A (2:17)

That sounds like a really hard business to run. Like you've got a lot of, a lot of wires that might get crossed.

B (2:22)

Up like Literally, I'm picturing that meme of the person in the data center and they're like, I don't know where this cord goes.

A (2:27)

Just looking at the wall, like, yep, some of these go somewhere.

B (2:30)

On one hand the business sucks because it requires a massive cash outlay to finance all that rigging. But on the other hand, it rocks because it was basically a monopoly with limited players in each region, and you receive predictable monthly subscription payments from all your customers. And to say the industry was debt heavy would be an understatement. In the early days, TCI couldn't afford to pay down the principal on these piles and piles of loans that it serviced. So anything left after paying interest, they plowed it back into the company's operations. And they were nearly always on the brink of breaching their covenants.

A (3:05)

I hate it when banks are always asking for their money back. It's just, it's so annoying, you know.

B (3:09)

It'S just so unreasonable. And there's this funny story, Ben, where the banks threatened to raise the interest rates on the loans that TCI had outstanding and it would be bankrupt, like they would, they wouldn't be there anymore. Malone called their bluff. And he took his keys out of his pocket and threw them on the conference room table. And, and he said, if you do that, it's yours to run. Guess what? Next morning he comes in, keys are still on the table, interest rates are still the same.

A (3:37)

All right, if you want to deal with a problem, you deal with it. I'm out.

B (3:40)

Think you can drive this spaceship better than me? Go for it. And so as a result, TCI rarely produced earnings or net income. And the official accounting measure of profitability that Wall street gauge success upon was net income. And not many people cared for their stock because banks refused to cover it. They had no publicity, they boasted little sell side industry coverage. And the banks treated them basically in the whole cable industry, as essentially a scarlet letter. So I've been up late, I've been reading, and I actually bought a physical book in detailed in the book Cable Cowboys by Mark Robichaw. It was around this time that Malone started to espouse a concept little used by Wall street analysts in corporate valuations. He said the true value of cash flow, defined as operating earnings before interest, depreciation and taxes, or ebitda. Woo.

A (4:34)

So is it like it's all the, the water that goes into the pipe from the stream before it, you know, divvies off all of the different places, the different homes, the different businesses and stuff like that? We just Want to know like the, the full flow of the initial input kind of.

B (4:49)

I like your bro science. I follow it. I, I think about it more as what is the true capacity of the engine, right? How big is this engine before I have to siphon off some of that gas to pay for the taxes and everything else that goes along with it. And so this guy, he's like a dog with a bone. He goes on this tour de force over the next few years and he argues that after tax, earnings simply didn't count, right? So what was important was cable's predictable and strong cash flow was which funded TCI's continued expansion. And get this, he even went so far as to say that net income was an invention of accountants.

A (5:26)

Haven't accountants been around for like back to the Rowans, back to the Greeks or modern accounting at that time had been around for what, like 50 plus years old and he's just taken that on.

B (5:35)

He basically told GAAP accounting to go and shove it mature. And his whole thing was he would tell a young analyst that because TCI had high interest payments and big write offs on cable equipment, it produced losses. But wait, that's not a bad thing because it produces losses. It paid hardly any taxes to the government. So as long as cable operators collected predictable monopoly rent from customers, net interest payments went up and they grew from acquisitions. Why worry? The guy was totally anti profits.

A (6:07)

It's kind of like the Silicon Valley thing with Russ Hanneman is if you're pre revenue, you don't have expectations. It's great.

