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Cbeyond, Inc. (NASDAQ:CBEY)

Q4 2013 Earnings Conference Call

March 13, 2014 05:00 p.m. ET

Executives

Robert G. Clancy – Vice President of Investor Relations

James F. Geiger – Co-Founder, Chairman, Chief Executive Officer and President

J. Robert Fugate – Co-Founder, Chief Financial Officer, Executive Vice President and Secretary

Analysts

Frank G. Louthan – Raymond James & Associates, Inc.

Michael Rollins – Citi Investment Research

George F. Sutton – Craig-Hallum Capital Group LLC

Donna Jaegers – D.A. Davidson & Co.

Barry M. Sine – Drexel Hamilton, LLC

Michael Funk – BofA Merrill Lynch

Michael McCormack – Jefferies LLC

Operator

Good day ladies and gentlemen and thank you for standing by and welcome to the Cbeyond’s Fourth Quarter 2013 Conference Call.

(Operator Instructions)

Now my pleasure to join the call with Rob Clancy. Sir, please go ahead.

Robert G. Clancy

Thank you, operator, and thank you call participants for joining us today to discuss Cbeyond’s operating and financial results for the fourth quarter of 2013.

I would like to begin today's call by reminding you that this call contains forward-looking statements that include words such as believe, expect, anticipate, intend, project and similar expressions. Actual results may differ from our forward-looking statements. For specific factors that might cause future results to differ, we refer you to the forward-looking statement discussion in our most recent press release and the risk factors and other disclosures in our periodic reports that we file with the SEC.

On the call today, we have Jim Geiger, Chairman, President and CEO; and Bob Fugate, Executive Vice President and CFO.

With that, I'll turn it over to Jim Geiger.

James F. Geiger

Thank you, Rob, and thanks for joining us on the call today. I'll start by providing an update on our fourth quarter and full year accomplishments, discuss trends and sales and revenue growth particularly related to our 2.0 business transformation and conclude with an update on the strategic process that we announced last quarter. Bob will then provide detail on our fourth quarter and full-year 2013 financial results and present our 2014 guidance.

First, our fourth quarter financial results were in-lined with slightly favorable to our expectations due in part to our added focus organizationally on our existing customer base and our continued emphasis on 2.0 products and services.

In the fourth quarter of 2013 our 2.0 revenues were just under 20% of total revenue and total 2.0 revenue for the year was $68 million, an increase of 91% year-over-year. We finished the year with 2.0 revenue at an annualized run rate of $89 million. So I am very pleased to the quality of the new revenue streams we are generating. We expect very significant 2.0 growth rates in 2014 and our current plan would call for existing the year with $140 million of annualized 2.0 revenue.

2013 was the year of significant accomplishments and change for us. We have undergone our ongoing successful 2.0 business transformation. The accelerating rate of our transformation has been enabled by a number of factors in the business including the focus, energy and skill of our team. Just a few of their notable accomplishments in 2013 were the development of our communications on the Go package. The unique offering that completely integrates our cloud PBX and mobile services expertise leveraging our [Indiscernible] capabilities allowing our PBX feature set to work on mobile phones using both the wifi and cellular capabilities of the phone. A true replacement opportunity for on premised phones.

Establishment of our Las Vegas data center to better serve our west coast cloud customers. The launching growth of our total access capabilities in which we offer professional and managed services to enable customer transitions to the cloud. I should note here that according to MSP mentor, the leading authority on Managed Service Providers worldwide we are now ranked 16th in the world as a Managed Service Provider or MSP after being unranked in 2012.

We added the iPhone to our list of mobile phone offerings in the fall. And less tangibly but perhaps a greater importance we learned a lot about the market, target customer segments and how best to address them with our sales channels.

We’ve recently reorganized our management team and businesses into three customer facing areas to reflect what we have learned in the market and to drive greater focus on customer opportunities. The three areas are: our core business which is the historical base of 1.0 revenue. This is a valuable and profitable foundation providing a source of customers for 2.0 upgrade and a source of cash to fund our transformation.

