In the comments to my Earnings: Metro Fiber Still Strong Despite Headwinds post there was some discussion about relative EBITDA margins. EBITDA is one of the major metrics that people use for valuation in this sector (Bear on Business reminds us why). Its ratio to revenue is called EBITDA margin, of course, and because it is defined relatively similarly across the sector we can use it to contrast different companies. So for the sake of fun, I’ve put together the following graph of adjusted EBITDA margins as reported by a cross section of the competitive fiber companies of all stripes over the past 5 quarters:
I have removed a one-time $64M non-cash item from Level 3’s Q4/08 adjusted EBITDA, but otherwise I haven’t bothered – or in the case of abvt didn’t have the details, they said in their report that EBITDA margin should return to normal levels for the year – somewhere in the mid 30s I’d guess but we will see as the year unfolds. I did not include the ILECs because the consumer base isn’t easily separated.
The first thing that jumps out at me is that there has definitely been an industry trend upward lately, almost across the board. Cogent Communications (NASDAQ:CCOI, news, filings) is the only case which has been trending obviously downward, and we can chalk that up to its response to pricing pressure last summer in its transit business. Cogent’s need to be the pricing leader at all costs has taken a big toll on its EBITDA margins.
XO’s percentage is volatile, but invariably the lowest in the group – which indeed is one reason why they get little respect. Amongst the rest, the difference lies with whose business is the most heavily weighted toward metro fiber: PAETEC (news, filings), glbc, and itcd have less of it than TW Telecom (NASDAQ:TWTC, news, filings), Level 3 Communications (NYSE:LVLT, news, filings), and RCN Metro for example. They therefore have lower EBITDA margins, but also lower capex as a percentage of revenue. It’s more about business model than anything else. But whether revenue has been hurt by the recession or not, EBITDA margins seem to imply that the sector has compensated well on costs for the most part.
The other thing that jumps out a bit for me is just how few line crossings their are. Once a company is in a slot, it generally stays there. Apparently, it isn’t easy to improve EBITDA margins relative to the field.
I’m probably going to be keeping track of this graph (or an improved version), so if you have a company you’d like to see on it – then just ask.
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Categories: Financials · Internet Backbones · Metro fiber
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Nice, Rob……who needs to be “consolidated ” jumps out with this chart. Thanks.
Great chart. The number of companies below 20% is shocking.
Though American Fiber Systems is a privately held company, our EBITDA trends are in the upper tier of the chart.
I have found over the years that fiber-based, on-net focused EBITDA growth moves up annually. Companies that rely heavily on type 2 circuits or ILEC rentals or special access have a difficult time breaking past 18% -20%. This makes sense if your costs are controlled by another party like an ILEC and they price against you at the retail level. It’s a squeeze.
Beyond the ILEC controlling the costs (and competing directly with the CLEC carrier), you are also have a more limited ability to innovate due to the dependence factor.
By the way – great chart.
A Gross Margin comparative chart would be interesting as well.
Incidentally, LVLT, CCOI and ABVT seem to be sitting on alot of Cash.