B (6:13)

Why would you go after revenue? Because to make money. No, if you show revenue, people will ask how much? And it will never be enough. He was like Russ Hanneman before Russ Hanneman, but with profit. But Ben Malone changed how investors define profit. And in the process, he opened doors to capital for the cell tower business, the dot com companies, and now even the AI chip companies of today. All right, I don't want your eyes to glaze over here, so grab a beverage or something to keep you awake. But I want to go a bit deeper on the mechanics of EBITDA and talk through at least the lens that Malone saw the world through. Hey, thanks for listening. We'll be right back after a word from our sponsors. You just launched your new AI product. The new pricing page looks great. I'm talking crisp, but behind it, last minute glued code, messy spreadsheets and running ad hoc queries to figure out what to bill. Customers get invoices they can't understand. Engineers are chasing billing bugs Finance can't close the books well, with Metronome, you hand it all off to the real time billing infrastructure that just works. Reliable, flexible and built to grow with you. They turn raw usage events into accurate invoices, give customers bills they actually understand, and keep every team in sync in real time. Whether you're launching usage based pricing, managing enterprise contracts, or rolling out new AI services, Metronome does the heavy lifting so you can focus on your product, not your billing. That's why some of the fastest growing companies in the world like OpenAI and Anthropic, run their billing on metronome. Visit metronome.com to learn more. That's metronome.com Here's a growth tax nobody talks About Every new monetization model you ship creates a nightmare for your finance team. Ad usage based pricing. Now you're tracking consumption against commitments. Launch product bundles. That's multiple performance obligations per contract. Offer mid cycle upgrades. Good luck reallocating revenue manually. But that's exactly where RightRev shines. RightRev is the revenue recognition engine built for companies that can't afford to let accounting slow down growth. When your revrec is automated, your product team can ship new pricing without asking finance for permission, and your sales team can close creative deals without worrying about downstream chaos. To get up on my CFO soapbox for a sec, I love talking about creative pricing models, hybrid pricing credits, tiered usage. But I've seen too many companies where the sales team is celebrating a huge quarter while finance is still trying to figure out how to recognize half of it. In a world where your pricing model might change three times next year, that flexibility is everything. If you want to scale your monetization without breaking your books, visit riterev.com that's right, rev.com where modern monetization meets bulletproof accounting being a CFO, you know how much I love tools that actually make the lives of accounting and finance folks easier. One of my favorite tools right now is Rillet, the AI native ERP going head to head with netsuite. Yes, someone is finally doing it. I met Rillet two years ago when they were still in stealth. Since then, they've absolutely taken the finance world by storm. Their mission is to make the zero day close a reality. And they're actually doing it. Customers are literally closing their books at 1:35pm on the first day of the month. They've got everything you need to scale your business complex revenue recognition, native integrations, custom reporting, multi entity close management, and much more. They're only a few years in and are already supporting Nasdaq publicly listed companies. Yes. Seriously, if you want to scale your business on an ERP that wasn't built in the 90s, you need to check out Rillet. Book a demo@rillett.com CJ oh cool, that's me. That's R I l l e t.com CJ R I l l e t.com CJ Tell him I sent you there.

A (10:12)

CJ Are you about to quote another book?

B (10:14)

Why get out me like that? Ben yes. In fact, as detailed in the book the Outsiders by William Thorndike, EBITDA in particular was a radically new concept going further up the income statement than anyone had gone before to arrive at a pure definition of the cash generating ability of a business before interest payments, taxes and depreciation or amortization charges. So it basically put the cash generating capacity of a company into a vacuum, into a universe where how much debt you took on, how, how much infrastructure you had that got old and turned into a non cash expense as it rotted away and where your business was physically located, none of that matters anymore. Ben.

A (10:53)

So it's basically saying, you know, we're not necessarily all on the even playing field to start. So it's saying like, hey, if I didn't have to take on all this debt, if I didn't have to incur all these things to get things going, this is where we would be.

B (11:05)

Oh, you're totally right. And I know I'm poking fun at operating in this fantasy land, but you kind of need to take that lens in order to compare different companies to depending on where they're located. Like are you running a cell phone tower in Brazil versus in Massachusetts in the us that's going to be a fundamentally different tax environment that you're in.

A (11:24)

Yeah, that's true.

