Innovate the Future

Original Web Article: Citron asks:  Can Investors “See Beyond” market hype, and get to the cold truth about CBEY?

Review Summary: 
Citron Research, and I use the ‘research’ designation with a 40 pound grain of salt, published a report on Cbeyond (NASDAQ:CBEY) that is very unfavorable. It is amazing how someone can bash a company with no real information and get away with it.
Review/Analysis:  
This research is without a doubt one of the worst attempts at destroying the value of a stock, without any evidence, that I have ever seen or can imagine.
Let’s take the four points from the report one at a time:
1. Tracking of market penetration in newer cities is lagging disastrously far behind Cbeyond’s original “big 3?.
Wow, an amazingly round robin way to avoid discussing hugely successful markets. Let’s look at the growth rates and revenues for each of the markets mentioned in the Citron report between 2006 and 2008 (in 000s):
                                2006           2007               2008             % Change 
Atlanta                    63529         72811             81059                27.6
Dallas                     51335         61184             69501                35.4
Denver                    58531         64829             70707                20.8
Chicago                  12281          26748            36367               196.0
Houston                  26382         38990             46843                 85.1
Los Angeles             1828         12347             23669             1295.0
Hmmm…seems like the new markets are growing pretty fast in spite of competition and economic pressures.
2. Competitive forces have been mounting steadily and now present a totally different landscape than when Cbeyond established its presence in its lead cities a decade ago. 
One of the great ways to hide things is to have them somewhere else and not directly inline within a report. Why? Because most readers will never follow the links and read the other materials and then tie the multiple sources together. Seems like that is what a ‘research report’ is supposed to do, isn’t it? But, doing the external reference method is exactly what Citron did here.
First they referenced a blog posting on Telephony Online. Looks kind of official. But, the blog is TelephonyUnfiltered. Anyone can post there. So, it isn’t Telephony Online reporting anything.  But, to be fair, the blog post reports reasonable information: “Small businesses, under pressure from the sagging economy, are in turn increasing pressure on telecom service providers to lower prices”. Sounds perfectly reasonable and nothing that would not be expected in the current economic situation.

Then Citron references a Communications Technology article that states: “Comcast launched broadband wireless service in Portland today”. Uh oh, Cbeyond better watch out. But, that is not what Cbeyond does. It sells not only baseline services, like those provided by Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ) and others, it layers on applications. It sells foundational services as a package and with add ons. That is what distinguishes Cbeyond from the others, but Citron failed to make the distinction.
Citron then states: “the cable companies are simply better configured to go cheaper and wireless”. Really? I thought a Mobile Virtual Network Operator (MVNO), like Comcast, utilizes someone elses network and delivery platforms and simply resells? Coincidentally, Comcast is using Clearwire (NASDAQ:CLWR) and Sprint (NYSE:S) (as stated in the very article that Citron referenced). It would have been nice if Citron had bothered to define what a MVNO is and how two MVNOs compete against each other. Perhaps they compete based on layered applications? Like those offered by Cbeyond?
3.  Increasing churn rates.
Wow! This is an unbelievable bending of reality. What happened to comparisons in a research report? It would have been nice if Citron had stated that Verizon has a 1.3% churn rate and ATT (NYSE:T) has a 1.7% churn rate.
It would have been nice if they mentioned that Cbeyond has 3 year contracts while others normally have 2 year contracts.  
It would have also been nice if Citron had explained why the churn rate was increasing. Cbeyond, like any smart business, breaks down the churn rate into ‘controllable’ and ‘uncontrollable’. Here are Cbeyond’s definitions from their annual reports:
Controllable: “includes customers leaving for service or pricing reasons”
Uncontrollable: “includes customers leaving for reasons outside of our control, mainly for non-payment”
Cbeyond’s controllable churn rate has stayed consistently at 0.4%. It is the uncontrollable churn rate that has been increasing and it is due to the current economy, not due to customer dissatisfaction as proposed by Citron.
And what about the ’sweet spot’ that Citron mentions? The “revenue duration beyond commissionable original contract”. Baloney. They try to trick the reader by saying ‘what if the rate jumps up to 2%’? Cbeyonds loyal ‘controllable churn rate’ is only 0.4%. Sounds like the sweet spot lasts a whole lot longer than Citron reported.
Each quarter Cbeyond reports the number of customers added and the churn rate.  According to those numbers, Cbeyond’s total number of customers has increased every quarter for the last two years. From Q308 to Q408 the number of customers increased by 4.7% versus a churn rate of 1.4%.

4. Houston, we have a problem!
Citron glancingly talks about legal problems with the city of Houston suing for ‘right of way’ payments. Well, after being in executive roles in telecom for quite a while, I can tell you this happens all the time. They file the lawsuit to avoid statute of limitations issues since they normally discover discrepancies very late in the game. These always get worked out and are very common.
Conclusions:
Citron Research is trying to drive the stock price down as they have done on many other stocks. They previously called themselves: StockLemon.com. I guess that being called Citron Research lends them an air of credibility. A pity they don’t publish real research.
Cbeyond is growing, competing, and expanding.
Cbeyond has a very competitive product suite at reasonable prices.
Cbeyond is pursuing the SMB space that is almost impossible for the big boys to penetrate and succeed in.
 
Note: I do not own a position in Cbeyond.
 

David Croslin
President, Innovate the Future, Inc.
david@innovatethefuture.com
www.innovatethefuture.com
www.davidcroslin.com