Last week I posted a graph of EBITDA margin trends for a cross section of longhaul and metro fiber providers. In the comments, fellow blogger Dave Rusin of Telecom Straight Shooter mentioned that a Gross Margin chart might also be interesting. Now, I had been thinking about it, but while I was thinking, another reader who recently became a fellow blogger, Brian Scully of Silver Oak Advisors had already put it together and he very kindly passed it along:
Now, there is a reason why I focused on EBITDA margin rather than Gross Margin in my previous graph, and that is that its definition is mostly consistent throughout the sector. For Gross Margin, that is not always the case because carriers don’t always include the same expenses.
However it is still instructive. At the top of this chart you will see three companies that use fully burdened gross margins: abvt, RCN Business (NASDAQ:RCNI, news, filings), and TW Telecom (NASDAQ:TWTC, news, filings). Their common characteristic of course is that they have the heaviest focus on metro fiber of anyone on the list. Level 3 Communications (NYSE:LVLT, news, filings) is right there too and has lots of metro fiber, but it has two offsetting factors: 1) it does not include its own network opex, and 2) it has a substantial low margin voice business. That makes it hard to compare directly on this chart. Cogent Communications (NASDAQ:CCOI, news, filings) is IMHO a bit lower than the pure metro providers mainly because they lease most of theirs rather than own the conduit or fiber sheath.
In the middle are PAETEC (news, filings) and itcd, which have some metro fiber but it is not their central business and isn’t likely to be come so. At the bottom are XO Holdings (news, filings) and glbc. XO is always puzzling to me because they have a big metro footprint, but it just isn’t enough to help – they just have way too much revenue that doesn’t fall on their footprint or at least doesn’t make sufficient use of it. Global Crossing of course has the least amount of metro and regional fiber on the list (in the USA), and a sizable low margin voice business as well which really brings it down. I often make the point that Global Crossing’s biggest need right now is a better metro footprint in the US to go along with the ones they have in the UK and South America, and this graph demonstrates well why I think so.
So Dave, where does AFS fall on the graph? I’m guessing in the mid 60’s if using a fully burdened gross margin…
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Rob:
We are at 68% more than likely 70% at year end or early 2010.
We are metro heavy as well.
Dave
This is a very nice chart. If I may offer one suggestion, because the colors and symbol keys are sometimes difficult to decipher on net, it might help to list leaders with best to worst percentages in top down order starting with ABVT in the “chart key,” for example.
I do have a question regarding LVLT’s method of excluding 1), which would make their GM’s lower if I have understood Wayne Crimi for a # of years correctly now, do you agree?
The other offset, voice in 2), by its nature-off of owned network-acts to reduce GM’s, but unfairly comparatively speaking, if I understand you correctly.
Do you consider the exclusion of 1) and the inclusion of 2) to be a fair trade in developing (3)’s GM percentage stat versus competitors?
A fair trade? Hmmm… that depends on what one is judging I guess.
I’d say simply that gross margin is just harder to look at comparatively than ebitda margin for all these companies because of the variation in product mix. Even amongst the others there are differences in what network opex is counted and what is not, Level 3 is just the most extreme case.
Thanks for the suggestion for format, I am also trying to improve the display.