Our enterprise solutions business, which is focused on selling and serving our 2.0 customers with greater technical needs. Our field direct and indirect channels are the principal sales channels for these customers which are generally businesses with 30 to 500 employees and which require higher bandwidth MPLS or cloud-server products. And our national business, which includes our up-selling and inside sales groups in addition to mining the base for opportunities we are identifying sales prospects both in our existing cities and throughout the U.S. so we can now serve customers with both network based and over the top solutions.

A typical customer in this group is the business with 5 to 30 employees requiring a simple solution such as our communications on the go package which as mentioned before combines our cloud PBX in the great mobile services. A key change in our go to market approach is the use of marketing generated leads for all of our sales channels instead of the older sales prospecting cold calling model.

We are investing multiple means of lead generation and rapidly ramping up the number of qualified leads available for the channels with increasing success.

Our lead generation is focused on three customer segments, compliance verticals such as healthcare and financial sectors, businesses with remote workers, and multi-location businesses; all within the broad range of 5 to 500 employees. We believe these customer categories or the groups most ready to adopt our cloud services

Our new lead generation capability as well as our new discipline around the use of our sales automation tools should help drive increase productivity this year and our early visibility support thesis. One thing we have learned sales reps who sell cloud have greater overall productivity, in fact our [Indiscernible] reps that sell cloud have doubled the productivity of the [Indiscernible] reps not selling cloud. I mean coupled with markets with rep productivity twice the company average. So we have some real tangible signs of success.

In addition, we’ve recently implemented a co-selling approach that enables our direct and indirect channels to collaborate rather than compete on sales opportunities. Although new, we are already seeing opportunities multiply including many that we wouldn’t have got a chance that before which is resulting in a growing sales pipeline. One exciting byproduct of these changes is an increasing number of larger size deals that were coding [Ph] and winning including customers with monthly recurring revenue in the multiple thousands and tens of thousands of dollars.

What about sales trends in Q4? Overall revenue production in Q4 was below Q3 which is not surprising since we are carrying fewer reps and Q4 is normally a slower period with fewer selling things. But importantly the majority of our new sales in Q4 were 2.0 sales and sales in our direct channel for more than 70% 2.0 increasing as a percentage total in each month of the quarter. And we increased the amount of 2.0 sales by 10% sequentially over Q3.

Moving forward we have taken steps to heavily weight sales compensation to 2.0 to further catalyze our transformation. We continue to refocus the sales channels on 2.0 at the same time have continued to selectively down size the numbers of both reps and management to achieve greater efficiency.

In the midst of these organizational changes in Q4, our sales force did not show overall productivity improvement however we did achieve continued improvement in 2.0 productivity so the quality of our new revenue continues to improve. Our visibility in Q1 gives us confidence that we will continue to see gains in 2.0 productivity entering 2014 particularly due to the new marketing lead generation capability and the collaborative approach to managing the direct and indirect teams.

So well, I am not satisfied with overall revenue production or sales productivity yet our recent trend suggests things are moving in the right direction and that we are making the changes we need to create positive sales momentum this year by building a much more valuable and defensible business with our new products and services.

Now I would like to discuss the key operating matrix in underlying business development relating to our core 1.0 base of customers. You may recall that on our third quarter call we discussed an increased level of pressure on our 1.0 revenue base from three factors; an uptick in customer churn, an increased level of discounts and credits needed to retain customers whose contracts are approaching the renewal period and reductions in our mobile revenue due to price competition in t churn.

I am pleased to report that we made progress in Q4 on each of these issues. First through more effective and focused management of the base, we have stabilized both customers and revenue churn in Q4 at the same levels we posted in Q3. With renewed management focus and clarity on prioritizing revenue over unit churn we expect to see stable to positive trends in this area in 2014. Second, we have developed more sophisticated methods of providing financial incentives to existing customers for retention and renewal.

