cBeyond: Likely to Lose Even More Money

cBeyond's (CBEY) stock price is failing fast. The TTM net margin is already near zero. This means it is actually below zero currently (i.e. the company is losing money). It had an operating loss both of the last two quarters. The churn rate has increased from less than 1% per month to 1.5% per month (i.e. from <10% to 18% per year). It was 1.3% in the 2008 year ago quarter. This means the average retention beyond the original contract date has been shortened by almost 3 years to 2 years and 7 months. The company says the churn rate is stable now, but in this environment it could easily go to 2.0% per month (24% annualized). This would make CBEY lose even more money.

cBeyond, Inc. is a small player in a “big boy” niche. It provides managed Internet protocol-based communications services to small businesses in the United States. Its services include local and long distance voice services, broadband Internet access, mobile voice and data, email, voicemail, Web hosting, secure backup and file sharing, fax-to-email, virtual private network, and other communications and information technology (IT) services.

CBEY has sold itself to the market as a growth company. However, CBEY has not repeated its original success in its first three target areas: Atlanta, Dallas, and Denver (2000 – 2002). The company is not achieving the expected market penetration in other areas (5% at most when 11% was expected). Essentially the competitive landscape has changed dramatically since the company started. It now seems unlikely that its business plan will succeed at anywhere close to its goals, especially given the current economic conditions. There is no reason to expect that it is deserving of a 150 PE. It is currently losing money, not growing. There is no turn around in the offing. The expectations are getting worse, not better. An excellent report by Citron Research covers most of these facts (I got it from InfoNgen).

A few of the vital statistics on this stock are (most data from TD Ameritrade):

• PE = 146
• FPE = 97
• P/S = 1.1
• P/B = 2.7
• P/CF = 8.8
• Short Interest (Current month) = 5.9M
• Short Interest (Previous month) = 4.1M
• Days to cover = 7.3
• % of float = 23%
• Float = 25.5M
• Shares Outstanding = 28.7M
• Held by Institutions (MRQ) = 95%
• Beta = 1.2
• Total Debt = 0
• Quick Ratio = 1.17 (this is rather poor considering CBEY has no debt)
• EPS Growth (MRQ) = -94%
• EPS Growth (TTM) = -86%
• Revenue Growth (MRQ) = 22%
• Revenue Growth (TTM) = 24%
• Return on Equity = 2% (industry avg. = 21%)
• Revenue per Employee = $247K (industry avg. = $543K)
• Gross Margin (TTM) = 68%
• Operating Margin (TTM) = 1.3%
• Net Margin (TTM) = 0.75%

Both the CEO and CFO have been sellers recently. The only insider buying lately seems to have been at $0 or other very low price(s).

CBEY reported 1st quarter 2009 earnings of $0.00, missing the consensus estimate of the 11 analysts covering the company. This negative surprise is noteworthy because the guidance for the quarter had dropped 95.00% in the year leading up to the announcement, and yet the company was still unable to meet the number (TD Ameritrade).

In summary this company looks like a complete dog! Its guidance is unreliable. It keeps dropping. CBEY's competition has gotten bigger and tougher. Its aggressive sales tactics are still winning it clients, but it is not retaining them. It cannot succeed in this mode. Its services had not been commoditized, when it started. Now that they have been, it is having a hard time competing with the “big boys”. This is not likely to change, even after the recession ends. The revenue per employee is a telling statistic. The level of short selling is telling. The CEO and CFO insider selling is telling. With the equities markets apparently headed downward, this stock should far outperform them to the down side. The technical charting data bear these thoughts out (see below).

This daily chart of CBEY above shows a confirmed downtrend. The 20 day sma is about to cross the 200 day sma headed strongly downward. This usually means that there is significant downward movement coming in the near term. The 3 day sma is solidly below the 12 day sma. This is in turn solidly below the 20 day sma. Downtrends don’t get much stronger. There is some support at approx. $12.60. Beyond that there is no real support until approx. $9.20 (with a low of support in that area of $8.41). The recession is hurting this company along with many others. However, in this case it seems to be exposing long term systemic weaknesses, not just recession induced pains. This is a good short, even though it has come down a lot already. Going by its PE and FPE alone, one might expect this stock to drop 75% or more (I am by no means saying that will happen). It is not a market leader. It does not have an unassailable market position. It does not have huge assets like WY. It does not have far superior technology. It had an operating loss in both the Dec. and the Mar. quarters. The situation seems to be getting worse.

