% from $762 in the fourth quarter of 2004. Cbeyond expects that ARPU will continue to decline moderately through at least 2006 pending increased revenue from our wireless service and other value-added applications.
Cost of Service and Gross Margin
Cbeyond's gross margin was 70.4% for 2005 and 69.9% for the fourth quarter of 2005. The decline in gross margin in the fourth quarter was due to the net unfavorable impact of $0.3 million that pertains to prior periods resulting from regulatory changes and a large dispute settlement. Excluding the effect of the $0.3 million pertaining to prior periods, the gross margin for the fourth quarter would have been 70.5%. In February 2006 the Georgia Public Service Commission partially reversed a rate reduction that had been in effect since September 2003, resulting in a retroactive charge and an increase in access circuit costs for our Atlanta operation. The outcome of this regulatory action could not be anticipated or estimated prior to the commission ruling, including whether the action would have a positive or negative impact on Cbeyond's results. As the impact became reasonably estimable prior to closing the fourth quarter of 2005, Cbeyond recorded a $1.3 million charge to Cost of Service in the fourth quarter of 2005 to reflect the cumulative impact of this ruling through the third quarter of 2005. In addition, Cbeyond recorded a credit of $1.0 million during the fourth quarter of 2005 resulting from the favorable settlement of a dispute with a vendor. This dispute related to costs charged during the first three quarters of 2005 for the installation of access circuits in our Chicago operation.
Income from Operations and Adjusted EBITDA
Cbeyond reported income from operations of approximately $1.3 million in the fourth quarter of 2005 versus a loss from operations of $1.8 million in the fourth quarter of 2004.
For the fourth quarter of 2005, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, was $7.8 million, an improvement of 53.0% over the adjusted EBITDA of $5.1 million in the fourth quarter of 2004. Adjusted EBITDA excludes the impact to EBITDA of non-cash stock-based compensation expense, loss on disposal of property and equipment, and gain on early retirement of debt. The net impact to cost of service noted above was a $0.3 million reduction to adjusted EBITDA during the fourth quarter of 2005. Refer to Schedule I for a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure and other information.
Net Income
Cbeyond reported net income of $5.3 million and net income available to common stockholders of $4.2 million for the fourth quarter of 2005 as compared to a net loss of $3.3 million and a net loss available to common stockholders of $5.2 million for the fourth quarter of 2004. Cbeyond's net income includes the effect of a gain of $4.1 million on the early retirement of its debt to Cisco Systems Capital Corp. in the fourth quarter, following its initial public offering in November.
Cash and Marketable Securities
Cash, cash equivalents and marketable securities amounted to $37.9 million at the end of the fourth quarter of 2005, as compared to $37.2 million at the end of the fourth quarter of 2004.
Capital Expenditures
Capital expenditures, including non-cash purchases of property and equipment, were $12.6 million in the fourth quarter of 2005. These capital expenditures included the following special projects, Los Angeles startup costs, costs incurred to add new central office collocations to our network in response to regulatory changes, enhancements to the Company's data centers, and new product-related enhancements to our operating support systems, in addition to capital expenditures related to the growth of our customer base.
Business Outlook for 2006
Cbeyond is providing the following guidance for 2006:
-- Revenues of at least $206 million
-- Adjusted EBITDA of at least $30 million
-- Capital expenditures of $42 million
The business outlook for 2006 is influenced by a variety of factors including, but not limited to:
-- Continued growth in customers, revenues, and adjusted EBITDA in our first five markets, including expected achievement of positive adjusted EBITDA in our Chicago operation in the fourth quarter of 2006, approximately eighteen months from launch;
-- Initiation of service in Los Angeles in the first quarter of 2006, which we expect will produce adjusted EBITDA losses during the year consistent with trends realized with prior new market launches. Startup losses will increase significantly compared to the pre-launch losses recorded in the fourth quarter. Pre-selling began in Los Angeles in January 2006, but our first customers were not installed until March. As a result, there will be no material revenues recorded in the first quarter of 2006. We expect our Los Angeles operation to achieve positive adjusted EBITDA in 18 months or less from launch, similar to our expectations for our Chicago operation;
-- Rollout of BeyondMobile as part of Cbeyond's product portfolio in the first quarter of 2006, which is expected to increase revenues while negatively impacting gross margins and adjusted EBITDA throughout 2006 due to costs associated with subscriber acquisition, wireless handset subsidies, and additional headcount to service mobile subscribers. Cbeyond believes that BeyondMobile will have a long term positive impact on Cbeyond's business due to increased ARPU, customer satisfaction, revenues, and adjusted EBITDA but at the expense of a higher short-term negative impact on adjusted EBITDA, primarily due to the cost of handset subsidies before a significant base of wireless subscribers has been built. Cbeyond offers its wireless services solely as an addition to its core package of communications services and applications to its customers and not on a stand-alone basis. Because our wireless services are always sold as an embedded part of our packages of services and not on a stand-alone basis, the financial impact of Cbeyond's wireless results will be integrated into its consolidated and segment reporting and not tracked separately;
-- Effects on the pricing of transport and access lines due to the Triennial Review and Remand Order (TRRO) and network optimization efforts to mitigate these pricing impacts. The Company anticipates incurring higher than normal costs during the first and second quarters of 2006 as these network optimization efforts are undertaken. These costs will largely consist of capital expenditures to build out additional collocation facilities and expenses solely associated with moving affected individual circuits to more favorably priced, high capacity circuits. The Company anticipates that it will spend approximately $2.3 million in capital expenditures that we would not have spent otherwise and will accelerate another $2.6 million in 2006 that we would have spent in future periods. Further, we estimate that the provisioning, installation and moving costs associated with TRRO-related network circuit changes, which we expense in the period incurred, will be in the range of $1.0-$1.5 million in 2006, primarily in the first quarter;
-- Increased costs related to being a public company. During 2006, the Company will experience increased costs due to:
-- implementation and testing of Sarbanes-Oxley controls;
-- increased auditing fees as a public company;
-- increased directors and officers insurance as a public company, and
-- increased legal costs as a public company.