As a result, we are able to reduce credits and discounts to customers in the retention process while also keeping churn stable. And third while our mobile revenue continued to decrease due to elevated churn rates as well as contracts renewals at lower price points, we introduced our new communications on the go package of cloud PBX with mobile as well as the iPhone in Q4. We expect both of these to have a positive impact in future period specially in driving new volumes through our growing inside sales channel.

To conclude my comments regarding the business, we are more confident today that our recent changes in management, the organization of our business to get closer to our customers, the development of lead generation targeted at key customer categories, a collaborative approach to managing our direct and indirect sales channels and our growing 2.0 product portfolio and infrastructure will provide us with the tools we need to accelerate growth in our 2.0 business.

We have also taken steps to strengthen our 1.0 business and ensured the stability of this valuable source of cash generation and potential conversion to 2.0.

Turning to our strategic process on our last call we announced that our board of directors had formed a strategic committee to explore and evaluate a wider way of strategic alternatives intended to increase shareholder value including acquisitions designed to accelerate our 2.0 transformation and the visibility of our cloud services as well as a business combination for sale of the company.

Following that announcement we engaged UBS investment bank as an advisor and UBS has been actively involved in the process and is working with the board and management to evaluate all options. As noted before we are not able to state when the review will be concluded and there is no assurance that any action or transaction will arise from the review. In the meantime, we will remain focused on our transition Cbeyond 2.0 and do not plan to comment further or provide updates on the strategic review unless being appropriate.

So in conclusion let me summarize. 2013 was an important and successful year for us in deepening our 2.0 transformation and building the capabilities in organization needed to improve the value of our business for 2.0 growth. We closed up year on target with our revised plan and better position to protect our 1.0 base and grow the 2.0 business. We believe that 2014 will be a bridge year that will establish us more firmly on our path to 2.0 and finally, we are board and advisers continue to explore strategic alternatives to improve shareholder value.

And at this time I will turn the call over to Bob to provide more detail on the quarter and guidance for 2014. Bob?

J. Robert Fugate

Thanks Jim. Today I will discuss our financial results for the fourth quarter and provide our guidance for 2014. Let me begin with fourth quarter revenue. We posted total revenue of $111.5 million in Q4, a 6.2% decrease year-over-year and 1.9% decrease sequentially which is improved from the 3.8% sequential decline in Q3. The year-over-year decline is largely the result of lower than expected sales productivity churn and pricing pressure on our existing base.

ARPU in Q4 was $658 an increase of $5 from Q3 level. An indicator of our success in driving 2.0 business. In addition, ARPU in Q4 was $20 higher than ARPU in the fourth quarter of 2012. The principal reason for the ARPU increase year-over-year was the higher level of cost recovery fees charged in 2013 versus 2012. Our 2.0 ARPU remains roughly 80% above our 1.0 ARPU.

Network voice and data revenue declined 8.2% year-over-year due to the reasons I cited earlier which more than offset continued growth in our 2.0 network services. Managed hosting and cloud revenue in Q4 grew 28.3% year-over-year and 10.6% quarter-over-quarter, an acceleration in growth reflecting increasing levels of comfort in the sales channels with selling cloud services.

Growing numbers of larger size accounts billing and the popularity of our total cloud phone system in particular.

Total 2.0 revenue in the quarter was $20.6 million or 18.4% of total revenue and 81% higher than a year ago. Additionally, 2.0 revenue as the percent of total revenue is up 270 basis points from last quarter and we ended the quarter with 2.0 revenue being 20% of December's monthly revenue.

