Zayo Group isn’t afraid of other competitors, including traditional telcos that once shied away from offering this service, getting into the dark fiber game.
The service provider maintains that because it has been selling the service for a long time it has an advantage over any competitor trying to sell to wireless operators or other carriers.
CEO and Chairman Dan Caruso told investors during its fiscal second-quarter earnings call that dark fiber is not as easy for incumbent telcos, which have remained reluctant to give up what they see as a core asset to a potential competitor.
“What comes natural to us by building these dark Fiber Solutions is unnatural to a traditional provider of ... telephone company services,” Caruso said during the earnings call, according to a Seeking Alpha transcript. “Their primary response is in the form of 'can we convince you to keep leasing capacity perhaps by lowering price and providing more bandwidth?' You definitely see response but not necessarily in the form of the kind of infrastructure solutions that those who are focused on it do more naturally.”
Caruso said that even though other carriers are responding, “it's hard for many of them to respond with complex dark fiber solutions.”
Fiber solutions, enterprise, transport remained mixed
As Zayo continues to win more tower and small cell backhaul deals from wireless operators, the service provider saw the fruits of that labor play out in its second quarter.
For the quarter, Zayo reported Fiber Solutions grew 9% to $200.5 million, which Zayo said is in line with the expectations it previously set.
“Demand for Fiber Solutions remains strong, with net bookings growing 14% quarter-over-quarter,” said Andrew Crouch, president and COO of Zayo. “We continue to believe there is sufficient market demand for this business to grow at an accelerated pace while also producing significant cash flow.”
However, the service provider reported that the Transport and Enterprise Networks segment bookings did not perform according to expectations Zayo set.
“In our Transport and Enterprise Networks segment, bookings and net installs performance continues to be below our expectations,” Crouch said. “In both segments, we have several initiatives under way to improve top line performance along with EBITDA and cash flow.”
Crouch added that Zayo is considering “moving point-to-point Ethernet Transport to our Transport segment in an effort to improve the alignment of our products” because it views “the Transport segment as the next layer of our infrastructure business.”
Analysts responded favorably, saying that Zayo should be able to enhance its bookings rate throughout 2018.
“We believe Zayo is well positioned to continue its bookings momentum, with growth underpinned by several key industry tailwinds, including investments in 5G/fiber/high-bandwidth connectivity needs, as well as greater enterprise/carrier capacity to spend via tax reform,” said Deutsche Bank in a research note. “We estimate Zayo will reach $8.5mn in monthly bookings by C4Q18, which should flow to gross installs shortly thereafter.”
A transitional time
While Zayo may be seeing momentum for Fiber Solutions, the service provider is not immune to the revenue challenges caused by legacy transitions in the enterprise and transport space, a factor that was evident in its overall results.
Here’s a breakdown of Zayo’s key metrics:
Bookings: Zayo reported $7.9 million in net bookings and record $7.6 million gross installs, showing progress toward its goal to reach $8.5 million. The $1.6 million in net installations imply a 4% growth rate, which means Zayo remains below its 6-8% target.
Churn: Ongoing customer churn continues to be a challenging metric for Zayo. The service provider reported that churn remains elevated at $6 million, but that it expects it to moderate throughout 2018.
Communications infrastructure: Driven by growth in its Fiber Solutions and Enterprise Solutions, Zayo reported that its Communications infrastructure segment revenue was $530 million. The service provider reported $200 million in Fiber Solutions revenue and $146 million in Transport. Finally, colocation was $59 million due to demand for its ZColo services.
Allstream: Allstream continues to be a challenge for Zayo, with revenues dropping 3% to $123 million for the quarter.
Financials: Zayo reported $653.5 million of consolidated revenue. This included $530 million from the Communications Infrastructure segments and $123.5 million from the Allstream segment.