B (11:25)

So we've spoken about debt a lot, but to get more specific, the debt was used to buy physical stuff. That's why they're taking out all these loans, which you could argue it does get old and it turns into what we call a non cash expense on the P and L. And so the cable industry's Achilles heel here is that it has very heavy network investments and it could use that to its advantage to create these what I'm calling phantom expenses that would get rid of profits. Even though you're getting the cash, you're just putting marking down this non cash expense and therefore you don't have to pay taxes on it.

A (11:55)

So it's like physical, like the actual Cables cost money, which is not a, like monthly expense or a yearly expense.

B (12:03)

You already paid for it.

A (12:04)

You already paid for it.

B (12:05)

And so now you're taking these charges each month to say, well, this is, we know we divide this thing over five years. It's 60 months divided by 60. Now we have this expense that we get to mark down. But it's not like you had to pay anybody. Again, you already paid for it, so you're reducing your taxable burden. So in other words, if an operator used debt to buy or build additional infrastructure and they depreciated the newly acquired assets, he could continue to shelter his cash flow indefinitely. And so this is a double whammy. You reduced your net income, which taxes are based on, by aggressively depreciating the construction costs. And then you decrease your taxable income even further via the massive interest expenses on the debt you use to fund said construction.

A (12:50)

All right, to link it back to share price, how are we maximizing shareholder value here?

B (12:55)

Shareholder value. Look at you with these terms. Malone's realization that maximizing earnings per share eps, the holy grail for most public companies right at the time, was, was inconsistent with the pursuit of scale in the nascent cable TV industry. So to Malone, higher net income meant higher taxes. And he believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, like we said, and fund internal growth and acquisitions with pre tax cash flow. So he's trying to build this empire in the background. He's like, I don't really give a crap about profits right now. And as one observer put it, it was better to pay interest than taxes. And Malone's playbook made sure he didn't do much of the latter. And he was able to convince the analysts that the share price should be rewarded for that.

A (13:37)

That makes sense. It's how you build wealth, I guess.

B (13:39)

You know, that is funny, Ben, and we'll get to that later. But first I want to tie this back to some other industries that are out there. Malone's EBITDA evangelism didn't just stay in telecom. It spread like wildfire through the world of leveraged finance. Hell, you could argue that he helped create the world of leverage finance and private equity firms, but you heard of a couple of them. They were the first true disciples of this. Private equity firms needed a way to evaluate acquisitions that could carry lots of debt but still throw off enough cash to service that debt. And EBITDA became the North Star. It showed the potential before debt payments came knocking. And the bigger the ebitda, the bigger the debt package you could stomach.

A (14:18)

It's still feeling like we're made up fantasy land here.

B (14:21)

Maybe. But what happens if the investment bankers follow along? Because the bankers, Ben, the bankers need a common denominator to value companies quickly across industry. So EBITDA make comparisons easier, faster and more headline friendly. So 10x EBITDA, it becomes shorthand for dealmakers everywhere, regardless of what was actually going on below the line.

A (14:43)

Now you're going to tell me there's going to be some sort of twist right here.

B (14:46)

You're like the guy you watch a horror movie with and he's like, they're going to jump out of the corner right now. All right, so there is a twist. Software companies show up to the party and despite their low capital intensity and minimal physical assets. Right. We make stuff in the cloud. Cloud. They adopted EBITDA as a badge of sophistication. Even if you weren't laying cable or buying trucks, you could still flex your EBITDA margin on an earnings call. And the Logic There is SaaS companies wanted to play in the same capital market sandbox and needed to therefore speak the same language. So suddenly a metric born out of capital heavy infrastructure projects is now powering investor decks for cloud native companies slinging APIs and freemium models. But we didn't stop there, Ben. You know what we're going to do next?

A (15:26)

What?

B (15:27)

We're going to adjust the shit out of this.

A (15:29)

But the physical, the physical things are gone now. So it's just, it's just, it's all in the cloud.

