Zayo commits nearly $75M to build out 1,000 small cell sites

Zayo is serious about the small cell market opportunity; so much so that a top level company executive said that it plans to dedicate about $75 million in capital to build out 1,000 new sites.

Dan Caruso, CEO of Zayo, confirmed during the company's second quarter earnings call that its small cell plan will be across multiple markets.

"It may not continue every quarter at an increment up, whereas the pattern here looks like it's been a steady increment, but we do expect there to continue to be kind of step function increases in the number of small cells that we're winning and installing," Caruso said during the earnings call, according to a Seeking Alpha transcript. "So what's inherent here is the commitment to build 1,000 incremental small cells. It's about $75 million of committed capital that will go into that. That's across multiple markets."

As of the end of December, Zayo had a total of 2,224 small cells on its network. Out of this mix, 596 were operational, while the remaining sites were under contract with major wireless operators. This is up from the 1,200 small cell sites it said it had in November 2015.

What makes Zayo an interesting player in the small cell space, one where it offers a mix of backhaul and turnkey site services, is its overall installation and build out approach.

Caruso said in a number of cases, a wireless operator that initially contracts with Zayo for fiber-to-the-tower could be a good potential candidate for small cells, a prospect that could spell further revenues for the company.

"Even [if] the anchor tenant itself in a given market might be building it out or dark fiber-to-the-macro-tower and only is dabbling in small cell today compared to where they'll be a year, two years, or three years from now," Caruso said. "So there's a lot of subsequent business, add-on business that you win and expect to win from your anchor tenant and there's a lot of incremental tenants that you expect to win on top of that. They don't always go on the same pole. In fact, with small cells, they're usually on a different pole or building, but they're leveraging that same investment; that same fiber that's going in the ground is used to tap into and serve multiple carriers."

Similar to the way it rolls out fiber-to-the-tower, the service provider will leverage and extend existing fiber builds that could be for FTTT or another purpose.

During the quarter, Zayo won a number of large FTTT deals including one Indiana.

In Indiana Zayo will connect fiber to 78 new towers, one where it will construct 234 new route miles of fiber. For this deployment, it will leverage 350 miles of existing fiber network that Zayo will leverage, bringing down the company's capital investment for the project to an incremental $14 million. A similar FTTT deployment in Atlanta will extend its existing 1,320-mile route mile network by more than 1,000 miles to provide FTTT service to over 500 towers.

Caruso said that its ability to leverage and extend existing nearby fiber facilities enables it to keep the costs of small cell deployments low.

"These wireless carriers, who are able to work closely with someone who has a lot of network in the ground and use that collaboration to be very kind of deliberate about where to locate the small cell sites so that the cost of getting from the small cell site to a fiber splice point is low," Caruso said. "The incremental cost is low. Therefore, the customer benefits because they get a better price per unit and we benefit because we get a better IRR because we're leveraging a lot of the investment that's already in place."

Small cell is only one of the near-term opportunities that Zayo can take advantage of with its wireless operator customers. Like other dark fiber providers, Zayo is keen on getting a piece of the emerging Cloud-RAN (C-RAN), which will require dark fiber in between the towers and all small cells feeding back to the base station.

Jennifer Fritzsche, Senior Analyst for Wells Fargo, said in a research note that Zayo is in a good position to take advantage of the emerging C-RAN trend due to its density of fiber assets and its experience in serving wireless operators.

"Dense metro fiber networks for fronthaul are a critical component to make C-RAN deployments economical," Fritzsche said. "The fronthaul can take many forms, such as carrier Ethernet, wavelengths or microwave, although dark fiber is the most efficient for large-scale deployments. ZAYO is best positioned to play here, in our opinion, given its large exposure to the wireless space already."

For more:
- seek the Seeking Alpha earnings transcript

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