Investor Presentation

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1 The Last Communications Company A Small Business Will Ever Need. SM Investor Presentation November 2010

2 Cautionary Notice Regarding Forward-Looking Statements This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of Such statements include, but are not limited to, statements identified by words such as "expectations," "guidance," "believes," "expects," "anticipates," "estimates," "intends intends, ""plans plans, ""targets targets, ""projects" and similar expressions. Such statements are based upon the current beliefs and expectations of Cbeyond's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that might cause future results to differ include, but are not limited to, the following: the risks related to the cloud services strategy and the integration of the assets, resources and customers of MaximumASP and Aretta; finalization of operating data, the significant reduction in economic activity, which particularly affects our target market of small businesses; the risk that we may be unable to continue to experience revenue growth at historical or anticipated levels; changes in business climate or other factors affecting our customer base; the risk of unexpected increases in customer churn levels; changes in federal or state regulation or decisions by regulatory bodies that affect Cbeyond; periods of economic downturn or unusual volatility in the capital markets or other negative macroeconomic conditions that could harm our business, including our access to capital markets and the impact on certain of our customers to meet their payment obligations; the timing of the initiation, progress or cancellation of significant contracts or arrangements; the mix and timing of services sold in a particular period; our ability to recruit and maintain experienced management and personnel; rapid technological change and the timing and amount of start-up costs incurred in connection with the introduction of new services or the entrance into new markets; our ability to maintain or attract sufficient customers in existing or new markets; our ability to respond to increasing competition; our ability to manage the growth of our operations; changes in estimates of taxable income or utilization of deferred tax assets which could significantly affect the Company's effective tax rate; pending regulatory action relating to our compliance with customer proprietary network information; the risk that the anticipated benefits, growth prospects and synergies expected from our acquisitions may not be fully realized or may take longer to realize than expected; the possibility that economic benefits of future opportunities in an emerging industry may never materialize, including unexpected variations in market growth and demand for the acquired products and technologies; delays, disruptions, costs and challenges associated with integrating acquired companies into our existing business, including changing relationships with customers, employees or suppliers; unfamiliarity with the economic characteristics of new geographic g markets; ongoing gpersonnel and logistical challenges of managing ga larger organization; our ability to retain and motivate key employees from the acquired companies; external events outside of our control, including extreme weather, natural disasters, pandemics or terrorist attacks that could adversely affect our target markets; and general economic and business conditions. You are advised to consult any further disclosures we make on related subjects in the reports we file with the SEC, including the "Risk Factors" in our most recent annual report on Form 10-K, together with updates that may occur in our quarterly reports on Form 10-Q and Current Reports on Form 8 K. Such disclosure covers certain risks, uncertainties and possibly inaccurate assumptions that could cause our actual results to differ materially from expected and historical results. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. 2

3 Cbeyond Business Overview Managed Services Provider to Small Businesses Integrated suite of applications and services delivered to ~55,000 small business customers in 14 major U.S. cities Small business market not adequately served by incumbents Strong Channels of Distribution All IP Platform Consultative selling built on culture of referrals ~55 direct sales reps per market Supported by growing indirect channel and upselling group New online sales and private label channels IP network affords application flexibility and advanced features Lower cost structure relative to traditional networks Integration of wireline, mobile and IT services Proven, Replicable Model Positive market-level operating cash flow typically within 2 yrs Positive free cash flow* typically within three years Predictable revenue and margin growth with each market launched Cbeyond s mission is to deliver big business IT and communications tools to small business at prices they can afford and we can deliver profitably. *Adjusted EBITDA less Capital Expenditures 3

4 Our Target Market The Small Business Entrepreneur Cbeyond s Customer Profile 250+ Enterprise ~20K Cbeyond s Approach to Sales & Marketing Direct Sales Force: 80% Indirect Partners: 20% ~$695 monthly ARPU 8 voice lines 14 employees 7.9 applications 3 year contract No telecom/it dept. 70% previously used the ILEC for voice <5 5 to 249 employees SMB (Small and Medium Businesses) SOHO 1.5 million (Top 25 U.S. cities) 3.5 M Regimented, consultative sales force ~55 sales reps per city Door to door prospecting Face to face, consultative selling Vertical marketing +30% of sales from referrals Community involvement Cbeyond serves entrepreneurs who value customer service and productivity enhancing applications over price. 4