-- Increased non-cash stock-based compensation expense due to the adoption of FAS 123(R) beginning in the first quarter of 2006. This expense is excluded from the calculation of adjusted EBITDA.
Conference Call
Cbeyond Communications will hold a conference call to discuss this press release Wednesday, March 15, 2006, at 5:00 p.m. ET. 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 (800) 289-0496 (for domestic U.S. callers) and (913) 981-5519 (for international callers). For those who cannot listen to the live broadcast, a replay will be available shortly after the call through the close of business on March 22, 2006.
About Cbeyond
Cbeyond (Nasdaq: CBEY) is an Atlanta-based managed services provider that delivers integrated packages of voice, mobile and broadband services to small businesses in Atlanta, Chicago, Dallas, Denver, Houston and Los Angeles. Cbeyond offers core communications services like local and long-distance voice, mobile and broadband Internet access along with enhanced applications, including voicemail, email, Web hosting, data backup, file-sharing, VPN and more. 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 "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "projects" and similar expressions. Such statements are based upon the current beliefs and expectations of Cbeyond Communication'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: changes in federal or state regulation that affects the Company; 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; the need to balance the recruitment and retention of experienced management and personnel with the maintenance of high labor utilization; 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; the inability to attract sufficient customers in new markets; changes in estimates of taxable income or utilization of deferred tax assets in foreign jurisdictions which could significantly affect the Company's effective tax rate; and general economic and business conditions
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 Schedule I, 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 (loss), cash flow or operating income (loss) 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 generally accepted accounting principles, or GAAP, as a measure of performance or liquidity. The Company defines adjusted EBITDA as net income (loss) before interest, taxes, depreciation and amortization expenses, excluding non-cash stock option compensation, write-off of public offering costs and gain recognized on troubled debt restructuring, 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 stock option 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 (loss): -0- CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, ------------------------------------------ 2004 2005 2004 2005 --------- --------- --------- --------- Revenues: Customer revenue $ 31,164 $ 43,272 $ 108,863 $ 154,883 Terminating access revenue 963 1,064 4,448 4,214 --------- --------- --------- --------- Total revenue 32,127 44,336 113,311 159,097 Operating expenses: Cost of service 9,157 13,342 31,725 47,161 Selling, general and administrative 17,939 23,234 65,159 86,453 Write-off of public offering cost 1,103 - 1,103 - Depreciation and amortization 5,756 6,411 22,647 24,160 --------- --------- --------- --------- Total operating expenses 33,955 42,987 120,634 157,774 --------- --------- --------- --------- Operating profit (loss) (1,828) 1,349 (7,323) 1,323 Other income (expense): Interest income 149 443 637 1,325 Interest expense (610) (379) (2,788) (2,424) Loss on disposal of property and equipment (993) (157) (1,746) (539) Gain on early retirement of debt - 4,060 - 4,060 Other income (expense), net (35) - (236) (9) --------- --------- --------- --------- Total other income (expense) (1,489) 3,967 (4,133) 2,413 --------- --------- --------- --------- Net income (loss) (3,317) 5,316 (11,456) 