Hi everyone….what a week, huh! These last few days have really tested me. Our favorite son has taken it in the shorts and after being ahead of the benchmarks for the year the last few days saw that nice fact go bye-bye. In times like these I try hard to talk to other investors to gain perspective and then go back to the numbers to see actually where we are versus what I'm expecting.
To that end, here's my model for 2008, with my estimates for both Q3 and Q4:
- Interactive model - requires Internet Explorer and the Office plugin
- Non-Interactive model - for everyone else
Essentially, for the year I'm expecting 1025 in ebitda, 100M increase in cash and 0, yes ZERO, in cash flow loss for the year. Now, that might seem aggressive but it's surprisingly easy to get there…..the key is we need 2.675% (or 20M CNS) and 3.75% (or 30M) growth in CNS for Q3 and Q4 respectively. This would equate to around 6% growth in CNS for 2008.
Frankly, I don't believe our growth in CNS (which is really the key to making our guidance) is that hard. I have 20M in Q3. I think we should see around 8 or 9 for Europe, perhaps 2 or 3 for CDN, and 8 or 9 for wholesale. I don't think we will see anything in enterprise in Q3 as they continue to churn off low margin clients. As for Q4, I guess the big question is whether we will be able to continue to grow in a recessionary environment. Personally, I think bandwidth will continue to grow and pricing will stay firm in metro….I think we will get there.
Another interesting thing I have been doing is following gross margins quarter over quarter in order to see how we are trending. We exited Q2 with approp. 65.40% in CNS gross margins, assuming we pick up our 20M in CNS growth @ 80% gm, we should exit Q3 with 65.83% gm, or an increase of 0.43%. Using the same theory and calculations you get around 66.34% in Q4 with ebitda margin of 27.24% for Q4. That would be a very nice improvement compared to Q407!
BTW, all of this assumes we will NOT grow WVS past the 175…..on this point I would remind we are the margin leader by a mile and we can always make up for a few mil here or there just by dropping our pricing on a route or two.
From a valuation point, I think we end the year with about 6B in net debt, so with a value of 3.6B today, and assuming 1025 in ebitda, you get something a little north of 9x 2008 ebitda: pretty cheap compared to history. I think we do 1250 to 1300 in 2009, so assuming the same 9x valuation you would get around a double from here. All this assumes we can roll over our 10 debt of course (one the things that keeps me up at night)
Good luck out there. Oh yeah, a really good book I just read is The Medici Effect
PS: For those that have never seen this before all you need to do is put your estimates in the blocks in yellow to see how your estimates stack up against mine, and than how they total for the full year.