Now I would like to make a few comments about our customer churn. Our monthly customer churn for Q4 was 1.7% stable with the Q3 level reflecting the continuing high level of price competition in the smaller hand of the SMB space. Fortunately through better management of the retention process we were able to maintain churn at a consistent level while reducing the level of credits and discounts given to retain customers. Our revenue churn has generally been 5 to 10 basis points below unit churn and given the increased focused on retaining higher revenue and more profitable accounts, we may see a wider divergence in the future between these matrix, as we are squarely focused on managing revenue churn.

Churn on our 2.0 customers continued to be less than 0.9% or roughly half of our overall churn. The longer service life and higher ARPU of 2.0 accounts should lead to a more profitable and valuable base of revenue as they fill the space of lower price 1.0 customers churn.

Next I will cover gross margin and adjusted EBITDA. Gross margin in the quarter decreased sequentially by 180 basis points due to revenue compression combined with higher access expense to provide additional bandwidth to our customers. Selling general and administrative expenses excluding non-cash share-based compensation in realignment expenses decreased by $3.2 million sequentially, due largely to lower headcount.

Our adjusted EBITDA for the quarter was $17.7 million, a decline of $300,000 sequentially, due to lower gross profit partially offset by SG&A efficiencies. Our adjusted EBITDA margin was 15.9%, stable with Q3.

Moving to CapEx. Total capital expenditures in the quarter were $17.2 million of which $14.1 million were cash capital expenditures. Our cash CapEx during the quarter was down slightly from the third quarter and in line with our expectations. Noncash CapEx during Q4 was $3.1 million, which consisted mostly of capital lease obligations related to our fiber assets. As of December 31 we had 507 lead fiber buildings.

Turning to our cash position. Our cash balance at December 31 was $28.9 million, an increase of $4.9 million sequentially. The increase in cash is largely the result of free cash flow of $3.6 million. Because of our ongoing strategic review process, we did not repurchase any shares during the fourth quarter. We currently have $2 million outstanding on our term loan, which is our loan we used to repay one of our fiber partners. This is unchanged from last quarter. We expect to begin payments on this loan over a three and a half year period beginning in early 2015.

We have no borrowings outstanding under our $75 million revolving credit facility. We also have $16.8 million in outstanding capital lease obligations, mainly incurred to support our construction of fiber to reduce the cost of serving customers with high bandwidth services. Free cash flow defined as adjusted EBITDA, less our cash capital expenditures was $3.6 million in Q4, an increase of $400,000 sequentially.

Lastly, I'd like to provide our 2014 guidance. Our 2014 revenue guidance range $410 million to $430 million reflecting steady, gradual increases in sales productivity along with stable churn and other matrix including ARPU. The year-over-year revenue decline appears worse than last year but recall we implemented a price increase in 2013 via cost recovery fees to bring us to competitive parity. We also made a change to the methodology for calculating USF payments which will result in 2014 revenues being several million dollars lower than last year. When factoring in these two items to compare the revenue declines of both periods on normalized basis. We expect the 2014 decline to be less than the 2013 decline reflecting gradual improvements in the overall fundamentals of our business.

Our guidance for adjusted EBITDA is $50 million to $65 million reflecting the variability around sales productivity and the flexibility we have through reduced costs should our sales improvements not materialize.

Our guidance for cash capital expenditures is $45 million to $50 million, which result in a free cash flow guidance range of $5 million to $15 million. The overall outlook for 2014 anticipates continued pressure on our existing base but improvement in sales productivity and specifically more 2.0 sales which have a much higher ARPU and much lower churn rate. Thus despite the pressure on our 1.0 business we are continuing to build a very valuable 2.0 business and as Jim mentioned, expect to exist 2014 with an annualized run rate of close to $140 million of 2.0 revenue.

At this time I will turn the call over to the operator for question.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) And it looks like our first phone question will come from Frank Louthan with Raymond James. Please go ahead. Your line is open.

Frank G. Louthan – Raymond James & Associates, Inc.