3,736 Dividends accreted on preferred stock (1,869) (1,092) (7,083) (8,550) --------- --------- --------- --------- Net income (loss) available to common stockholders $ (5,186) $ 4,224 $ (18,539) $ (4,814) ========= ========= ========= ========= Earnings (loss) per common share Basic $ (39.59) $ 0.27 $ (143.71) $ (1.19) Diluted $ (39.59) $ 0.20 $ (143.71) $ (1.19) Weighted average number of common shares outstanding Basic 131 15,571 129 4,042 Diluted 131 25,977 129 4,042 CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands) (Unaudited) December 31, December 31, 2004 2005 ----------- ----------- ASSETS Current Assets Cash and cash equivalents $ 22,860 $ 27,752 Marketable securities 14,334 10,170 Accounts receivable, net of allowance for doubtful accounts of $1,033 and $1,811 as of December 31, 2004 and December 31, 2005, respectively 5,356 10,688 Other assets 2,467 4,328 ----------- ----------- Total current assets 45,017 52,938 Property and equipment, gross 113,848 142,973 Less: accumulated depreciation (61,901) (85,905) ----------- ----------- Property and equipment, net 51,947 57,068 Other assets 2,239 4,826 ----------- ----------- Total assets $ 99,203 $ 114,832 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable $ 5,327 $ 9,364 Other accrued expenses 16,912 29,989 Current portion of capital lease obligations 336 382 Current portion of long-term debt 13,666 - ----------- ----------- Total current liabilities 36,241 39,735 Deferred installation revenue 525 511 Long-term portion of capital lease obligation 382 - Long-term debt 56,665 - Convertible preferred stock 78,963 - Stockholders' equity (deficit) Common stock 1 258 Deferred stock compensation (1,210) (701) Additional paid-in capital 78,598 230,805 Accumulated deficit (150,962) (155,776) ----------- ----------- Total stockholders' equity (deficit) (73,573) 74,586 ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 99,203 $ 114,832 =========== =========== CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Selected Operating Statistics (Dollars in thousands, except where noted) (Unaudited) ------------------------------------------------- Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 2004 2005 2005 2005 2005 -------- -------- -------- -------- -------- Revenues Atlanta $ 11,573 $ 12,356 $ 13,046 $ 13,874 $ 14,443 Dallas 9,015 9,714 10,321 10,840 11,402 Denver 9,914 10,834 11,660 12,445 12,977 Houston 1,625 2,266 2,862 3,592 4,331 Chicago - 6 293 652 1,183 Los Angeles - - - - - -------- -------- -------- -------- -------- Total revenues $ 32,127 $ 35,176 $ 38,182 $ 41,403 $ 44,336 ======== ======== ======== ======== ======== Operating profit (loss) Atlanta $ 5,219 $ 5,489 $ 6,016 $ 6,772 $ 5,978 Dallas 2,061 2,512 3,113 3,646 4,103 Denver 4,255 4,363 4,779 5,234 5,397 Houston (1,144) (578) (301) 197 397 Chicago (535) (1,500) (1,976) (1,999) (615) Los Angeles - - - - (382) Corporate (11,684) (11,403) (11,920) (12,470) (13,529) -------- -------- -------- -------- -------- Total operating profit (loss) $ (1,828) $ (1,117) $ (289) $ 1,380 $ 1,349 ======== ======== ======== ======== ======== Adjusted EBITDA Atlanta $ 6,844 $ 7,001 $ 7,540 $ 8,249 $ 7,384 Dallas 3,430 3,813 4,455 4,957 5,336 Denver 5,487 5,624 6,085 6,544 6,701 Houston (870) (264) 74 631 936 Chicago (535) (1,496) (1,822) (1,794) (358) Los Angeles - - - - (382) Corporate (9,230) (10,036) (10,576) (11,022) (11,773) -------- -------- -------- -------- -------- Total adjusted EBITDA $ 5,126 $ 4,642 $ 5,756 $ 7,565 $ 7,844 ======== ======== ======== ======== ======== Adjusted EBITDA margin (market-level) Atlanta 59.1% 56.7% 57.8% 59.5% 51.1% Dallas 38.0% 39.3% 43.2% 45.7% 46.8% Denver 55.3% 51.9% 52.2% 52.6% 51.6% Houston (53.5%) (11.7%) 2.6% 17.6% 21.6% Chicago N/M N/M N/M N/M (30.3%) Los Angeles N/M N/M N/M N/M N/M Adjusted EBITDA margin (as % of total revenue) Corporate (28.7%) (28.5%) (27.7%) (26.6%) (26.6%) Total 