Zayo's aggressive network builds spell new revenue growth opportunities, says Wells Fargo

Zayo Group's ongoing network buildout via acquisitions and organic builds, intended to satisfy its growing customer base, will also enable it to grow its top line annual revenue, says Wells Fargo in a research report.

"An increasing proportion of ZAYO's capex has been toward major network expansions that have long sales cycles and are very capital-intensive," said Jennifer Fritzsche, senior analyst,  telecommunications services for Wells Fargo, in a research report. "However, these projects are all underpinned by an anchor tenant contract that pays for all of, or at least a significant portion of, the estimated capex."

Fritzsche added that while Zayo has spent $175 million, or 21 percent, of an estimated $813 million in capex to fund these expansions, the company has only installed 7 percent of that figure.

"We estimate ZAYO could generate over $40MM in additional annualized revenue by simply installing its existing backlog of these projects," Fritzsche said.

The service provider has set a high bar for itself. Dan Caruso, CEO of Zayo, told investors during its third fiscal quarter 2016 earnings call that Zayo is on track to reach 3 million net installs by the end of 2016.

During that period, Zayo reported gross installs were $5.9 million and net installs were $2.1 million, driven by record low churn of percent.

A key element of Zayo's growth strategy is its approach to leverage and extend its existing fiber network investments.

As it completes a fiber buildout for a wireless operator customer in San Antonio, Zayo will extend its existing network in San Antonio and Austin by more than 700 miles to provide fiber to the tower service to more than 300 cell towers. After completing this expansion, Zayo's FTTT network will include over 8,500 macro towers nationwide, including those under construction.

Zayo is positioning itself to win additional fiber-based service deals. By building out fiber to more towers, the service provider can pursue a host of other opportunities with local business, content providers, data centers, and local school districts all of which are looking for alternative fiber suppliers.

"While the anchor tenant economics for a fiber build have become more competitive (IRRs negative to the low single-digits), the opportunities for follow-on customer sales have greatly improved," Fritzsche said.

Related articles:
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Zayo sees dark fiber dollars in content providers, data centers, and school districts
Zayo's Caruso: Tower backhaul tenants provide FTTT, enterprise upsell opportunities
Zayo Group says it's on track to reach 3M net installs by the end of 2016

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