Great. Thank you. So looking at the strategic alternatives the size, the sales of the company can you get us an idea of what’s maybe some of the other thoughts you might have or the ways to take rapidly take cost out of the business other way shortening up and looking at the margins going forward it's almost like you are guiding a little bit of margin decline and what will take to improve that, what are that’s kind of seen a little bit of drag here, sort of sales getting ramped up or some of the 2.0 investment and when should we start to see that turn around again.

James F. Geiger

Okay thanks Frank. The first part of your question related to the strategic alternatives and really I think part of your question was assuming that there were some organic strategic alternatives. Really when we speak of strategic alternatives we are speaking of the potential for transactions that might change our business going forward. And as we noted in our prepared text that could result in either an acquisition or a sale or other combination, joint venture. It could result in none of these and simply the decision to continue growing organically but we work really specifically describing our alluding to changes in the business.

In terms of improving margins or how that might occur going forward, what I will just say is that the expected change in margin from 2013 to 2014 is largely the result of pressure on the topline. This is primarily a function of the stable level of churn that we are experiencing and that churn takes out of a level of gross profit in the business that is essentially all of the difference in EBITDA from last year to 2014 in our guidance. So how would we improve that, that’s all partly mitigated by savings and headcount that we’ve already taken additional savings that we’ll expect to achieve going forward and then bear in mind that our plan this year assumes a level of success on the sales and marketing side. So it assumes that the productivity gains that we expect from the sales force will occur. If they don’t occur, we have the flexibility to take out additional cost and boost EBITDA margins in the short term but it's our plan that they will continue. We are on track for that. We believe that we are in the midst of improving the quality of our revenue based very solidly with transformation to 2.0 we are seeing good evidence of that and I think that's what we will be able to report as the year goes by.

Frank G. Louthan – Raymond James & Associates, Inc.

Okay, great. Thank you.

Operator

Thank you sir. Our next question will come from Michael Rollins with Citi Investment Research, please go ahead. Your line is open.

Michael Rollins – Citi Investment Research

Thanks for taking my questions. Two questions if I could. Firstly, can you talk about the decision to report earnings too late in the process? Is that a function of maybe you thought you will be done with the strategic review by this point or do you sort waiting to get all the information now, then secondly if I can ask question about the business with a 2.0 revenue even this even the size it has gone into, can you talk about what the biggest product contributors are to that 2.0 revenue and maybe give us a sizing of those biggest products? Thanks.

J. Robert Fugate

Let me speak to the first question as to the timing of the earnings call, there is a variety of reasons but I would not attributed to anything that relates to the strategic process and we really can’t comment on that any further than what we have already done. In terms of, okay. Jim?

James F. Geiger

And Mike this is Jim, in terms of your second question as you may recall from a number of our conversations quarterly calls, the biggest differentiation of our cloud services is the combination of network services. So we are successful in cloud the better we can connect those customers with a persistent and clean pipe. So when you take as we do for is a medium-sized or a midsized business, their enterprise applications. They are really concerned about and actually don’t have the sophistication to manage connectivity, secure connectivity to the cloud from their different locations. And so we do that for them and that’s the really important part of our differentiation in the marketplace. So I would tell you that network, the MPLS, IPVPNs network access including fiber and Ethernet those are among our highest billing services and then followed by our total cloud phone system, our total cloud data, PCBC our data center, our server based virtualized server based products, so sort of in that order. So there is today a mix that is a little bit more dominated by connectivity than it is cloud servers and cloud phone system but we expect that mix to continue to evolve overtime.

Michael Rollins – Citi Investment Research

Thank you very much.

James F. Geiger

You are welcome.

Operator

Thank you sir. Our next question will come from the line of George Sutton with Craig-Hallum please go ahead your line is open.

George F. Sutton – Craig-Hallum Capital Group LLC

Thank you. Jim one of the points you made was that you improved your lead generation capability and I just want to make sure I understood what you mean by that?