16.0% 13.2% 15.1% 18.3% 17.7% Capital expenditures Atlanta $ 278 $ 600 $ 1,365 $ 1,046 $ 1,935 Dallas 565 471 816 894 1,795 Denver 647 701 1,043 1,047 1,047 Houston 558 511 1,142 894 1,492 Chicago 1,441 621 1,029 879 727 Los Angeles - - 93 252 1,786 Corporate 2,554 834 1,138 1,796 3,812 -------- -------- -------- -------- -------- Total capital expenditures $ 6,043 $ 3,738 $ 6,626 $ 6,808 $ 12,594 ======== ======== ======== ======== ======== Other Operating Data Customers (at period end) 14,713 15,978 17,435 18,897 20,347 Net additions 1,307 1,265 1,457 1,462 1,450 Average monthly churn rate 1.0% 1.0% 1.0% 1.0% 0.9% Average monthly revenue per customer location $ 762 $ 764 $ 762 $ 760 $ 753 CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure (In thousands) (Unaudited) ------------------------------------------------- Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 2004 2005 2005 2005 2005 -------- -------- -------- -------- -------- Reconciliation of Adjusted EBITDA to Net income (loss): Total Adjusted EBITDA for reportable segments $ 5,126 $ 4,642 $ 5,756 $ 7,565 $ 7,844 Depreciation and amortization (5,756) (5,674) (5,978) (6,097) (6,411) Non-cash stock option compensation (95) (85) (67) (88) (84) Write-off of public offering cost (1,103) - - - - Interest income 149 248 260 374 443 Interest expense (610) (631) (684) (730) (379) Gain on early retirement of debt - - - - 4,060 Loss on disposal of property and equipment (993) (79) (194) (109) (157) Other income (expense), net (35) 3 (25) 13 - -------- -------- -------- -------- -------- Net income (loss) $ (3,317) $ (1,576) $ (932) $ 928 $ 5,316 ======== ======== ======== ======== ======== Three Months Ended Twelve Months Ended December 31, December 31, -------------------------------------- 2004 2005 2004 2005 -------- -------- -------- -------- Reconciliation of Adjusted EBITDA to Net income (loss): Total Adjusted EBITDA for reportable segments $ 5,126 $ 7,844 $ 16,802 $ 25,807 Depreciation and amortization (5,756) (6,411) (22,647) (24,160) Non-cash stock option compensation (95) (84) (375) (324) Write-off of public offering cost (1,103) - (1,103) - Interest income 149 443 637 1,325 Interest expense (610) (379) (2,788) (2,424) Gain on early retirement of debt - 4,060 - 4,060 Loss on disposal of property and equipment (993) (157) (1,746) (539) Other income (expense), net (35) - (236) (9) -------- -------- -------- -------- Net income (loss) $ (3,317) $ 5,316 $(11,456) $ 3,736 ======== ======== ======== ========
Except for historical information and discussion contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The specific forward-looking statements cover Cbeyond's expectations for revenue and EBITDA, as adjusted, for the fourth quarter of 2005 and fiscal year 2005. The statements in this release are not guarantees of future performance and actual results could differ materially from our current expectations. Numerous factors could cause or contribute to such differences. Some of the factors and risks associated with our business are discussed in Cbeyond's filings with the Securities and Exchange Commission. CBEY-G CBEY-F
Financial and operating highlights in the fourth quarter of 2005 include the following:
-- Strong fourth quarter revenue growth with net revenues of $44.3 million, up 38.0% over the fourth quarter of 2004
-- Positive net income before dividends of $5.3 million during the fourth quarter of 2005, including a gain on early retirement of debt of $4.1 million, compared to a net loss of $3.3 million in the fourth quarter of 2004
-- Adjusted EBITDA (a non-GAAP measure) of $7.8 million, an increase of 53.0% from the fourth quarter of 2004. Adjusted EBITDA margin of 17.7%, up from 16.0% in the fourth quarter of 2004
For the full year, Cbeyond's revenues in 2005 grew by 40.4% over 2004, and its adjusted EBITDA grew by 53.6% over the prior year.
