SMB market holding steady, providers say

Though macroeconomic fears are generating concern about the small and medium business (SMB) market for telecom services, two providers in that market say their latest numbers suggest that caution is warranted but fear is probably not.

“Dire predictions seem premature at this stage,” said Jim Geiger, chief executive officer of CBeyond, on the company’s third-quarter earnings call late last week.

CBeyond began reporting a softening in the SMB space back in February, and while the company says the larger economy is still weighing noticeably on its customers, it is still growing and expects to continue growing next year. Its customer count and revenue were up 22% and 25%, respectively, in the third quarter, and average revenue per user grew slightly sequentially to $760 per month.

At the same time, customer churn resulting from business failures has risen in the past year and increased to 1.3% in the third quarter. In the fourth quarter, Geiger said, it may grow to 1.4%. Next year, CBeyond expects such churn to rise further still, but it is also predicting revenue and earnings growth.

With that in mind, CBeyond decided to scale back its expansion plans for next year. Instead of entering three new markets in 2008 and three in 2009, it will instead enter just two new markets in each year and plan to accelerate that pace in 2010.

“Prudence would dictate slowing the pace of new market launches to achieve the optimal balance of growth and profitability,” Geiger said.

Not everyone believes that the SMB market is as safe as CBeyond describes it.

“The small business market is friggin’ brutal,” said Eric Kainer, an analyst at ThinkPanmure, in an email. “It is a real testament to CBeyond that they are able to execute remarkably right through this market…The space slowed down in early summer, and the latest meltdown has sent many small businesses into refocusing on their operations and ignoring areas like IT and communications.”