Cbeyond sees softness in SMB market

IP provider Cbeyond reports slight but lasting weakness

IP services provider Cbeyond reported seeing broad but minor economic weakness in the small and medium business (SMB) market Monday in a muted echo of comments from AT&T last month that sparked widespread concern among investors.

In a speech at an investor conference late Monday, Chief Executive Officer James Geiger said Cbeyond has seen a modest increase lately in involuntary disconnects among its SMB customers. The percentage of Cbeyond’s customers that went out of business rose to 0.7% in the third quarter from its historical level of 0.6%. That phenomenon is likely to continue, Geiger said.

“I think strong demand and broad but minor softening in the economy is going to persist for us,” he said. “I wish it were something as simple as to say it was mortgage companies. It’s nothing as tidy as that. It’s a very broad weakness across all of our [served industries]. With 33,000 customers, we have a pretty good sample set.”

Geiger also pointed out that Cbeyond customers as a group tend to have better-than-average credit, evincing about half the failure rate of the overall SMB market. That might make the softness the company is seeing all the more meaningful, but Geiger argued that it also implies that any hypothetical increase in SMB economic woes would have a blunted impact on Cbeyond’s business. “If business failures tripled,” he said, that outcome, combined with the company’s other churn, would still leave it with a total churn of about 1.9%--not a large number. “We’d all have bigger problems if a third of SMBs failed this year. I don’t think it’s going to get that bad. We’ll just hope that that correlation holds true for us.”

Meanwhile, the company pointed out that growth in new customer additions is strong and accounts for the vast majority of its revenue growth. The company is expecting up to $280 million in revenue for 2007, a potential increase of 31% from 2006.