Zayo's Caruso: Dark fiber is one of our highest margin businesses

Zayo continues to see new opportunities to sell dark fiber, a service that has become a key requirement to participate in the wireless backhaul market segment.

According to the company's estimates, dark fiber is among its highest EBITDA margin businesses and will represent 30 percent of its overall revenues.  

"The dark fiber is among our highest EBITDA margin businesses, so they will represent 30 percent of our overall revenues," said Dan Caruso, CEO of Zayo, during the company's fiscal fourth quarter earnings call, according to a Seeking Alpha transcript.

Caruso said that wireless operators' ongoing movement to small cells, enhancing macro tower footprints and emerging CRAN architecture is driving greater interest in dark fiber solutions.

"It includes more macro towers and it's beginning to include greater understanding of the effects of CRAN architectures and how that ties into the need for fiber in order to make that technology work," Caruso said.  "So the opportunity to do larger deployments that our dark fiber in nature as opposed to what used to be five years ago T1s and then more recently were Internet networks, a lot of them are moving towards dark fiber networks because of the proliferation of and the combination of small cells, more macro towers and the vision of the CRAN architecture."

Momentum in its wireless backhaul continued to grow throughout the fiscal fourth quarter. As of the end of June, Zayo sold services to over 800 macro tower and small cell sites that leverage previous anchor fiber-to-the-tower (FTTT) network builds already in place.

A key FTTT market for Zayo has been Seattle. Earlier this year, Zayo secured a new agreement with an unnamed wireless carrier to provide FTTT service to 500 towers, a deal that will not only expand its wireless backhaul business, but also could be used to target new enterprise and content service opportunities.

"The Greater Seattle was one of the big wins during the fiscal year fourth quarter where we took our Seattle footprint, which was already pretty robust and we used that to work with a customer and satisfy their demand for a dark fiber to the tower solution that greatly expands our fiber presence in that geography," Caruso said. "This project base is solely on the contracted revenue, produces a 2 percent unlevered return and incremental capital."

Outside of Seattle, Zayo also won a number of key wireless backhaul deals with major wireless operators, including projects in Dallas, Nashville, Phoenix and Denver.

Nashville was also another area where Zayo won a sizeable dark fiber-based wireless backhaul deal.

"Another example to that is Nashville, where we took a -- a footprint we have in Nashville but not one that wasn't nearly as extensive as in comparison to Seattle, but are using it to satisfy a large dark fiber to tower deal what would result in a much more extensive, unique and deep footprint in the greater Nashville area," Caruso said. "So the large deployment there, the cost of the project is largely covered by this customer deal. And then any incremental activity we get on top of that is where we have an opportunity to make a significant positive return."

Although Zayo does face competition in the overall wireless backhaul market, Caruso said that the landscape has changed as the wireless industry has shifted away from TDM-based circuits to Ethernet and dark fiber.

"The competitive landscape has shifted as we move from DS1s and Ethernet to big dark fiber and infrastructure deployments so if you look backwards in time, you would have seen the ILECs participate more," Caruso said. "You would have seen the larger cable companies participate more. That's changed. It's harder for those types of companies, generally speaking, to participate when it's varied infrastructure heavy deployments."

From an overall financial standpoint, Zayo reported that fourth fiscal quarter revenues were $361.9 million, up 25 percent from the previous quarter on an annualized basis.

Likewise, adjusted EBITDA of $210.9 million increased 24 percent over the previous quarter on an annualized basis. Operating income for the quarter declined $2 million from the previous quarter, and net income increased by $58.8 million from the previous quarter.

For more:
- see the earnings release
- see Seeking Alpha's earnings transcript (reg. req.)

Special report: Wireline telecom earnings in the second quarter of 2015

Related articles:
Zayo pre-sells 7 new customers for planned Omaha-to-Dallas fiber route
Zayo carves niche in fiber-based small cell backhaul, turnkey installation services
Zayo sees growing interest in dark fiber for macrocell, small cell backhaul
Zayo grows fiber-to-the-tower footprint to 800 macro tower, small cell sites
FBI: San Francisco has been hit with 12 fiber optic cable cuts in a year

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