James F. Geiger

Sure. Well you can – I think you have known us well over the years. We had a [Indiscernible] here when we had a thousand young people to set up a college that we taught how to sell a simple communication centric bundle every floor and every door and we – the world has evolved and so the Cbeyond and we have a much more targeted business today and we are assisting our sales organization with tools. We have sales force that come as the primary tool that we used to distribute lead and interact with our sales folks and follow what their activity and discovery meetings and closes and appointments as well as their qualified [Ph] services. So we have augmented our capability in a very specific and targeted fashion with website SEO, pay per click display ads, email campaigns. We have got higher, various demands and vendors to help us with that as well as a more focus on a traditional referral program that we have been developing through these various channels.

So a much different people buy differently today George I think. The way we sell has to become more efficient and rather than a 100% self generated leads, we want to move that down the continuum towards the 100% qualified leads that we can. The more time we spend in front of customers, the better opportunity we have and getting our people and try to qualified leads is a winning strategy for us.

George F. Sutton – Craig-Hallum Capital Group LLC

Okay. Thanks for clearing that. Then relative to the fiber investment you made there wasn’t much of an update in terms of the performance of some of those lit buildings. Could you give us any sense of an update there?

James F. Geiger

Sure. Well we have got about 500 lit buildings. I think the number is 507. We are going to move that to about 800 by the end of the summer time and I would tell you that we have about 89% conversion of existing customers in those buildings. The revenue stream annualized at December 13 was about $12 million in that line of business and you can imagine that the margins are significantly higher than our average. We continue to grow that business and I would tell you it's the nice line of business for us that [Indiscernible] approved.

George F. Sutton – Craig-Hallum Capital Group LLC

Okay. And lastly from me, you mentioned some changes in your retention process or some more specifications, and I am wondering as we look at the low end 1.0 piece of your business, historically we talk about the cable competitors there. Is that where you are still seeing the competition or are you starting to see more from over the top [Indiscernible] folks and it's about what some of those retention ideas might be?

James F. Geiger

Well we – we are a lot more focused now on revenue and profitability of our customers. So we have sold historically a fairly generic product but over time that has distributed and the profitability varied as well. So we are lot more focused on customers that are filling higher amounts as well as having a higher profitability with us and that of course relates to generally speaking the access medium that we use to get to that customer. We are not seeing a lot of over the top players. We are seeing them creep in but another piece, I guess another difference from today versus yesterday would be that we are happy to separate out network now for an existing customer should someone want to move to an over the top IP PBX provider, we would be happy to sell them that, taking a customer that would call on average bill 600 bucks a month and have a call it 65% to 68% gross margin and moving them to an over the top offering maybe we cut revenue in half but the margins go up. I mean that is the difference George than how we had been approaching this in the past where we were trying to compete network to network and from with a cable company that have competitive advantage on the access.

George F. Sutton – Craig-Hallum Capital Group LLC

That makes sense. Okay. Perfect. Thank you.

James F. Geiger

You are very welcome.

Operator

Thank you sir. Our next question will come from Donna Jaegers with D.A. Davidson, please go ahead with your question please.

Donna Jaegers – D.A. Davidson & Co.

Thanks. On the strategic review should we assume that was started by an offer for the company?

James F. Geiger

Donna I don’t think you should assume anything on the strategic review other than what we have told you and that’s really not something we could comment on.

Donna Jaegers – D.A. Davidson & Co.

Okay. Alright. And then on the usual contract term first, 2.0 offerings what’s your typical length of contract there, three years?

James F. Geiger

Yes. It will remain for three years. It's been pretty consistent.

Donna Jaegers – D.A. Davidson & Co.

Great and I was looking at year guidance job offerings the other day and you have quite a few sales people and inside sales people mostly inside sales people and cloud sales people listed as far as openings. Is that new, are you adding to the cloud? Or to the entrepreneur sales force or is that more back filling churn?

