CBeyond: At least it’s not getting worse

The economic climate surrounding business IP communications is holding steady, CBeyond said in reporting its second quarter earnings late Wednesday.

Though acknowledging “the continuation of a challenging economy” in the second quarter, Jim Geiger, CBeyond’s chief executive officer, said, “The economy did not appear to worsen, at least in its effect on our business.”

The service provider reported $85 million in second-quarter revenue, up nearly 26% from a year earlier. And it added 3300 gross new customers in the quarter, an 11% sequential increase. In a research note this morning, ThinkPanmure analyst Erik Kainer called CBeyond’s results “respectable…in a weakened economic backdrop” and “very solid…despite a foreboding market environment.”

The company did lower its outlook for the year slightly, from between $355 million and $360 million to between $350 million and $355 million, a projection that CBeyond said “assumes a continued challenging economy during the second half of the year.”

The economy did affect CBeyond’s customer churn, which stayed flat in the second quarter at 1.3% despite efforts to improve it. Most of that churn -- 0.9 percentage points -- came from what the company calls “uncontrollable” customer losses, which mainly stem from customers failing to pay.

Though the company had previously expected to return to higher churn levels by the end of the year, management has adopted a more conservative stance following the second quarter. Though the company hopes to improve churn levels before the end of the year, if economic conditions don’t improve, CBeyond no longer expects a return to historical levels in 2008.

CBeyond’s second-quarter earnings were highly anticipated as a bellwether of the current health of the business IP communications market. CBeyond had warned of some softness in the small and medium business sector in February. And a VoIP infrastructure provider, Acme Packet, announced a second-quarter revenue shortfall last month.

“We have seen much greater caution on behalf of many small business owners/managers, such that decisions to switch service providers are taking perhaps twice as long as just a few months ago,” ThinkPanmure’s Kainer wrote in today’s note. “Service providers and MSPs serving the smaller end of the SMB market have seen elongated decision-making cycles, perhaps as a result of the ‘IT manager’ at these firms, the owner, being fully engaged in driving sales rather than new IT capabilities.”

CBeyond also announced this week its entry into its twelfth market, Washington D.C., which is also the first market it has targeted inside Verizon Communications’ local incumbent territory.