Last week I took a look at relative revenue trends amongst a wide range of competitive telecoms, but revenue is not the whole story. In this post, I update and add to an earlier study of adjusted EBITDA margin trends from back in May, including Q2 numbers, some missing data, and the results of Sprint Wireline and CBeyond. With no further ado, here is the updated chart across 6 quarters now:
It is much harder to pick out the recession in this graph than in the revenue graph. That is because of the aggressive cost cutting that has been going on by those seeing the most revenue pressure, and it has been generally successful across the sector in not just maintaining margins, but in continuing to expand them.
As usual, the companies whose businesses focus around their own fiber have the highest EBITDA margins (and also the highest capex): Abovenet, TW Telecom, RCN Metro, and Cogent. Level 3 fell back a bit this quarter mainly because of the higher revenue pressure they have seen. ITC Deltacom and Paetec have continued to hold margins steady with cost savings offsetting revenue pressure or better. And both Global Crossing and XO remain below 15%, but both managed a clear rebound in the second quarter. XO has a long way to go yet to catch the field, but Global Crossing just might be ready to change strata over the next few quarters.
Amongst the newcomers to this chart, Sprint has surged upwards on the strength of cost savings despite their steady revenue pressure. Looking at Sprint Wireline’s clear upward margin trend is quite a change of pace of the usual look at its revenue leakage. CBeyond’s margins seem to be on a steady downward trend. They own the least amount of fiber of the companies charted here, and one might attribute their margin declines to greater sensitivity to churn because of that. But I think some of it comes from their determination to keep expanding into new markets despite a tough pricing environment – definitely bold but not without its side effects.
If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!
Categories: CLEC · Financials
Join Our LinkedIn Group
It seems odd to compare Ebitda margins amongst CLECs where some have significant wholesale operations, others very moderate or nascent wholesale businesses and at least one in CBeyond with absolutely zero.
When I think of “picking out the recession” from 2001-2002 I remember Rhythms net and WorldCom, among scores of others, whose WS business was significant in explaining how the tanking of one led to the tanking of many. Perhaps Wholesalers like LVLT, Sprint Wireline, Cogent, TWTC, XOHO, GBLC and ABVT could be contrasted apart from PAET, ITCD and CBEY for example. Don’t know where RCN Metro belongs, but with all of these relatively healthy “remaining” CLECs I think it is more useful to compare apples and apples.
I would argue that it is much harder to design appropriate buckets for different types of operators these days than you indicate. There is just so much overlap. Amongst those you list as wholesalers, there isn’t a single one that doesn’t have a major division serving the enterprise. And both PAET and ITCD actually have a fair amount of their own fiber.
I do agree there are major differences, and it would be wrong to look at the graph as a horse race. Abovenet sits at the top because of its business model, but along with it comes substantial capex demands and other issues. Instead, the graph should be seen as a means of categorization. The magnitudes of margins tell us a bit about the type of company,whereas the relative trends (up or down) also tell us which types of CLECs might be doing better or worse.
EBITDA is EBITDA — true cash EBITDA (based off of GAAP Revenue) growth is even better — it seems Wall Street does not “bucket” companies for “apples-to-oranges” comparisons though they exist.
I don’t believe you should rely on EBITDA alone. Unlevered FCF should be considered just as much.
The CLEC/IXC market will be interesting to watch as GAAP is phased-out for IFRS.
When you drive cash EBITDA from GAAP revenue, you get a true cash measurement …
ULFCF is nice in theory, but it depends on a lot of conditions — size, scale, demand, competition, mood of analysts, lemmings of Wall Street with one size fits all, and where you are in your business growth cycle (early/declining, etc).
I have watched many Public Companies reach ULFCF – the Holy Nirvana according to Wall Street and these companies get no more credit for it than an EBITDA multiple, not even a cash EBITDA multiple …
If you are situated with great demand, unique assets — you should poor every dime you have back into meeting the demand … the FCF will happen automatically as demand slows or peaks … because you will stop investing capex and let the returns flow into the business. Assuming you run a financially disciplined business and are close to your customers.
Understood. I don’t want to lead on that I would utilize ULFCF as a valuation guide, but as a operating metric comparison along with EBITDA to industry peers. As you mentioned, it gives me an idea of where you are in the cycle based on historical results.
Good Afternoon Rob,
Can you please explain to me why EBITDA is the indicator of choice for your analysis. I am trying to figure out what are some of the most widely used mearures to gage performance. Thank You