The Weekly chart showing the support level at approx. $9.20 is below:

Comments

[itodder:]

CBeyond is a good company, with a great product, which is a bit too difficult to explain to small business customers. As a result, they expend too much effort to get the sale. Telecom is changing and CBeyond does have the right product and support. They just may be unable to sell enough of it to survive the bad economy and tweak their sales model.

Jul 09 04:44 PM

[William Cowie:]

Cbeyond the product is great (VOIP). Cbeyond the company is dismal. How do I know? We've been a customer for 5 years. Back then the company was well-run. But, as they grew, they hired many people and did not spend the money on training they needed. The result? Rookies servicing clients. We had someone sell us a VPN. So we asked them how to use it. "Go look on the website, I don't know," was the response. We found a competent person, but their internal bureaucracy forbids that person to talk to us, on pain of termination. Needless to say, we'll be part of the churn when our contract is up.

VOIP is no longer cutting edge. It's becoming a commodity, and only those with superior service and reasonable costs will survive. I fear Cbeyond may not be one of them.

Jul 10 12:33 AM

[David White:]

William Cowie: I have done some consulting with Cisco. They have a full line of VOIP products, which work well together. You tend to pay a premium for the Cisco brand, but they have reasonably good technical support. Plus you can be reasonably sure things work well. They also continually update their software/firmware, and they make sure things are compatible. The extra price you pay up front up front may be a net cost savings over the lifetime of the product.

Jul 10 10:40 AM

[David White:]

Clarification: I don't actually know the price comparison of Cisco's products to cBeyond's products. Cisco could actually be cheaper. Cisco is the networking industry leader, so it tends to charge a premium over many others. Still it has almost any add on product you can imagine. Plus you can be sure all of the add on products work with the other things you bought. This is definitely not true for VOIP technology providers with limited product offerings. When you have to buy the add on you want from another manufacturer, you are almost guaranteed to have problems.

Jul 10 12:57 PM

[David White:]

For smaller companies, the Cisco Call Manager Express (VOIP lan-pbx) and the Cisco Unity Express (VOIP voicemail/automated attendant) family of products (assuming they are still called that) were developed to leverage Cisco's router development. As such they tend to be very price competitive. Plus features such as VPN are available through different versions of the router firmware. You can always upgrade these systems more easily and generally much less expensively than products of other manufacturers.

Plus Cisco can help you plan your expansion, if your business is growing. They have enterprise level products too. This may be an area that cBeyond falls flat in.

Cisco probably provides a much richer feature set. Some of which you may find helpful for your business.

Jul 10 01:15 PM

[David White:]

Actually it may be more than a coincidence that Cisco came out with the Cisco Call Manager Express (CCM on a router) and Cisco Unity Express (Voicemail plug in module for a router) in 2003 if memory serves me. I believe this made the Cisco VOIP lan-pbx/voicemail products for the small business cheaper. It likley made it much more difficult for CBEY to compete with Cisco. CBEY was last able to achieve good market penetration in a new area in 2000-2002.

Of course, there are other competitors such as Avaya, Nortel, etc.

Jul 11 03:22 AM

[David White:]

CBEY was up yesterday on a big up day by the markets. However, the investor sentiment on this stock is clearly still downward. The Put/Call Open Interest stands at 2.53 today (very bearish). CBEY is down on a slightly up day.

Jul 14 03:36 PM

[Smooth Crim...:]

David White: Cbeyond is partners with Cisco. Missed that in your research, did you?

Jul 16 04:49 PM

[Gandalf the...:]

www.glgroup.com/News/C...

You are a clown if Citron "research" is excellent by your standards. That is a blog with the intent of driving down CBEY's stock price for its own gain and with dubious and misleading "facts" at best.

Aug 05 10:27 AM

[Gandalf the...:]

www.glgroup.com/News/C...

Aug 05 10:38 AM

[Jesus Shutt...:]

Suck it Trebec. You are a moron.

Aug 10 03:34 PM