B (15:33)

Let's call in our chiropractor to adjust this. So okay, you can just adjust anything these days, Ben. Some use adjusted EBITDA and throw in to use a blanket term, management add backs. I want to do like a doctor Evil management add backs. We punch a hole in the protective layer around the world which we call the ozone layer. These could be layoffs due to over hiring. They could be marketing schemes that totally bomb they could be global expansions that failed. It can quickly become this get out of jail free card. And you can grow EBITDA while making terrible, terrible long term choices like over levering to hit a short term multiple or outsourcing core infrastructure to cut costs or failing to invest in R and D. There are a lot of ways to adjust ebitda and you don't get a red flag for that unless someone's really paying attention.

A (16:23)

So what's the hit rate on these? Like, you know, are these companies eventually making up that debt. Are they eventually paying back the initial capital investment? Like, yeah. What's the percentage hit rate here?

B (16:34)

You always have to pay back the bank. A lot of these debt packages here are pretty big and they go from one private equity sponsor to the next. So there is an element of kicking the can down the road. It also depends on what industry you're in. Right. Because there are different debt expectations of what's healthy depending on if you're in the telecom industry versus the software industry. Or today, if you look at the companies that are making chips out there, that's an entirely different profile.

A (17:00)

So what are some of the craziest adjustments that you've ever heard of?

B (17:03)

Well, everyone's heard about the Adam Newman wework community adjusted ebitda. He basically took all the costs of running the business and chalked it up to this weird community thing. But one of the weirdest ones I've seen in an M and A transaction is the business owner's horse trailer.

A (17:19)

Okay, tell me more.

B (17:21)

Another is unsuccessful advertising campaign. So, hey, this one bombed. But we're going to say that was a one time expense. Put that experiment below the line. One of the craziest ones I've seen are hurricanes. Hurricane adjusted ebitda. I actually heard about this one. When. When the hurricanes unfortunately hit the coast of North Carolina a couple years ago.

A (17:41)

You're just saying. Oh, well, we. We didn't earn money that time because there was a natural disaster that like nobody could have predicted.

B (17:49)

They basically said there was a lot more cost to clean up everything. So we're just going to adjust away these acts of God.

A (17:54)

Okay, keep going.

B (17:56)

Here's another one. Future layoffs. Yes. Before. Before you even get fired. Ben. We can just. We can just adjust the costs out.

A (18:04)

Yeah, no, that makes sense. Let's do that.

B (18:07)

And here's the worst one. A lot of these casinos are on tribal land and you can chalk up all sorts of expenses to distributions to the tribe, which is essentially you're taking a pool of the profits and saying, we're going to add that back in as if we weren't operating this casino on native American land. All right, I got one more for you. But it may be too gross for the video, Ben.

A (18:30)

Maybe we'll leave it on the cutting room floor. We'll see.

B (18:32)

You've been to a casino before, right?

A (18:34)

Oh, yeah, yeah.

B (18:35)

You play the slot machines, man.

A (18:37)

It's playing the slot machines. You know, if they got the ponies, I got to make sure my ponies are with them.

B (18:42)

Well, people would sit at the slot machines and they would think they're on a heater. And what do they do to incentivize you to stay there and keep gambling?

A (18:49)

Oh, they got like free drinks for everyone.

B (18:51)

Yeah. Yeah. The people wouldn't want to get up, so they would continue to drink. They would continue to play for hours. They wouldn't make a stop at the.

A (18:57)

Restroom, Ben oh man, I thought you were just going to tell me they were spilling their drinks everywhere. I didn't realize it had to go through something first.

B (19:04)