Financial Overview and Key Operating Metrics
Financial and operating metrics, which include non-GAAP financial measures, for the three months and twelve months ended December 31, 2005, and 2004 include the following: -0- For the Three Months Ended December 31, --------------------------------------- 2005 2004 Change % Change -------- -------- -------- --------- Selected Financial Data (unaudited) (dollars in thousands) Revenue $ 44,336 $ 32,127 $ 12,209 38.0% Operating expenses $ 42,987 $ 33,955 $ 9,032 26.6% Operating income (loss) $ 1,349 $ (1,828) $ 3,177 N/M Net income (loss) before dividends $ 5,316 $ (3,317) $ 8,633 N/M Capital expenditures $ 12,594 $ 6,043 $ 6,551 108.4% Key Operating Metrics and Non- GAAP Financial Measures Customers 20,347 14,713 5,634 38.3% Net additions 1,450 1,307 143 10.9% Average monthly churn rate 0.9% 1.0% (0.1%) (10.0%) Average monthly revenue per customer location $ 753 $ 762 $ (9) (1.2%) Adjusted EBITDA (in thousands) $ 7,844 $ 5,126 $ 2,718 53.0% For the Twelve Months Ended December 31, ---------------------------------------- 2005 2004 Change % Change -------- -------- -------- --------- Selected Financial Data (unaudited) (dollars in thousands) Revenue $159,097 $113,311 $ 45,786 40.4% Operating expenses $157,774 $120,634 $ 37,140 30.8% Operating income (loss) $ 1,323 $ (7,323) $ 8,646 N/M Net income (loss) before dividends $ 3,736 $(11,456) $ 15,192 N/M Capital expenditures $ 29,766 $ 23,741 $ 6,025 25.4% Key Operating Metrics and Non- GAAP Financial Measures Customers 20,347 14,713 5,634 38.3% Net additions 5,634 5,026 608 12.1% Average monthly churn rate 1.0% 1.0% 0.0% 0.0% Average monthly revenue per customer location $ 756 $ 774 $ (18) (2.3%) Adjusted EBITDA (in thousands) $ 25,807 $ 16,802 $ 9,005 53.6%
Management Comments
"We were pleased with our continued rapid growth in revenue and adjusted EBITDA during 2005. We believe the profitability of our underlying business model is even more clearly demonstrated in the performance of our individual markets," said Jim Geiger, chief executive officer of Cbeyond. "Our three oldest markets as a group contributed adjusted EBITDA, unburdened by centralized costs, of $73.7 million in 2005, while growing revenue in these markets at over 30% and reaching target market shares of 9% to 14%.
"In 2006, we are excited by the launch of our operation in Los Angeles, the largest market in the U.S. for small business, and we are equally enthusiastic about the launch of BeyondMobile, our new nationwide, privately-branded mobile service offering for BeyondVoice customers," added Geiger.
Fourth Quarter Financial and Business Summary
Revenues and ARPU
Cbeyond reported revenues of $44.3 million for the fourth quarter of 2005, an increase of 38.0% from the fourth quarter of 2004. ARPU, or average revenue per user, was $753 in the fourth quarter, a decline of 1.2% from $762 in the fourth quarter of 2004. Cbeyond expects that ARPU will continue to decline moderately through at least 2006 pending increased revenue from our wireless service and other value-added applications.
Cost of Service and Gross Margin
Cbeyond's gross margin was 70.4% for 2005 and 69.9% for the fourth quarter of 2005. The decline in gross margin in the fourth quarter was due to the net unfavorable impact of $0.3 million that pertains to prior periods resulting from regulatory changes and a large dispute settlement. Excluding the effect of the $0.3 million pertaining to prior periods, the gross margin for the fourth quarter would have been 70.5%. In February 2006 the Georgia Public Service Commission partially reversed a rate reduction that had been in effect since September 2003, resulting in a retroactive charge and an increase in access circuit costs for our Atlanta operation. The outcome of this regulatory action could not be anticipated or estimated prior to the commission ruling, including whether the action would have a positive or negative impact on Cbeyond's results. As the impact became reasonably estimable prior to closing the fourth quarter of 2005, Cbeyond recorded a $1.3 million charge to Cost of Service in the fourth quarter of 2005 to reflect the cumulative impact of this ruling through the third quarter of 2005. In addition, Cbeyond recorded a credit of $1.0 million during the fourth quarter of 2005 resulting from the favorable settlement of a dispute with a vendor. This dispute related to costs charged during the first three quarters of 2005 for the installation of access circuits in our Chicago operation.
Income from Operations and Adjusted EBITDA
Cbeyond reported income from operations of approximately $1.3 million in the fourth quarter of 2005 versus a loss from operations of $1.8 million in the fourth quarter of 2004.
For the fourth quarter of 2005, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, was $7.8 million, an improvement of 53.0% over the adjusted EBITDA of $5.1 million in the fourth quarter of 2004. Adjusted EBITDA excludes the impact to EBITDA of non-cash stock-based compensation expense, loss on disposal of property and equipment, and gain on early retirement of debt. The net impact to cost of service noted above was a $0.3 million reduction to adjusted EBITDA during the fourth quarter of 2005. Refer to Schedule I for a reconciliation of this non-GAAP financial performance measure to the most directly comparable GAAP measure and other information.
Net Income
Cbeyond reported net income of $5.3 million and net income available to common stockholders of $4.2 million for the fourth quarter of 2005 as compared to a net loss of $3.3 million and a net loss available to common stockholders of $5.2 million for the fourth quarter of 2004. Cbeyond's net income includes the effect of a gain of $4.1 million on the early retirement of its debt to Cisco Systems Capital Corp. in the fourth quarter, following its initial public offering in November.
Cash and Marketable Securities
Cash, cash equivalents and marketable securities amounted to $37.9 million at the end of the fourth quarter of 2005, as compared to $37.2 million at the end of the fourth quarter of 2004.