5 Growing Nationwide Footprint Cbeyond s Current and Future Markets Seattle Portland Bay Area Los Angeles San Diego Established Markets Phoenix Denver Minneapolis Chicago Kansas City St. Louis Dallas Houston Detroit Cleveland Tampa Pittsburgh Atlantat Boston New York Newark Philadelphia Washington, D.C. Charlotte Miami Recent launches: Q1-09 Washington, D.C. Q4-09 Seattle Q3-10 Boston Cbeyond s first 14 markets cover 65% of the 1.5 million SMBs in the top 25 U.S. cities Cbeyond s market share: 14% in earliest 3 markets 7% in established markets 5% in all markets Future target t markets Cbeyond currently serves 14 major U.S. markets; the top 25 markets in the U.S. have 1.5 million small businesses (5 to 249 employees). 5

6 Value Proposition to Customers Productivity Comprehensive Strong Enhancing + Customer + Technology Applications Experience Partners Cloud Services Voice & Broadband Business Continuity Mobile Voice & Data Messaging & Collaboration Web Marketing Simple packages and pricing Consultative, face-to-face sales Project management of service activation Pro-active performance management CbeyondOnline Cisco Microsoft Research in Motion (BlackBerry) National MVNO* partnership Clearwire** and more Cbeyond makes complex IT services SIMPLE for the small business entrepreneur. * Mobile Virtual Network Operator **Clearwire partnership announced 8/4/10; targeting launch in early

7 Broad Product Set Drives Value Proposition Voice Services Cloud Services Messaging & Collaboration Local, Long Distance, Toll Free Virtual Receptionist Personal Call Assistant Scheduled Call Forwarding Directory Listing Analog, Digital, SIPconnect Virtual Services Dedicated Servers Cloud PBX Cloud Sites Hosted Microsoft Exchange SpamBlocker Integrated Voic Fax-to- Conference Calling Filesharing Broadband T1 ( Mbps; symmetric) Ethernet (2 10 Mbps; symmetric) WiMAX* (6 Mbps and 1 Mbps ) VPN On-net / Off-net VPN Remote User Mobility Mobile Devices (e.g. cell phones, smartphones) BlackBerry, Android, Windows Mobile Laptop Card (3G and 4G*) Text Messaging Mobile Workforce Manager Business Continuity Secure Desktop Secure Backup Web Hosting Wireless Back-up Managed Firewall Virus Protection Remote Call Forwarding Broad suite of applications drive Cbeyond s value proposition and provide a significant ifi upselling opportunity. Storage 7

8 Waves of Innovation at Cbeyond 10+ Years of Growth Managed Data Center Services Virtual Servers Dedicated Servers Cloud PBX Increasing Value and Customer Wallet Share Mobile Voice & Data MVNO platform BlackBerry/Android 3G Laptop Cards 4G Mobile Devices Mobile SIP Integration Mobile Applications Software as a Service Web Marketing Business Continuity Hosted Microsoft Exchange Web Security Social Media Marketing Hosted Microsoft Sharepoint Voice & Broadband Integrated Packages Dynamic Bandwidth Managed VoIP SIPconnect & PCA Virtual Receptionist Personalized Packages Wireless Backup & Boost Ethernet (various technologies) VPN-MPLS Future Cbeyond is investing in future product innovations to drive differentiation and growth. 8

9 Cbeyond Cloud Services ~40 employees Virtual and Dedicated Servers, Cloud Sites and Colocation Worldwide Microsoft Hosting Partner of the Year 2009 New, highly efficient and scalable 33K sqft data center + = ~10 employees Virtual server platform optimized for software PBXs National SIP trunking Platform complements capabilities of MaximumASP; natural product extension Cbeyond Cloud Services ~50 employees (primarily technical) ~$12 million in 2010 revenue 100% commercial (predominantly SMB) 80% national 20% international 98% hosting 2% colocation Cbeyond has combined MaximumASP and Aretta to form a new, high growth Cloud Services division. 9

