Zayo's small cell, backhaul investments poised to pay off as 5G, IoT come to the fore

Zayo Group is getting increased attention from investment analysts thanks to its ongoing buildout of fiber to the tower (FTTT) and dark fiber, which positions it to benefit from pending deployments of 5G by major operators like AT&T (NYSE: T) and Verizon (NYSE: VZ).

Alongside cell tower operator Crown Castle, Zayo could see significant upside when commercial deployments of fixed wireless 5G begin to roll out, and that led at least one analyst firm to upgrade Zayo to Buy.

"As the largest operator of small cell networks in the U.S. and one of the largest pure-play providers of dark fiber in large metros respectively, Crown Castle and Zayo look well positioned for this long-term investment cycle," said Goldman Sachs analyst Simona Jankowski in an Investors Business Daily article detailing the near future of 5G.

Known for its dark fiber services, Zayo has increasingly expanded its footprint in the U.S. and recently entered Canada's fiber market through its acquisition of Allstream. That purchase had some analysts fretting a bit as Allstream's profitability has been affected by the ongoing decline of traditional ATM and frame relay data services. However, IP and unified communications services were growing about 10 percent year over year, giving Zayo access to an established services mix in a brand-new territory.

Zayo most recently expanded its network in San Antonio and Austin, Texas, to serve 300 more towers in the area. The buildout brings its total U.S. FTTT network coverage to over 8,500 macro towers.

BTIG analyst Walter Piecyk said in a blog post that "there is no denying Zayo's scale given its 110,000 route mile network spanning North America and Europe. That scale resonates with the wireless operators in the United States, which are increasingly looking to Zayo to execute on their network densification plans."

Despite Zayo's stock not changing much since shortly after its IPO in fall 2014, Piecyk said that the company should see acceleration in revenue growth as more of its FTTT projects come online.

Jankowski believes that "pre-standard" 5G commercial deployments will begin sometime in 2017, with AT&T and Verizon moving forward with a rollout of fixed wireless 5G to homes in the U.S., and mobile 5G deployments beginning in South Korea ahead of the 2018 Olympics.

With Zayo posting millions of dollars in net installs each quarter – the company recorded $2.2 million in net installs during its fiscal second quarter, for example – the dark fiber provider appears well positioned to serve the backhaul needs for wireless operators as 5G rolls into the landscape.

For more:
- see this Investors Business Daily article
- see this BTIG post

Related articles:
Zayo expands fiber footprint to serve 300 additional towers in San Antonio, Austin
Zayo's Allstream acquisition closes, but analysts fret over legacy business declines
Zayo net installs rise to $6.4M as provider narrows net losses to $10.8M