Capital Expenditures
Capital expenditures, including non-cash purchases of property and equipment, were $12.6 million in the fourth quarter of 2005. These capital expenditures included the following special projects, Los Angeles startup costs, costs incurred to add new central office collocations to our network in response to regulatory changes, enhancements to the Company's data centers, and new product-related enhancements to our operating support systems, in addition to capital expenditures related to the growth of our customer base.
Business Outlook for 2006
Cbeyond is providing the following guidance for 2006:
-- Revenues of at least $206 million
-- Adjusted EBITDA of at least $30 million
-- Capital expenditures of $42 million
The business outlook for 2006 is influenced by a variety of factors including, but not limited to:
-- Continued growth in customers, revenues, and adjusted EBITDA in our first five markets, including expected achievement of positive adjusted EBITDA in our Chicago operation in the fourth quarter of 2006, approximately eighteen months from launch;
-- Initiation of service in Los Angeles in the first quarter of 2006, which we expect will produce adjusted EBITDA losses during the year consistent with trends realized with prior new market launches. Startup losses will increase significantly compared to the pre-launch losses recorded in the fourth quarter. Pre-selling began in Los Angeles in January 2006, but our first customers were not installed until March. As a result, there will be no material revenues recorded in the first quarter of 2006. We expect our Los Angeles operation to achieve positive adjusted EBITDA in 18 months or less from launch, similar to our expectations for our Chicago operation;
-- Rollout of BeyondMobile as part of Cbeyond's product portfolio in the first quarter of 2006, which is expected to increase revenues while negatively impacting gross margins and adjusted EBITDA throughout 2006 due to costs associated with subscriber acquisition, wireless handset subsidies, and additional headcount to service mobile subscribers. Cbeyond believes that BeyondMobile will have a long term positive impact on Cbeyond's business due to increased ARPU, customer satisfaction, revenues, and adjusted EBITDA but at the expense of a higher short-term negative impact on adjusted EBITDA, primarily due to the cost of handset subsidies before a significant base of wireless subscribers has been built. Cbeyond offers its wireless services solely as an addition to its core package of communications services and applications to its customers and not on a stand-alone basis. Because our wireless services are always sold as an embedded part of our packages of services and not on a stand-alone basis, the financial impact of Cbeyond's wireless results will be integrated into its consolidated and segment reporting and not tracked separately;
-- Effects on the pricing of transport and access lines due to the Triennial Review and Remand Order (TRRO) and network optimization efforts to mitigate these pricing impacts. The Company anticipates incurring higher than normal costs during the first and second quarters of 2006 as these network optimization efforts are undertaken. These costs will largely consist of capital expenditures to build out additional collocation facilities and expenses solely associated with moving affected individual circuits to more favorably priced, high capacity circuits. The Company anticipates that it will spend approximately $2.3 million in capital expenditures that we would not have spent otherwise and will accelerate another $2.6 million in 2006 that we would have spent in future periods. Further, we estimate that the provisioning, installation and moving costs associated with TRRO-related network circuit changes, which we expense in the period incurred, will be in the range of $1.0-$1.5 million in 2006, primarily in the first quarter;
-- Increased costs related to being a public company. During 2006, the Company will experience increased costs due to:
-- implementation and testing of Sarbanes-Oxley controls;
-- increased auditing fees as a public company;
-- increased directors and officers insurance as a public company, and
-- increased legal costs as a public company.
-- Increased non-cash stock-based compensation expense due to the adoption of FAS 123(R) beginning in the first quarter of 2006. This expense is excluded from the calculation of adjusted EBITDA.
Conference Call
Cbeyond Communications will hold a conference call to discuss this press release Wednesday, March 15, 2006, at 5:00 p.m. ET. 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 (800) 289-0496 (for domestic U.S. callers) and (913) 981-5519 (for international callers). For those who cannot listen to the live broadcast, a replay will be available shortly after the call through the close of business on March 22, 2006.
