Zayo will release second-quarter fiscal year 2018 earnings on Wednesday, and analysts are expecting that the Colorado-based network infrastructure provider’s wholesale and enterprise segments will benefit from two factors: tax reform and wireless operators' capital plans.
Morgan Stanley said in a research note that tax reform and wireless operators preparing their networks to support 5G could help increase customer bookings at Zayo.
While the bill had only recently been passed near the end of the fourth quarter, AT&T said during its fourth-quarter earnings call that it expects business customers to increase spending.
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Likewise, CenturyLink recently noted that enterprise at legacy Level 3 was seeing positive spending from its business customers.
“Bookings momentum for Zayo has already been building over the past couple of quarters, and we would point to two events late in the December quarter that should accelerate this further,” Morgan Stanley said. “First is the passage of tax reform; while early in telco earnings, AT&T sounded more bullish about the spending habits of its enterprise customers due to the cash tax savings. With the late timing of the bill, this may mean more of the activity gets pushed into the March quarters.”
Fiber backhaul possibilities
After Sprint and T-Mobile scuttled their latest merger efforts, Sprint noted in its fourth quarter earnings call last week that it was going to increase capital spending, including a focus on purchasing lit and dark fiber solutions from other providers for small cells and towers.
"We are working aggressively with a lot of other fiber providers, companies like Zayo where we are bringing a lot of fiber to our sites,” Sprint said during its earnings call. “And this is especially now as you roll out more and more sites requiring massive MIMO to support 5G, as well, that we do this even more aggressively."
Morgan Stanley isn’t alone in its thesis about Sprint’s wireless backhaul and overall wireless infrastructure expansion plans.
Wells Fargo analyst Jennifer Fritzsche wrote in a recent research note that based checks with various tower companies, Sprint is working to improve and expand its wireless network, and is doing so through by issuing “requests for proposal” to various providers to obtain new towers, small cells and fiber connections that would be likely used for backhaul.
Reducing churn rates
A key metric that analysts will be looking out for will be Zayo’s customer churn rate.
Morgan Stanley wrote in its research note that although Zayo reported an uptick in customer installations and bookings over the past few quarters, churn has hindered revenue growth.
“While bookings and gross installs have been strong for Zayo in recent quarters, the higher churn (from 1.1% target levels) holds down revenue growth,” Morgan Stanley wrote.
Morgan Stanley added that “while higher churn is likely to continue in the December quarter, we are looking for signs of progress in 2018.”
During the third quarter, Zayo reported bookings for the quarter were $7.6 million, gross installs of $7.3 million, 1.2% in churn and $1.2 million in net installs. Excluding the Allstream segment, these metrics are on a monthly recurring revenue (MRR) and monthly amortized revenue (MAR) basis.
Led by Andrew Crouch, president and COO of Zayo, the service provider is reorganizing its sales structure around five main clusters: carrier; finance and professional services; media; content and commerce; and cloud software and infrastructure services.
For the quarter, Morgan Stanley said it has forecast Zayo to report $7.8 million in bookings and $649 million in revenue.