10 Cloud Computing is Transforming IT for SMBs Cloud Computing enables the transition of IT resources (such as servers, storage and applications) from on-premise to on-demand in the cloud. High Growth Industry Global market for SMB cloud services is expected to be ~$60 billion in % annual industry growth ( ) Cloud Services Managed virtual servers, dedicated servers, cloud sites SMB spend = $50 to +$900 per month Moving IT to the Cloud Increases security, reliability and redundancy Minimizes capital investments and avoids the refresh cycle Provides the ability to scale-up/down on-demand U.S. SMBs and Cloud Computing ~70% have an on-premise server ~60% are aware of cloud computing ~15% are currently using cloud computing ~45% plan to use cloud computing within the next 12 mths Cbeyond will offer simple cloud server packages; bringing clarity to the cloud for the small business market. Sources: AMI, Cisco and McKinsey 10

11 Cloud PBX A New Model for SMB Communications Server Virtualization (Cloud Servers) Migrating SMB phone systems to the Cloud VoIP Trunking (SIPconnect) CLOUD PBX Mobile Integration (SIP end-points) Multi-vendor support Various software PBXs will be supported Linux and Windows server environments Channel Partner enablement through the private label reseller channel Software-based Phone Systems (Software PBX) Ideal for new business creation and growing businesses Reduced initial investment Simplified provisioning Increased reliability The new Cloud PBX model combines four key trends from Cbeyond s core business and the assets of Aretta and MaximumASP. 11

12 Ethernet Initiative Opportunity to replace T-1 access with Ethernet-over-copper circuits for a portion of our customers. Ethernet conversion will cut access cost in half for the circuits impacted. Targeting 30-40% of customers by end of 2012 Project will cost ~$25M and has very short payback - expected to reduce circuit costs by $20-$30 on average per month for ALL customers when fully deployed in Ethernet also delivers major increases in bandwidth for the customer. Part of the higher bandwidth will be provided within one package, which will allow additional bandwidth to be offered for a fee. The Ethernet initiative will reduce cost, increase value to the customer, and support ARPU! 12

13 Strong Organic Growth Emerging Markets Miami, Minneapolis, Washington DC, Seattle, and Boston Balance of Established Markets Houston, Chicago, LA, San Diego, Detroit, and San Francisco First 3 Markets Atlanta, Dallas, and Denver $66 $113 $159 Annual Revenue (in millions) $214 $280 $350 $414 $450 * Targeting approximately 9% organic growth in 2010 Recent acquisitions will add revenue beginning in November 2010 Approximately $12 million annual revenue currently $ E Cbeyond has achieved strong organic growth in Established Markets. *Based on management guidance 13

14 Gross Margins Have Been Improving as ARPU Decreases 69% 68% Gross Margin % vs. ARPU 68.4% $ % $760 67% 66.8% 67.1% $740 66% 66.2% 66.0% $720 $700 65% Q2-09 Q3-09 Q4-09 Q Q2-10 Q3-10 $680 Gross Margin ARPU Despite decreasing ARPU, greater cost efficiencies have driven steadily improving gross margins. 14

15 Margin Leverage as Markets Reach Scale First 3 Markets All Markets 20% 15% 15% 24% 16% 16% Adjusted EBITDA Margin (fully allocated*) Established Markets 28% 30% 20% 18% 18% 19% 31% 30% 30% 22% 22% 22% 17% 15% 16% Adjusted EBITDA margins in first three markets of approximately 30% Total EBITDA margins declined in 2008 and 2009 due to an increase in new market launches during 2007 and Q3-10 YTD New Markets *Fully allocated adjusted EBITDA distributes corporate expenses across markets based on percentage of revenues Revenue growth coupled with operating leverage drives margin expansion. 15

16 High Capital Efficiency First 3 Markets Established Markets CAPEX / Revenue (fully allocated*) Capital intensity declines rapidly in established markets as the business scales capex / revenue is 8% in first three markets All Markets 21% 21% 19% 19% 16% 14% 20% 21% 21% 20% 19% 17% 16% 15% 15% 15% 13% 11% 13% 12% 10% Declining capital intensity, coupled with high EBITDA growth, will drive high FCF growth and attractive returns on invested capital Overall capital efficiency i has been obscured by high growth and new market launches Q3-10 YTD * Fully allocated CAPEX distributes corporate CAPEX across markets based on percentage of Revenue Cbeyond has low ongoing g capital requirements and continues to achieve increasing capital efficiency. 16

