Zayo’s Caruso: 5G plans, industry consolidation causing a near-term pause in fiber spending decisions

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Zayo sees the advent of 5G plans and rapid consolidation as a long-term opportunity for its business, but as carriers map out their strategies, it’s causing some to delay decisions.

During its second-quarter fiscal year 2017 earnings call, Dan Caruso, CEO and chairman of Zayo, told investors that the service provider’s customers are trying to think through their next steps.

In particular, carriers are trying to understand how the new presidential administration will realign the regulatory environment, the interplay of 5G wireless with fiber, and ILEC M&A.

“All these things kind of popped up almost in the short term, which isn't causing a reduction in demand,” Caruso said. “I think it will cause an increase in demand. But what it is doing is causing a pause in very near term decision making and I think that's really what you're seeing here, near term decision making about bigger, longer-term deals.”

Caruso said that as consolidation of the ILEC and CLEC markets continues, the role Zayo plays as a pure-play fiber provider will be “essential.”

“With consolidation, Zayo's fiber platform will become more and more special and unique,” Caruso said. “Constant consolidation [has established] Zayo as the only independent operator of deep, dense fiber networks throughout the U.S. and beyond.”

Caruso added that the “underlying drivers of demand, things like cloud and 5G and the continual emerging of new web scale concepts, all have implications on bandwidth demand in a positive way.”

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Here’s a breakdown of Zayo’s key metrics:

Dark Fiber Solutions: Zayo’s Dark Fiber business is its largest business by EBITDA with a 73% EBIDTA margin. During the quarter, the service provider reported $150.4 million in Dark Fiber Solutions revenue.

Network Connectivity: The Network Connectivity business, which consists of products like Waves, Ethernet and IP, has a strong cash flow profile of 23% of revenue. The growth rate is positive at 3% but lower than the other businesses in part because SONET is in that base, and SONET is a shrinking business. Overall, Network Connectivity revenues were $177.6 million.

Colo and Cloud: Zayo’s Colo and Cloud business consists of 13% of the company’s revenue. For the quarter, Colo and Cloud revenues were $66.7 million.

Canada and other segment: The service provider’s Canada and other segment revenue, which includes Allstream, was $112 million. Zayo noted that while its Canada business has not yet been rolled into different segments, the segment is decreasing in revenue but produces an increasing amount of EBITDA and cash flow.

Financials: From an overall financial perspective, Zayo reported $506.7 million of consolidated revenue, including $107.9 million from Zayo Canada. Net income was $19.8 million, including $19.6 million from Zayo Canada, up $4.1 million sequentially.

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