James F. Geiger

We are growing our inside sales capability, so that is a very productive channel for us and one that we are investing more in and we are growing that quite significantly. I think we will double that in 2014. But you could say that they are back fills for the outside cloud sales people because certainly there are people who have executed those jobs to make room for the position. But I would tell you that that’s a very purposeful transformation of the type of person that we have selling today. We have spent a couple of years building great products and now we are being very selective about the people that we bring in to represent us in those products.

Donna Jaegers – D.A. Davidson & Co.

How has your salary gone up for those new cloud sales people?

James F. Geiger

Yes, the average cost of our sales person while they are shrinking in number is going up.

Donna Jaegers – D.A. Davidson & Co.

Can you give us as far as how much generally, I don’t want you to get trouble with the sales people but give us some idea if you want better people you are paying more.

James F. Geiger

Yeah we got to pay more but a lot of it of course is success based. We still do probably half of your potential for the years till success phase but on average I think we are paying about $10,000 more in base salary per person.

Donna Jaegers – D.A. Davidson & Co.

Okay and then one last quick question on the non-cash CapEx for next year should it be in sort of in line with what was this year, so that the CapEx finance by your fiber notes?

J. Robert Fugate

Yes I think it will be a similar number.

Donna Jaegers – D.A. Davidson & Co.

Okay, great. Thanks Bob.

Operator

Thank you sir. And our next question will come from the line of Barry Sine with Drexel Hamilton please go ahead, your line is open.

Barry M. Sine – Drexel Hamilton, LLC

Good afternoon gentlemen. Just first the number question, I may have missed this in the script, did you give the percentage of your customer base that are 2.0 customers?

James F. Geiger

We gave the revenue and we exited December 13 at 20% but the number is just over 10% of the customers while 18% of the revenue in Q4 and 20% at the end of the quarter.

Barry M. Sine – Drexel Hamilton, LLC

Okay that was the number of customers was 8.4 in Q3?

J. Robert Fugate

That’s right. Yes. Absolutely perfect.

J. Robert Fugate

Equally recorded just over 10%.

Barry M. Sine – Drexel Hamilton, LLC

Okay and then the – it sounds like the new lead generation your salesforce.com is something you are pretty enthusiastic about in terms of the moving details sales wise. When did that go into effect and what do you think the lead time will be in terms of seeing some impact on sales part activity with the new lead generation product?

James F. Geiger

We started in the fourth quarter and it is continued to ramp the leads. Of course we are trying to determine the cost per lead and the effectiveness of leads and also translate into appointments indoor proposal and closings. And I would say we are little early for that. We will probably give – we can give you some good information on that on our next quarterly call.

Barry M. Sine – Drexel Hamilton, LLC

Okay and my last question again on the strategic review, so obviously you started that last quarter with a board process and now you have gone out to retain adviser, just backing up a little bit the genesis of that the rational for doing that is that because you have been satisfied with your ability to increase sales productivity or get the sales productivity to yourself 2.0 viz-a-viz you would expect it?

James F. Geiger

Management is very confident in the business and our ability to continue to grow our 2.0 business which is a very I think valuable source of revenue and a very defensible place in the marketplace. So we don’t confuse our strategic review with the confidence of our ability to execute. Really what we are focused on was the low share price and shareholder value that we – we weren’t pleased with what was happening in the market. So we were hoping to realize more value for our shareholders.

Barry M. Sine – Drexel Hamilton, LLC

Understood, great. Thank you gentlemen.

Operator

Thank you sir. (Operator Instruction) Our next question will come from the line of Michael Funk with BofA Merrill Lynch , please go ahead. Your line is open.

Michael Funk – BofA Merrill Lynch

Good afternoon guys. Thank you for taking the questions. Little more detail maybe on the 2.0 customers if you could, any color you can give us on where seen success in customer verticals and/or maybe geographic regions where you are seeing a better sale with the products there would be helpful.