17 Realizing the Benefits from Investments in Markets Dollars in millions $20,000 Free Cash Flow * $15,000 $10,000 $5,000 $0 -$5,000 -$10,000 -$15, TTM * Free Cash Flow is defined as adjusted EBITDA - Capex Free Cash Flow has grown as investments from 2007 and 2008 have begun to generate returns and has totaled $15 million over the last four quarters. 17

18 Investment Considerations Steady organic growth driven by a superior product and a highly successful selling model that targets an underserved customer segment. New entry into cloud services adds new channels of distribution and opens up the small business market anywhere, taking us far beyond current 14 city footprint. Ethernet initiative promises significant EBITDA benefits beginning in Long term revenue growth, margin expansion, and low ongoing capital intensity expected to drive substantial free cash flow growth over time. 18

19 The last communications company a small business will ever need. TM

20 Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures Year Ended d Quarter Ended d Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep Reconciliation of Adjusted EBITDA to Net income: Total Adjusted EBITDA for reportable segments $ 52,108 $ 60,560 $ 63,126 $ 15,290 $ 19,049 $ 18,555 $ 18,411 $ 17,960 Depreciation and amortization (31,970) (41,505) (51,351) (13,176) (14,618) (14,282) (14,331) (14,506) Non-cash share-based compensation (9,989) (12,887) (15,954) (4,162) (4,105) (3,701) (3,932) (4,042) Public offering expenses (2) (183) Interest income , Interest expense (252) (224) (152) (41) (1) (45) (64) (85) Gain on early retirement of debt Other income (expense), net (67) 48 1, Income tax benefit (expense) 8,903 (3,094) 2,074 1, (1,025) (300) 143 Net income $ 21,498 $ 3,696 $ (2,220) $ (998) $ 925 $ 1,039 $ (98) $ (608) 20

21 Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures Year Ended d Quarter Ended d Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep Reconciliation of Adjusted EBITDA to Net income: Total Adjusted EBITDA for reportable segments 18.6% 17.3% 15.3% 14.4% 17.7% 16.8% 16.5% 15.8% Depreciation and amortization (11.4%) (11.9%) (12.4%) (12.4%) (13.6%) (12.9%) (12.8%) (12.8%) Non-cash share-based compensation (3.6%) (3.7%) (3.9%) (3.9%) (3.8%) (3.3%) (3.5%) (3.6%) Public offering expenses (0.0%) (0.2%) Interest income 1.0% 0.2% 0.0% 0% 0.0% 0% 0.0% 0% - 0.0% 0% - Interest expense (0.1%) (0.1%) (0.0%) (0.0%) (0.0%) (0.0%) (0.1%) (0.1%) Gain on early retirement of debt Other income (expense), net % (0.1%) 0.0% 1.4% 0.1% 0.1% Income tax benefit (expense) 3.2% (0.9%) 0.5% 1.1% 0.5% (0.9%) (0.3%) 0.1% Net income 7.7% 1.1% (0.5%) (0.9%) 0.9% 0.9% (0.1%) (0.5%) 21

22 Appendix: Historical Financial and Operating Data Year Ended Quarter Ended Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep Historical Financials (000s) Revenue $280,034 $349,700 $413,771 $105,955 $107,719 $110,515 $111,753 $113,456 Y-o-Y Growth 31% 25% 18% 17% 15% 12% 10% 7% Adjusted EBITDA $52,108 $60,560 $63,126 $15,290 $19,049 $18,555 $18,411 $17,960 Adjusted EBITDA Margin 19% 17% 15% 14% 18% 17% 16% 16% Capital Expenditures $57,534 $69,940 $62,126 $13,386 $14,538 $13,227 $15,168 $16,044 Capital Expenditures Margin 21% 20% 15% 13% 13% 12% 14% 14% Other Operating Data Customers, EOP 35,041 42,463 50,203 48,580 50,203 51,731 53,518 55,240 Churn Rate * 1.1% 1.3% 1.5% 1.4% 1.5% 1.4% 1.4% 1.4% ARPU * $748 $754 $744 $744 $727 $723 $708 $695 * Churn Rate and ARPU are calculated as the average quarterly values, respectively, over each year show n. 22