Following up on our look into revenue, ebitda margin, and capex financial trends across a selection of fiber-based telecoms, it is time to examine our last metric which will complete the set: EBITDA less capex as a percentage of revenue. It doesn’t have a formal name or at least a common one anyway, but I think of it as an unleveraged free cash flow margin that neglects working capital swings. What does it tell us? Let’s look at the graph first:
One can make the argument that this metric is the fairest comparison of these different business models, because it doesn’t discriminate between capitalized and uncapitalized costs. However, it is not so simple as that, because it doesn’t distinguish between companies who are investing excess cash flow into future growth from companies who don’t have any excess cash flow. Nevertheless, who is at the top of this chart on a consistent basis? Yep this is a puzzling one, as it is the only chart of the set on which you will find Sprint Nextel (NYSE:S, news, filings) and Level 3 Communications (NYSE:LVLT, news, filings), for whom 2009 was not fun at all, right alongside TW Telecom (NASDAQ:TWTC, news, filings) and RCN Business (NASDAQ:RCNI, news, filings) for whom the recession was barely a speed bump. The group clusters began 2008 around 10% and has risen surprisingly consistently to around 15% now.
One way to look at this chart is not at which is highest, but at which is the smooth and which is not. That tells us something of how company management is making its spending decisions. The least smooth are Cogent, Abovenet, CBeyond, and Deltacom. The first three are the most aggressive players in the sector right now and have the lightest debt loads and the highest growth rates. They spend their capex on a looser, more opportunistic basis than the others, and this is where it shows up. I’m not sure what to make of Deltacom in this group yet. The smoother group includes XO, PAETEC, Level 3, Sprint, RCN Metro, Global Crossing, and TW Telecom. While their reasons vary from the need to service debt to the personality of their executive teams, this group has managed their quarterly capex much more tightly and less opportunistically.
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Categories: CLEC · Financials · Metro fiber
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Rob-
Try doing the graph on a trailing 4 quarter basis. QoQ is just too choppy to get a real feel for the metric.
Big rumours
LVT3 Already started due diligence to buy/merge GC!!!!
Hah, that shouldn’t take very long – they’ve done it before… 🙂 Wouldn’t surprise me though, I’ll keep my ear to the ground.
Great work, Rob. I saw Dan Caruso’s article regarding value creation and your comment. You’re spot on…the best we can do is work with the numbers that are presented and try to draw a conclusion. As an outsider, determining accurate value creation is more difficult than Dan makes it seem, but transparency and disclosure from management (should they choose to do so) can help bridge the gap. Until then, all the rest of us can do is look at the financials as they are reported and then read Telecom Ramblings for your color commentary.