About Cbeyond
Cbeyond (Nasdaq: CBEY) is an Atlanta-based managed services provider that delivers integrated packages of voice, mobile and broadband services to small businesses in Atlanta, Chicago, Dallas, Denver, Houston and Los Angeles. Cbeyond offers core communications services like local and long-distance voice, mobile and broadband Internet access along with enhanced applications, including voicemail, email, Web hosting, data backup, file-sharing, VPN and more. 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 "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "projects" and similar expressions. Such statements are based upon the current beliefs and expectations of Cbeyond Communication'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: changes in federal or state regulation that affects the Company; 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; the need to balance the recruitment and retention of experienced management and personnel with the maintenance of high labor utilization; 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; the inability to attract sufficient customers in new markets; changes in estimates of taxable income or utilization of deferred tax assets in foreign jurisdictions which could significantly affect the Company's effective tax rate; and general economic and business conditions
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 Schedule I, 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 (loss), cash flow or operating income (loss) 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 generally accepted accounting principles, or GAAP, as a measure of performance or liquidity. The Company defines adjusted EBITDA as net income (loss) before interest, taxes, depreciation and amortization expenses, excluding non-cash stock option compensation, write-off of public offering costs and gain recognized on troubled debt restructuring, 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 stock option 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 (loss): -0- CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, ------------------------------------------ 2004 2005 2004 2005 --------- --------- --------- --------- Revenues: Customer revenue $ 31,164 $ 43,272 $ 108,863 $ 154,883 Terminating access revenue 963 1,064 4,448 4,214 --------- --------- --------- --------- Total revenue 32,127 44,336 113,311 159,097 Operating expenses: Cost of service 9,157 13,342 31,725 47,161 Selling, general and administrative 17,939 23,234 65,159 86,453 Write-off of public offering cost 1,103 - 1,103 - Depreciation and amortization 5,756 6,411 22,647 24,160 --------- --------- --------- --------- Total operating expenses 33,955 42,987 120,634 157,774 --------- --------- --------- --------- Operating profit (loss) (1,828) 1,349 (7,323) 1,323 Other income (expense): Interest income 149 443 637 1,325 Interest expense (610) (379) (2,788) (2,424) Loss on disposal of property and equipment (993) (157) (1,746) (539) Gain on early retirement of debt - 4,060 - 4,060 Other income (expense), net (35) - (236) (9) --------- --------- --------- --------- Total other income (expense) (1,489) 3,967 (4,133) 2,413 --------- --------- --------- --------- Net income (loss) (3,317) 5,316 (11,456) 3,736 Dividends accreted on preferred stock (1,869) (1,092) (7,083) (8,550) --------- --------- --------- --------- Net income (loss) available to common stockholders $ (5,186) $ 4,224 $ (18,539) $ (4,814) ========= ========= ========= ========= Earnings (loss) per common share Basic $ (39.59) $ 0.27 $ (143.71) $ (1.19) Diluted $ (39.59) $ 0.20 $ (143.71) $ (1.19) Weighted average number of common shares outstanding Basic 131 15,571 129 4,042 Diluted 131 25,977 129 4,042 CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands) (Unaudited) December 31, December 31, 2004 2005 ----------- ----------- ASSETS Current Assets Cash and cash equivalents $ 22,860 $ 27,752 Marketable securities 14,334 10,170 Accounts receivable, net of allowance for doubtful accounts of $1,033 and $1,811 as of December 31, 2004 and December 31, 2005, respectively 5,356 10,688 Other assets 2,467 4,328 ----------- ----------- Total current assets 45,017 52,938 Property and equipment, gross 113,848 142,973 Less: accumulated depreciation (61,901) (85,905) ----------- ----------- Property and equipment, net 51,947 57,068 Other assets 2,239 4,826 ----------- ----------- Total assets $ 99,203 $ 114,832 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable $ 5,327 $ 9,364 Other accrued expenses 16,912 29,989 Current portion of capital lease obligations 336 382 Current portion of long-term debt 13,666 - ----------- ----------- Total current liabilities 36,241 39,735 Deferred installation revenue 525 511 Long-term portion of capital lease obligation 382 - Long-term debt 56,665 - Convertible preferred stock 78,963 - Stockholders' equity (deficit) Common stock 1 258 Deferred stock compensation (1,210) (701) Additional paid-in capital 78,598 230,805 Accumulated deficit (150,962) (155,776) ----------- ----------- Total stockholders' equity (deficit) (73,573) 74,586 ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 99,203 $ 114,832 =========== =========== CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Selected Operating Statistics (Dollars in thousands, except where noted) (Unaudited) ------------------------------------------------- Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 2004 2005 2005 2005 2005 -------- -------- -------- -------- -------- Revenues Atlanta $ 11,573 $ 12,356 $ 13,046 $ 13,874 $ 14,443 Dallas 9,015 9,714 10,321 10,840 11,402 Denver 9,914 10,834 11,660 12,445 12,977 Houston 1,625 2,266 2,862 3,592 4,331 Chicago - 6 293 652 1,183 Los Angeles - - - - - -------- -------- -------- -------- -------- Total revenues $ 32,127 $ 35,176 $ 38,182 $ 41,403 $ 44,336 ======== ======== ======== ======== ======== Operating profit (loss) Atlanta $ 5,219 $ 5,489 $ 6,016 $ 6,772 $ 5,978 Dallas 2,061 2,512 3,113 3,646 4,103 Denver 4,255 4,363 4,779 5,234 5,397 Houston (1,144) (578) (301) 197 397 Chicago (535) (1,500) (1,976) (1,999) (615) Los Angeles - - - - (382) Corporate (11,684) (11,403) (11,920) (12,470) (13,529) -------- -------- -------- -------- -------- Total operating profit (loss) $ (1,828) $ (1,117) $ (289) $ 1,380 $ 1,349 ======== ======== ======== ======== ======== Adjusted EBITDA Atlanta $ 6,844 $ 7,001 $ 7,540 $ 8,249 $ 7,384 Dallas 3,430 3,813 4,455 4,957 5,336 Denver 5,487 5,624 6,085 6,544 6,701 Houston (870) (264) 74 631 936 Chicago (535) (1,496) (1,822) (1,794) (358) Los Angeles - - - - (382) Corporate (9,230) (10,036) (10,576) (11,022) (11,773) -------- -------- -------- -------- -------- Total adjusted EBITDA $ 5,126 $ 4,642 $ 5,756 $ 7,565 $ 7,844 ======== ======== ======== ======== ======== Adjusted EBITDA margin (market-level) Atlanta 59.1% 56.7% 57.8% 59.5% 51.1% Dallas 38.0% 39.3% 43.2% 45.7% 46.8% Denver 55.3% 51.9% 52.2% 52.6% 51.6% Houston (53.5%) (11.7%) 2.6% 17.6% 21.6% Chicago N/M N/M N/M N/M (30.3%) Los Angeles N/M N/M N/M N/M N/M Adjusted EBITDA margin (as % of total revenue) Corporate (28.7%) (28.5%) (27.7%) (26.6%) (26.6%) Total 16.0% 13.2% 15.1% 18.3% 17.7% Capital expenditures Atlanta $ 278 $ 600 $ 1,365 $ 1,046 $ 1,935 Dallas 565 471 816 894 1,795 Denver 647 701 1,043 1,047 1,047 Houston 558 511 1,142 894 1,492 Chicago 1,441 621 1,029 879 727 Los Angeles - - 93 252 1,786 Corporate 2,554 834 1,138 1,796 3,812 -------- -------- -------- -------- -------- Total capital expenditures $ 6,043 $ 3,738 $ 6,626 $ 6,808 $ 12,594 ======== ======== ======== ======== ======== Other Operating Data Customers (at period end) 14,713 15,978 17,435 18,897 20,347 Net additions 1,307 1,265 1,457 1,462 1,450 Average monthly churn rate 1.0% 1.0% 1.0% 1.0% 0.9% Average monthly revenue per customer location $ 762 $ 764 $ 762 $ 760 $ 753 CBEYOND COMMUNICATIONS, INC. AND SUBSIDIARIES Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure (In thousands) (Unaudited) ------------------------------------------------- Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31 2004 2005 2005 2005 2005 -------- -------- -------- -------- -------- Reconciliation of Adjusted EBITDA to Net income (loss): Total Adjusted EBITDA for reportable segments $ 5,126 $ 4,642 $ 5,756 $ 7,565 $ 7,844 Depreciation and amortization (5,756) (5,674) (5,978) (6,097) (6,411) Non-cash stock option compensation (95) (85) (67) (88) (84) Write-off of public offering cost (1,103) - - - - Interest income 149 248 260 374 443 Interest expense (610) (631) (684) (730) (379) Gain on early retirement of debt - - - - 4,060 Loss on disposal of property and equipment (993) (79) (194) (109) (157) Other income (expense), net (35) 3 (25) 13 - -------- -------- -------- -------- -------- Net income (loss) $ (3,317) $ (1,576) $ (932) $ 928 $ 5,316 ======== ======== ======== ======== ======== Three Months Ended Twelve Months Ended December 31, December 31, -------------------------------------- 2004 2005 2004 2005 -------- -------- -------- -------- Reconciliation of Adjusted EBITDA to Net income (loss): Total Adjusted EBITDA for reportable segments $ 5,126 $ 7,844 $ 16,802 $ 25,807 Depreciation and amortization (5,756) (6,411) (22,647) (24,160) Non-cash stock option compensation (95) (84) (375) (324) Write-off of public offering cost (1,103) - (1,103) - Interest income 149 443 637 1,325 Interest expense (610) (379) (2,788) (2,424) Gain on early retirement of debt - 4,060 - 4,060 Loss on disposal of property and equipment (993) (157) (1,746) (539) Other income (expense), net (35) - (236) (9) -------- -------- -------- -------- Net income (loss) $ (3,317) $ 5,316 $(11,456) $ 3,736 ======== ======== ======== ========
Except for historical information and discussion contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The specific forward-looking statements cover Cbeyond's expectations for revenue and EBITDA, as adjusted, for the fourth quarter of 2005 and fiscal year 2005. The statements in this release are not guarantees of future performance and actual results could differ materially from our current expectations. Numerous factors could cause or contribute to such differences. Some of the factors and risks associated with our business are discussed in Cbeyond's filings with the Securities and Exchange Commission. CBEY-G CBEY-F
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