Zayo Group saw mixed results during its fiscal fourth quarter, reporting that net installs rose to $2.4 million due to a rise in gross installs and a consistent churn rate of 1.1 percent. However, net bookings of $6.4 million were below the company’s expectations.
Specifically, what affected Zayo’s bookings during the quarter was that one of its customers cancelled a project that was worth nearly $200,000.
Dan Caruso, CEO of Zayo, told investors during its fiscal fourth quarter earnings call that the project was too difficult to complete.
“As both sides got deeper into the project, we realized the scope of what it would take to implement it was far different than what either side assumed when we struck the contract,” Caruso said, according to a Seeking Alpha transcript. “We worked with the customer and came to a mutual agreement that the best course of action was to take a step back on that particular project because the economics would have been far different than we thought and the timeline in which they were hoping to get it done would have been difficult to achieve.”
Financial analysts had a mixed reaction to Zayo’s lower than expected bookings results.
Cowen and Company, in a research note, saw Zayo’s decision to not go forward with the customer project as a sign that it wants to focus on customer wins that give it a better return on their investment.
“Regarding the bookings reversal, the project had unforeseen issues resulting in what would have been a greater investment and while Zayo could have continued with the project and kept the bookings/business, decided not to, which as a side note we took as a positive testament to the company’s unwavering commitment to return,” the firm's analysts said.
However, Pacific Crest Securities countered that perhaps Zayo is seeing challenges in securing more customers after gaining an anchor tenant for a FTTT build.
“We continue to believe it is difficult for Zayo to find the type of additional anchor tenants for its large speculative builds that will drive meaningful increased bookings; however, the company continues to express confidence in achieving its $7.0 million in bookings and $3.0 million in net install targets, although it would not specify when this would occur,” Pacific Crest Securities said.
Regardless of the lower bookings, Zayo reported gains in all three of its product lines: Dark Fiber Solutions, Network Connectivity, and Colocation and Cloud revenue.
Dark Fiber Solutions revenues were $106.9 million, up 8.6 percent year-over-year, and Colocation & Cloud revenue was $63.6 million, up 10.4 percent year-over-year. Network Connectivity revenue was $175.3 million, up 7.5 percent year-over-year.
“We actually had a really good quarter for metro dark fiber, which was offset by the mobile infrastructure side being low and then optically lower because of the cancellation,” Caruso said.
On the dark fiber side, Zayo won two key contracts with school districts in Colorado and Texas, both of which use existing fiber to the tower builds that were completed for a large wireless carrier.
In Denver, Zayo will build a 618-mile dark fiber network with the Denver Public Schools (DPS), Colorado’s largest school district. The network will connect 153 schools and sites, including two DPS data centers. Similar to other E-Rate builds, Zayo said that 562 miles of the network is already in place or under construction, with 56 miles still to be built.
No less compelling is the 1,178-mile Texas school district win, which also leverages a 122-site FTTT build in Dallas. The service provider will extend services to the area schools located in the Texas Education Service Center Region 11 via a fiber network build that's under construction in Dallas-Fort Worth for a major wireless operator.
“These are deals that are interesting, because they leverage the mobile infrastructure investment we put in place, as well as resulting the further extending of the fiber footprint that then could get leverage for other purposes over time,” Caruso said.
Zayo’s total revenue grew 9 percent on a pro forma annualized basis to reach $507 million, including $117.2 million from Zayo Canada.
Special report: Tracking wireline telecom earnings in Q2 2016
Zayo Group’s follow-on sales, Allstream integration, net installs could lift it to record quarter, analyst says
Zayo snags 12 new customers for its Sacramento-to-Salt Lake City fiber route
Zayo wins Denver school system dark fiber contract
Zayo's aggressive network builds spell new revenue growth opportunities, says Wells Fargo