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 Corp (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.