As expected, four metro fiber operators have reported earnings either after the bell yesterday or this morning. Let’s take a look through the results we previewed yesterday:
TW Telecom – Overall, Q3 results were perfectly inline with my expectations. Eerie actually, it doesn’t usually work out that well. Revenues were perhaps a tad lighter than analyst expectations, and M-EBITDA growth wasn’t particularly spectacular. But as always, TW Telecom generated its usual solid free cash flow and slightly higher EPS than analyst projections. I doubt any of this will surprise anyone much – as I said, you can set your watch by TW Telecom’s numbers. I’m still looking for that path to a bit higher growth though.
| ($ in millions) | Q3/09 | Q4/09 | Q1/10 | Q2/10 | Q3/10 |
Q3/10 (my estimate) |
|---|---|---|---|---|---|---|
| Total Revenue | $304.8 | $307.9 | $311.2 | $316.8 | $320.3 | $320-322 |
| M-EBITDA | $109.4 | $113.9 | $114.2 | $114.4 | $115.5 | $115-120 |
| M-EBITDA Margin | 35.9% | 37.0% | 36.7% | 36.1% | 36.1% | 36-37% |
| Earnings per share | 0.05 | 0.07 | 0.08 | 0.10 | 0.11 | 0.10-0.11 |
| Revenue Churn | 1.2% | 1.2% | 0.9% | 1.0% | 1.1% | ~1% |
| Capital Expenditures | $59.9 | $72.3 | $80.9 | $85.0 | $77.8 | $70-90 |
| Free Cash Flow | $33.8 | $25.7 | $17.5 | $15.2 | $23.8 | positive |
Abovenet – The big surprise with Abovenet’s Q3 earnings was that the expected capex surge didn’t happen, and the company actually reduced its guidance for that metric. And I was wrong to expect some opex to rise as well, holding back EBITDA – as margins held up and EPS beat my own range as well as analyst expectations by a dime. Revenues were at the high end of my guess, and the company reaffirmed guidance while suggesting it expects to reach the midpoint or higher of the guided range, and aimed EBITDA margins slightly higher. All in all, if the market didn’t like the company’s spending plans earlier in the year, they will probably love these results.
| $ in millions | Q3/09 | Q4/09 | Q1/10 | Q2/10 | Q3/10 |
Q3/10 (my estimate) |
2010 (Guidance) |
|---|---|---|---|---|---|---|---|
| Revenue | $92.4 | $94.3 | $97.2 | $100.7 | $103.7 | $102-104 | $400-410 |
| Adj. EBITDA | $40.7 | $39.2 | $42.6 | $45.7 | $47.2 | $44-45 | |
| EBITDA Margin | 44.0% | 41.6% | 43.8% | 45.4% | 45.5% | ~43-45% | +/= 2009 |
| Capex | $26.5 | $38.7 | $27.4 | $30.1 | $30.5 | $50 | $130-145 |
| EPS (diluted) | $0.88 | $0.921 | $0.52 | $0.62 | $0.66 | $0.55-0.65 |
Cogent – Cogent’s Q3 report was strong but quiet, meeting expectations across the board and moving one step closer to positive earnings per share. EBITDA margin rose above 30% for the first time, which is another milestone. As I said earlier, Cogent has been very quiet this year, and they have been working very hard behind those closed doors to bring the company forward into a new era. So quiet that they haven’t shown up anywhere in the metro fiber M&A frenzy, whereas there was a time when they bought assets every few months. They also added 36 buildings to their total on-net footprint, for a total now of 1539.
| $ in millions | Q3/09 | Q4/09 | Q1/10 | Q2/10 | Q3/10 |
Q3/10 (my estimate) |
|---|---|---|---|---|---|---|
| Revenue | $60.2 | $62.5 | $62.8 | $64.4 | $66.8 | $66-67 |
| EBITDA | $17.0 | $17.4 | $17.5 | $18.9 | $20.3 | $19-20 |
| Earnings per share | -0.07 | -0.03 | -0.01 | -0.02 | -0.01 | -$0.02 to 0 |
| Gross Margin | 57.8% | 55.9% | 55.3% | 54.8% | 54.3% | 54-55% |
| EBITDA Margin | 28.2% | 27.8% | 27.9% | 29.3% | 30.4% | 28-29% |
PAETEC – It was a strong quarter for PAETEC on the revenue front, mostly due to more revenue than I had expected from the Quagga acquisition as well as rapid growth in energy resale – I guess the telecom part was more normal. EBITDA, however, suffered a bit as did both EBITDA and gross margins, due to higher staffing costs as well as increased special access fees and of course Quagga again. The company reaffirmed guidance, which suggests that they expect EBITDA to jump in the fourth quarter. Overall, I doubt the market will love these results, but the company is in flux with its previous acquisitions plus the close of the Cavalier deal this winter – the effects of which will probably override this quarter’s worries.