James F. Geiger

Sure. We’ve got three focused areas for our 2.0 products, compliance verticals which are lot of healthcare and finance focused companies, companies with remote workers and companies with multiple locations. We find that they are the highest propensity for cloud usage. Now remember in the small and medium businesses 85% of all servers are still on premise. So there is a, we think coming tidal wave that will crash on shore and we think we are well positioned for it. We are well positioned we think for a couple of reasons. Number one is the successively achieved today just last month we signed one of our largest customers ever in the healthcare software provider came to us because they saw the scalability and success of our cloud based services, our server, cloud server services, there non-fiber customers 100 megabit connectivity virtualized servers, managed server component to it and the customer who bill over $50,000 a month.

Now in our old world, we had nothing like that. Now we are also in an alliance with Microsoft where Microsoft bars and value added resellers and managed service providers that are in their ecosystem will have the option to deploy their customers solutions on Cbeyond’s cloud that is based on Microsoft’s cloud platform. And essentially for us what that means is leads, with Microsoft implicit backing and we think that’s a significant opportunity in that small business world that impending tidal way as I referred to it Microsoft dominates. So being in their favor we think it's significant for our cloud business and we are very excited about it.

Michael Funk – BofA Merrill Lynch

One quick follow up here [Indiscernible] strategic review but given how robust the credit markets are and you mentioned that the stock value being catalyst to your, why wouldn’t you just taken the company product [Ph] I mean I am assuming that credit market actually probably would allow that obviously the stock [Indiscernible] course of actions?

James F. Geiger

Well, you can assume that the strategic review would include all avenues so making our own conclusions from that standpoint.

Michael Funk – BofA Merrill Lynch

Great. Thank you.

Operator

Thank you sir. Our next question will come from Michael McCormack with Jefferies, please go ahead. Your line is open.

Michael McCormack – Jefferies LLC

Hey guys. Thanks. Can you just give us some sense for the impact from financial standpoint maybe both on reps as well as margin as you migrate customers on to the fiber asset and then on the 1.0 loss, can you give us an sort of parameters on how much that is sort of rigging and 2.0 and the revenue being lost to competitive offers. Thanks.

James F. Geiger

Sure. The impact of revenues and margins when we convert to fiber, revenue is slightly up but I would tell you that the retention of that revenue goes up significantly. We cut merely in half ensuring characteristic of a customer that’s on fiber versus not. So there is also a on average a slight increase in the build revenue but margins I think are cost of access on average is in the 6% or 7% range on average, 6% to 7% revenues and so maybe even slightly higher than that. So essentially that they all become on net and the cost of access goes away. So an increase in margin overall and your follow-up question was about –

Michael McCormack – Jefferies LLC

The Second question was about of the 1.0 loss, how much of that is repriced in the 2.0 or how much [Indiscernible] coming from the conversion?

James F. Geiger

In our original transformation, at the beginning of the transformation I would say it was about 70% weighted towards conversions of existing customers and that has flipped now to about 70% new logos and about 30% of our 2.0 is conversions today. And we see that trend continuing towards new logos frankly not because we are not successful with the existing but because we are ramping new logo success with 2.0.

Michael McCormack – Jefferies LLC

Great. Thanks guys.

James F. Geiger

Thank you.

Operator

Thank you sir. (Operator Instruction) Gentlemen at this time I’m currently showing no additional questions in the queue. I would like to turn the program back over to management for any additional or closing remarks.

James F. Geiger

Thank you operator. I will just say in closing. As I mentioned we remain very confident about the opportunity that is before us with significant and we have the capability needed to capitalize on it. While our own pace has been slower than our aggressive internal expectations. We are making important mid course adjustment that we believe will put us on a path towards overall company growth over the long-term. Finally, together with our board of directors we are examining all options to improve the value of our business for our shareholders. We want to thank our investors for their continued support in our company and thank you very much for joining us on the call and have a great day.

Operator

Thank you gentlemen and thank you ladies and gentlemen again. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees you may logoff this time.

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