Zayo maintains that it is on track to increase its on-net bookings for the upcoming quarter, citing sales to local enterprises and wireless operators.
However, questions remain about how the service provider will work with Verizon as the wireless operator switches its fiber backhaul plans.
The service provider laid out its bookings thesis to Wells Fargo during a recent analyst meeting with the financial firm.
“While not providing explicit guidance, ZAYO is hopeful that that sales to its largest customers along with an improvement on regional, on-net sales will continue to drive a sequential improvement in bookings,” said Wells Fargo in a research note. “We do not sense there has been any dramatic change in wireless activity as carriers are still assessing network needs given varying densification and 5G deployment strategies.”
These comments appear to reiterate the statement the service provider made during its fiscal third quarter 2017 (PDF), Zayo said it was not satisfied with gross installs.
At that time, Zayo reported gross installs were $7.1 million and churn 1.2% and $5.6 million producing a net install of $1.5 million.
Zayo remains confident that hiring new management members and beefing up the sales team could put the company back on a growth path.
Leveraging, extending assets
A key focus for Zayo will be to leverage and extend the existing fiber assets it had installed in recent years to accommodate a number of tower backhaul and long-haul network needs.
"Zayo estimated its network is only ~33% utilized, which gives it significant expansion opportunity for shorter-payback and high IRR follow-on sales,” Wells Fargo said.
In particular, the service provider cited Minneapolis network where it currently has over 2,500 miles of fiber.
“Based on its total capex outlay in this market, ZAYO has already has generated ~60-70% IRRs on its existing investments and continues to see considerable demand from local enterprises,” Wells Fargo said.
MoffettNathanson agreed with this assessment and added that Zayo could use the assets it built in recent years to pursue new tower backhaul deals.
“Zayo clearly has the opportunity to drive follow-on sales against these assets (as an example, we have heard AT&T has a multi-thousand site FTT RFP in the market, and Zayo would appear well-positioned to compete for that business), but they did boost bookings in a way that we need to be cognizant of going forward,” MoffettNathanson said in a research report.
The Verizon factor
One of the key factors for Zayo is what effect Verizon’s internal fiber expansion plans will have on Zayo and other wireline operators that sell wireless backhaul services?
Verizon signed two significant fiber and component deals with its main suppliers Corning and Prysmian. Verizon will purchase up to 20 million km (12.4 million miles) of optical fiber each year from 2018 through 2020 from Corning and over 17 million kilometers (10.6 million miles) of ribbon and loose tube cables from Prysmian.
Zayo, which will become the largest standalone fiber player after CenturyLink completes its Level 3 deal, is confident that it will still play a large role with Verizon as the service provider has a number of contracts for fiber and other services with Verizon.
“While ZAYO acknowledged VZ’s desire to build fiber both within and outside of their incumbent footprint, ZAYO believes total revenue from VZ will grow longer term—albeit at a lower rate than past years,” Wells Fargo said.
Additionally, Zayo sees potential in the emerging small cell market, one where wireless operators have set on dark fiber-based solutions.
“ZAYO remains particularly bullish on the small cell total addressable market (TAM),” Wells Fargo said. “Specifically, ZAYO estimates each national carrier, including VZ, may need to build 4-10x as many small cells as they currently have deployed today.”