Continuing with this week's post-earning season analysis of competitive telecom companies, we look at EBITDA minus Capex, normalized by Revenue. In other words, something that might be called an adjusted operating cash flow margin. What we really want is to subtract maintenance capex, which would give us a number that the bond guys weigh heavily because it measures how much cash the business could generate if it weren't re-investing the surplus for growth. But that's a number we rarely if ever have, so we will make do with what we have and see what we can see:
The first thing that jumps out at me here is that Sprint Nextel (NYSE:S, news, filings) and Level 3 Communications (NYSE:LVLT, news, filings) are at the top, they turn a high percentage of their EBITDA into operating cashflow. They do so because they have lots of debt to service and revenue pressure as well, and in this recession they have been trying to eke every last bit of cash they can.
Right there with them though in the 15-20% range are the metro fiber specialists: TW Telecom (NASDAQ:TWTC, news, filings), abvt, and RCN Metro. These companies are on the top of yesterday's big spenders list (i.e. capex) because they are currently spending heavily on expansion, but they aren't spending it all.
In the middle near 10% after Q3 are the companies with the less metro fiber: PAETEC (news, filings), itcd, and glbc. Raul is right that the margin is much smaller between the metro-fiber-heavy and the metro-fiber-light, but it is still apparent.
And down on the bottom in the neighborhood of zero (in Q3) were cbey, Cogent Communications (NASDAQ:CCOI, news, filings), and XO Holdings (news, filings). Now, XO had to be on the bottom of a chart like this, because they hug the bottom of the EBITDA margin chart and they're still investing and adding markets anyway. CBeyond is not just fiber-light, it is also spending its capex aggressively, adding several new markets all the time and spending what they bring in to do so. Cogent went from the top half of the list down to the bottom half over the last three quarters, which parallels their capex surge lately. I guess they're attempting to accelerate into the turn of the recession.
Overall the trend for the last 7 quarters is clearly upwards, as the economy has driven nearly everyone to maximize the cash coming in, whether that be by cutting capex or finding cost savings under every rock. But while they are doing so, some of these companies are growing and some are shrinking, which I'll look into via relative revenue growth in a later post.
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