Cbeyonds 2.0 Initiative Results in Fewer Customers, $5.9M Net Loss

Cbeyond Inc. this week reported higher net losses and lower revenue as it struggles to add customers to its “Cbeyond 2.0″ initiative, which focuses on cloud and managed services rather than legacy connectivity.

The service provider showed a net loss of $5.9 million in 2014’s first quarter, compared to a net loss of $600,000 a year earlier. Total revenue was down as well, from $119.9 million a year ago to $108.5 million, due in large part to fewer new buyers.

“Our focus on realigning our sales force to acquire higher-value customers has resulted in a lower number of new customers than we have achieved historically,” Cbeyond told the SEC this week in a regulatory filing. “Because of this, in recent periods, customer churn has exceeded new customer growth, resulting in a decline in customers and total revenue. We expect similar trends in the near term until our realignment results in Cbeyond 2.0 customer revenue growth exceeding the revenue from churned Cbeyond 1.0 customers.”

Cbeyond added that it expects the trend to continue “until our realignment results in Cbeyond 2.0 customer revenue growth exceeding the revenue from churned Cbeyond 1.0 customers.”

Along those lines, churn increased somewhat to 1.7 percent, up from 1.6 percent in the first three months of 2013. Cbeyond said that’s due to losing smaller, price-sensitive customers “from whom we do not expect to be able to generate acceptable profit margins in the future. This shift in focus on retaining high-quality revenues rather than the number of customers served may result in a continued elevation of customer churn rates in the near term.”

Despite the drawbacks as Cbeyond pursues its 2.0 strategy, there is some light, too. For example, 2.0 revenue went up 78.1 percent from the year-earlier quarter, reaching $24.5 million. It comprised 22.5 percent of Cbeyond’s overall revenue.

And, average revenue per user is increasing. Cbeyond said ARPU in the first quarter stepped up by $5, to $661. In the long run, the company expects its technology-dependent customers (the ones relying on cloud and managed services), and new product launches, will “continue to benefit ARPU.”

“This expectation is evident by the current shift we are seeing between network, voice and data revenue, which declined 11.9 percent in the three months ended March 31, 2014, compared to the comparable period in 2013, and managed hosting and cloud revenue, which increased 30.9 percent in the three months ended March 31, 2014, compared to the comparable period in 2013.”

Still, Cbeyond has more to do to achieve those goals, and it’s been doing so not just through “Cbeyond 2.0,” but by cutting selling, general and administrative expenses. To that point, Cbeyond started off 2014 by axing 100 jobs. (Editor’s Note: Click here for our most recent industry layoff tracker.) That cost $2.3 million in “realignment charges” as well as $1.7 million in severance payments. On the whole, Cbeyond expects to save about $8.8 million as a result of its “workforce reduction” plan.

At the same time, salaries, wages and benefits decreased $6.4 million because of fewer employees and reduced commissions.

“We reduced the size of our traditional direct sales force in both 2012 and 2013 while adding a new sales force comprised of more experienced professionals dedicated to Cbeyond 2.0 opportunities,” Cbeyond said.

Meanwhile, Cbeyond is spending more money on lead-generation services for those salespeople, so they have better access to qualified potential customers. The service provider also has ramped up its emphasis on the indirect channel in the past couple of years, a sales force for which it does not have to provide overhead or benefits. Cbeyond did not say what percentage of sales its channel partners contributed to the 2.0 initiative in the first quarter.

Cbeyond’s higher losses and lower revenue come after the company warned last year that it would seek “strategic alternatives” in the form of selling, buying or some other tactic that would result in improved financials. Indeed, those words came to fruition on April 21 when Birch Communications announced it would purchase Cbeyond for $323 million.

The companies now are working toward the deal’s close, expected by some time in October, and determining, among other details, who will oversee the channel. Perhaps of greatest relief to partners is that Birch says it is assuming all of Cbeyond’s partner contracts. “There should be no trepidation,” Birch CEO Vincent Oddo told Channel Partners in April.

Click here for all of Channel Partners’ coverage of the pending Cbeyond-Birch transaction.