It's so much worse. But we need some new cushions, Ben. And we're going to adjust that cost out of our ebitda. Hey, thanks for listening. We'll be right back after a word from our sponsors. Ali and the team at Tabs are building something that directly addresses one of the biggest headaches I see finance teams deal with today. Pulling data from your erp, your CRM, your FPA tools and your usage systems and actually making it all work together. If you're running usage based pricing or complex contracts, you already know how this usually plays out. Contracts live in one system, usage data lives somewhere else. Billing happens in another tool. Revreck gets layered on top at month end and finance ends up just reconciling everything by hand to close the books. This is exactly the problem Tabs was built to solve. TABS is an AI native revenue platform built for controllers and CFOs. It brings together data from your ERP, CRM and real product usage into a single system of record. From there it automates billing, collections and revenue recognition without finance having to duct tape workflows together every month. If usage based revenue is core to your business, this is the future of how billing and Rev rec get done. Go check them out@tabs.com run. That's tabs.com run. We've all been burned. We've all bought that enterprise planning tool that promised the world only to realize six months later that we've basically taken on a second full time job just to keep the software running. I want to talk about a company that was built specifically to kill that cycle. Abacum. I actually remember my very first conversation with their founder and CEO Julio Martinez over three years ago. Back then they were just starting out in Spain. Fast forward to today. Julio moved the home base to NYC and they're the engine behind finance teams at Strava Replit and JG Wentworth. Abacome doesn't turn you into a software admin. The integrations are actually self service. You don't need a $300 an hour consultant to plug in your ERP or HRS. And they're doing AI in a way that actually impacts the things FP and A teams are doing every day. Things like creating variance summaries, building formulas and modeling scenarios. If you're scaling fast and you're trying to avoid that legacy platform trap, Abacum is the move. They're building the future of our tech stack and they're doing it with a CFO's perspective. Go to Abacum AI to see it for yourself. That is Abacum AI. Well, well, well. Here's what nobody tells you about being a CFO. You'll spend 50% of your time on stuff that is killing your momentum. The best CFOs I know are business leaders who know how to drive growth in heroic fashion. But most of us end up spending our days buried in manual work. I'm talking about collecting receipts, reviewing expenses and manually reconciling spend. It's painful. That's why CFOs need Brex. Brex built an intelligent finance platform that pairs corporate cards with debt. Built in expense management, plus a team of AI agents to handle the manual finance tasks for you. That way CFOs have more time for the high impact projects that drive growth. You know, the actually worthy of your CFO time. Bottom line, Brex is automating hundreds of thousands of hours of manual finance work every month across 35,000 companies like Anthropic Coinbase and Doordash. Ready to spend less time buried in expenses and more time driving results. Check out Brex app bre.commetrics it is brex.com metrics please. Guys. How the hell do I have three kids in daycare? Brex.com metrics so Zebidu is just another.

A (22:31)

Fad that died with disco boxy cars and shoulder pads.

B (22:35)

Well, I think the baggy jeans are coming back. But dude, we are so back right now. EBITDA is making a comeback and it's because of all these AI companies. AI companies are reawakening the original spirit of ebitda. Because these aren't lightweight software businesses running lean. They're big and they have chunky infrastructure spending. They have racks of GPUs just melting off the wall. They have custom silicone. They have private data centers with enough wattage to light up a small city.

A (23:01)

So you're telling me it's hardware heavy, it's capital intensive, you need a lot of like real stuff.

B (23:07)

Yes. We are back to stuff, Ben. It's the spiritual equivalent to Cable just with more H1 hundreds and fewer coaxial lines. And here's where it gets wild. You didn't call out my twist that time. I surprised you. I got you. So some AI companies are now borrowing against their chips. Not tostitos. Their, their AI chips. They're literally using GPUs as collateral to fund their operations. That's debt finance Compute with EBITDA holding this whole narrative together.

A (23:36)

Wait, but you just said that all these chips are like they're, you know, melting off the wall. They gotta replace them a bunch. So that's. That expense is. It's almost like a recurring expense. No.

B (23:46)

Yeah, and that's kind of what it should be. And you see all these companies making these funky changes on what we call the useful life of a chip because you can't just use it again. It's not like the railroad boom where, hey, if this doesn't work out, we can still at least put like some cattle on this and move it from point A to point B. These things just get burnt up. And you really have to nail down what is the useful life of this. And is this an ongoing expense? Is it more opex or is this something that's capex and I can play fast and loose between the lines of how fast I depreciate it. So according to the information, companies have used their high powered chips to get more than $20 billion in loans so far. EBITDA is once again helping these businesses tell a story that separates the engine's output from the fuel it takes to run it. It makes aggressive spending feel more palatable to investors who are hungry for scale and more forgiving of net losses that are just buried under the piles of the silicone that's melted.

