As a wireline infrastructure provider, Zayo Group has made a sizeable mark in providing a series of lit and dark fiber solutions to wireless operators, a trend that was evident in its third-quarter 2015 earnings.
Speaking to investors during the third-quarter earnings call, Dan Caruso, co-founder, chairman and CEO, said that wireless backhaul deals are a key contributor to its Physical Infrastructure revenue mix.
During the quarter, Zayo reported $183.7 million in fiscal first-quarter Physical Infrastructure revenue, up year-over-year from $154 million, in the same period a year ago.
"The primary things that drive the big deals in Physical Infrastructure are the wireless carriers. So, that has to do with small cell and fiber tower build-out so when you win and sign kind of a major project, that causes kind of ebbs and flows to that particular bookings number," Caruso said during the earnings call, according to a Seeking Alpha transcript. "And then there are other kind of bigger deals that can contribute to that, some have to do with Internet content companies, and some have to do with some of the long-haul dark fiber deals. So, when those types of deals kind of happen in a higher quantity, that can swing that number well up."
Within the wireless backhaul space, Zayo is currently working through four main phases: fiber-to-the-tower, dark fiber backhaul, small cells, and emerging C-RAN opportunities.
Each of these elements is being driven by different factors by the large wireless operators.
Over the past five years, wireline operators have seen FTTT as a way to replace aging copper-based TDM circuits like T-1 and DS3 that could not support the higher speeds for 4G LT data. Following on from the initial fiber-to-the-tower deals, Zayo has taken advantage of the thirst from some wireless operators for dark fiber products.
"The next phase, which just started recently, kind of a year and a half or so, was getting dark fiber solutions to towers themselves," Caruso said. "So that's relatively early in the game, but a lot of progress has been made over the last year and a half, two years, led in particular by one of the carriers, but the other carriers are spending more and more time thinking about kind of their long-term dark fiber-to-the-tower solutions."
However, the real next-gen opportunities in wireless where Zayo expects to see eventual growth are in small cells and cloud RAN (C-RAN).
At this stage, wireless operators are very much still early in the game of deploying small cells and C-RAN.
Verizon (NYSE: VZ), which has been aggressively rolling out small cell in various markets, told investors during the Wells Fargo conference this week that a large part of its wireless capital will focus on rolling out more small cells, for example.
Earlier this week, Zayo announced that now provides 1,200 small cell sites in its territory with a mix of fiber and turnkey network solutions.
Zayo reported that its small cell service has grown 260 percent over the past year. It has also seen an average cash flow yield of 15 percent across all small cell sales.
Caruso said that while wireless operators are still early in the process of implementing small cells, it forecasts it will have more business to pursue over time.
"The third phase has to do with small cells. And this has been well written out, and it's in its infancy," Caruso said. "But when people talk about the quantity of small cells, they talk about very, very large numbers. So we've done quite a bit of small cell, but it's miniscule compared to the number of small cells that the wireless carriers talk about putting in place."
In tandem with small cell, U.S.-based wireless operators' eventual adoption of C-RAN could provide more opportunities for wireless backhaul growth.
C-RAN is based on two tenets: centralization and virtualization of base station baseband processing. By leveraging an distributed base station architecture, C-RAN can enable a host of benefits, such as capex and opex savings, increased asset utilization, and savings on energy.
"That's in its infancy in the U.S., but it's pretty advanced particularly in Japan and in South Korea so pretty much every one of the wireless carriers is excited about how to architect their networks for the next 10 years using a combination of small cells and C-RAN technology," Caruso said.
As it looks forward to new growth opportunities, the service provider also announced a number of organizational and leadership changes that it said will enable it to intensify its focus in key strategic areas and continue to accelerate global growth. Zayo will reorganize along two principal operating units: Strategic Business Segments, reporting to co-COO Chris Morley, and Global Sales and Customer Success, reporting to co-COO Matt Erickson.
From an overall financial standpoint, Zayo Group generated quarterly revenue of $366.8 million, up $4.9 million from the previous quarter, representing 5 percent annualized sequential growth.
- see the earnings release
- here's the earnings transcript
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