| $ in millions | Q3/09 | Q4/09 | Q1/10 | Q2/10 | Q3/10 |
Q3/10 (my estimate) |
FY2010 (guidance) |
|---|---|---|---|---|---|---|---|
| Revenue | $395.6 | $390.1 | $390.1 | $396.1 | $408.4 | $400-402 | $1590-1630 |
| EBITDA | $64.2 | $65.2 | $65.5 | $65.1 | $62.2 | $66-67 | $260-275 |
| Capex | 27.7 | 36.6 | 29.5 | 31.4 | $34M | $30-40 | |
| Free Cash Flow | 36.5 | 28.7 | 36.1 | 33.7 | $28.2M | $25-35 | |
| Gross Margin | 50.8% | 50.8% | 50.6% | 50.3% | 49.5% | ~50% | |
| EBITDA Margin | 16.2% | 16.7% | 16.8% | 16.4% | 15.2% | ~16.5% |
And that’s that. This time anyway.
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Categories: CLEC · Financials · Metro fiber
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Rob,
Within the Cogent release was the news that they intend to raise $200 million in secured notes, the use for which would include buying back the convert, open market common buys and /or a “SPECIAL DIVIDEND”. This is a shareholder friendly company.
Hmmm, accessing the credit markets seems like a slightly odd thing for them to do right now, but Dave Schaeffer doesn’t just march to the beat of his own drum – he has his own personal fife & drum squad. I wonder what pricing they will get… Doesn’t that convert have a 0.5% coupon and a conversion price above 50 or something like that?
Yes, the convert was the economic equivalent of a bank heist and given the yield he has been buying it back at huge discounts to par. As to isssuing new debt, seems to me the right thing to do– no-one should want a completely unleveraged balance sheet and interest rates are at an all time low. Dave is doing the right thing for shareholders, and if he ever got an offer for the company that made sense I think he would take it.
Unless I have the wrong convert, this is a one percent hybrid bond on $200MM original principal for just $2MM interest per year all the way out until 2027! Hardly a bank heist for the capital received in return!
I do not see any prudence in using new funds to pay this principal amount off, unless there is something in the indenture tied to downward “stock price” adjustments on the convert strike price, forcing same.
Stated differently, I do not see how they find cheaper money than this today, as a “use of proceeds,” for such new money identified in the PR.
More than likely, the devil is in the details of the indenture with respect to a moving “strike price.”
http://www.sec.gov/Archives/edgar/data/1158324/000104746910001663/a2196368z10-k.htm
http://tv.sys-con.com/node/385150
Carl– I explained it to your other persona over on the IV LVLT board. The paper is effectively due in 2014 and is being retired at a big discount to par. (A bank heist is when the banks get robbed, and CCOI comes out of this smelling great).
“raise $200 million in secured notes, the use for which would include buying back the convert, open market common buys and /or a “SPECIAL DIVIDEND”. This is a shareholder friendly company.”
Let’s see. Raising money to buy back notes, buy back shares and pay a “SPECIAL DIVIDEND”? How is that shareholder friendly? A DEBT is a debt any way you slice it. It sits on CCOI’s books regardless the duration of the notes. So many times have I seen this movie before where managements would BORROW MONEY to buy back shares and pay special dividends, and only to see that blow up in their face one day. As a matter of fact, I have invested in a few of them and have gotten burned.
If CCOI has ANY kind of economic moat at all, this would be somewhat a wise move. CCOI DOES NOT have any economic moat, and the space they are competing is highly competitive.
Rob was right. “Dave Schaeffer doesn’t just march to the beat of his own drum – he has his own personal fife & drum squad.” How about buying back shares and pay “SPECIAL DIVIDENDS” through FCF, Dave? How is that for an original idea? 🙂
Now now, it isn’t necessarily bad to have your own personal fife & drum section. There was a time when I didn’t like Schaeffer much at all, but he’s grown on me over the years. His path may have been unique, but he’s made some very shrewd moves over the years and not many outright mistakes at all.
As for this particular financial move, I think the jury’s still out. I’m not sure we have the whole story.