A (24:41)

Where are we going to this?

B (24:42)

Well, where we're going is like, in many ways, the AI boom is the closest we've come to cable era Malone Economics. Malone's back. Huge upfront investment, deferred monetization in the hope that this infrastructure at scale, it'll eventually lead to dominance.

A (24:56)

All right, Malone's back. He's back with a vengeance. He's a zombie. And maybe that's apropos because he's. That's behind those eyes.

B (25:03)

He created a monster, Ben. And he, by the way, he also made a lot of people, including himself, very, very rich. So if you're wondering, Malone sold TCI for $48 billion in the late 1990s.

A (25:14)

I've never heard of this company before. And so I did a little sleuthing on the side here. C.J. do you know what TCI's successor is now?

B (25:23)

No. Who bought them?

A (25:24)

They were bought by AT&T Broadband. So I believe they are now AT&T as we know him today.

B (25:31)

You know, heroes never die. There is something interesting in all of this, right? There's a big difference between creating wealth and reporting income, right?

A (25:39)

Yeah.

B (25:40)

So it begs the question, what actually matters in all of this? And as Munger's partner in crime, Warren Buffett, was famous of saying, when we see companies that say, hey, we don't pay any taxes because we don't have any earnings for tax purposes, that's coming very close to a flim flam game.

A (25:55)

See, I knew he would come back to the Dairy Queen King himself.

B (25:58)

It all starts and ends with ice cream, right? Well, funny enough, if you were to ask Munger and Buffett what made them most angry about ebitda, it was the treatment of depreciation which actually surprised me. So Buffett called it negative float. You essentially paid for assets up front before you ever get any use or value out of them. And he said it's literally the worst type of expense there is out there.

A (26:19)

The cost of that float was, was.

B (26:21)

Less than, than zero. And that is a very valuable asset. I'll give you an analog. If you paid all your employees up front for five years of future work and then you mark down a non cash expense in years two through four, you still paid them. Right. So in that sense, depreciation is as real of an expense as you can possibly get. And we're ignoring it.

A (26:44)

And we're ignoring it a lot with the AI companies that we're paying for these chips that we're going to have to replace anyway.

B (26:49)

Yeah. And so it seems we've come back to a world where free cash flow matters the most. And ebitda, while it's close, it's not exactly the same thing. You can't adjust cash flow. You have to be honest about that. It just is what it is.

A (27:03)

Okay.

B (27:04)

And not to get too political on you, but EBITDA is in many ways like a democracy. It's the least worst system of measurement between industries and capital structure. It's kind of like the most portable metric we have in a very imperfect toolkit.

A (27:18)

So do you think is EBITDA here to stay? Or we just kind of see it go in waves again, like we're in the 80s again, but then maybe in another 10 years we're, we're seeing it go away? What's the deal there?

B (27:28)

I think it's here to stay, and we all just have to be honest with ourselves. A few companies are definitely burying recurring legal bills below the line or adjusting earnings because the oranges didn't grow in Florida. But if everyone just juices their metrics in different ways, unfortunately the only fair comparison is to create an equally juiced up field EBITDA and even adjusted ebitda. I hate to say it, introduce the least penalization across the board which keeps comparability intact.

A (27:55)

This kind of reminds me of the steroid era in baseball. It's like if everyone's juicing, like what matters? Or as the famous supervillain syndrome said in the Incredibles, if everyone's super, no one will be.

B (28:07)

When everyone's super, no one will be. It's all bullshit. Everyone may as well just be bullshitters. Long live Ibita. Around the Numbers is a mostly media production yelling an intro by Fat Joe. Artwork by Meg d'. Alessandro. Show is executive produced by Ben Hillman. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me, a guy who feeds his dog way too much ice cream and has a history of net operating losses. Lol. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom and have a great day. Peace.