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Zayo Group Holdings Inc  (NYSE:ZAYO)
Q1 2019 Earnings Conference Call
Nov. 07, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Zayo Group Holdings Fiscal Year 2019 First Quarter Earnings Call. My name is Arith, I will be your operator today. During the presentation, all participants will be in a listen-only mode. After today's presentation, there will be an opportunity for you to ask questions. (Operator Instructions) Please note, that this event is being recorded Wednesday, November 8, 2018.

I'd now like to turn the conference over to Brad Korch. Please go ahead.

Brad Korch -- Investor Relations

Good afternoon, and thank you for joining. Today's call will be led by Zayo's Chairman and Chief Executive Officer, Dan Caruso; and Chief Financial Officer, Matt Steinfort.

This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended September 30, 2018. For a link to the webcast, please visit the Investor Relations section of the Zayo website, www.zayo.com. The slide presentation and earnings release are directly available on the site.

Please turn to page two of our earnings call presentation while I review our safe harbor statement. Statements made on this call and contained in the earnings material available on our website that are not historical in nature may constitute forward-looking statements. Such statements are based on the current expectations and beliefs of management. Actual results may differ materially from these forward-looking statements due to risks and uncertainties that are described in more detail in our filings with the SEC. We undertake no obligation to publicly update or revise these forward-looking statements, except as required by law.

I will now turn the presentation over to Dan Caruso, our Chairman and Chief Executive Officer.

Daniel Caruso -- Chairman and Chief Executive Officer

Thank you, Brad. Our results for the quarter were lower than anticipated, both on the bookings and installs, which result in a lower implied growth. So our bookings were $7.3 million, and installs $7.6 million compared to the targets that we've been aiming toward which is north of $8 million and with an intent of getting to $8.5 million and above. The churn was $6.5 million, 1.2%, and together that produced the net installs of $1 million, which implies a 2% growth. Again, 2% growth relative to the target that we've set of 6% to 8%.

Our revenue, EBITDA growth declined, primarily due to the non-recurring items and FX, which on the non-recurring we foreshadowed during the last earnings call, and as the revenue is in line with kind of our low net installs.

EBITDA margin and unlevered free cash flow stayed healthy at 56% and 22%, and our levered free cash flow was positive at $55 million.

Now, these operating metrics are below targets. Later in the call, we will discuss these results in more detail. We'll explain why we believe that the December 2018 quarter results will look a lot similar to prior quarters, such as the June 2018 quarter and why we remain optimistic about near-term prospects for strong bookings, gross installs and net installs. But today we also announced a project to separate Zayo into two publicly traded companies, one that is laser-focused on our infrastructure business and one centered on enterprise services. I will provide the context that led to this decision and the rationale and why we believe this is a path that will unleash substantial value for our shareholders.

So let's start with a little bit of Zayo history. Zayo, from its very beginning, was a pioneer in Communications Infrastructure. And as part of that, we acquired 45 companies, nearly all of which were -- had significant fiber and/or data center assets. Along with these companies came other lines of business that were built on top of the infrastructure assets, and it's -- those sets of business that we accumulate over time in part the center of this conversation.

If you look at Zayo today, over the 10-plus years that we've been operation, we've amassed a lot of fiber assets, $12.2 million deep dense fiber networks throughout the US, Canada, Europe, and increasingly, a global reach that helps our customers solve bandwidth problems that cross into other parts of the world. We cover a lot of data centers with our fiber. In fact, the majority of data centers that exist within the parts of the world that we serve. We also have our own data center portfolio, 50 data centers that serve both as major data center locations for our customers, but also interconnect locations for a lot of our solutions and applications.

Our product mix from a percent of revenue standpoint is weighted toward Fiber Solutions and Transport. We also have a material amount of revenue in a segment called Enterprise Networks and Colocation.

A $2.6 billion of revenue translates to $1.3 million of adjusted EBITDA and $1.1 billion of investment in equity that we've made in Zayo since its inception is worth $8.6 billion, which is about 8x return.

So, in recent quarters, organic execution has been our focus. So, as we've talked about over the last number of calls, we've discussed several initiatives that we've been taking to improve the execution. We've been focusing to -- our transition to what we call a post-IPO management team, a team that was used to operating a business of more complexity and more scale than the original Zayo that was built through -- from a start-up through a series of acquisitions. We've verticalized and grew our sales force, including within our business development functions in fiber and colo. And we also regionalized our fiber teams, so that each of the teams could have a deeper understanding and execution of the opportunities within their geographies.

Now, we remain confident that these are the right long-term initiatives. The September 2018 quarter, obviously, decreased the conviction that these alone will yield the growth opportunities that we think are inherent within our platform. So that contributed to kind of an evaluation of whether kind of the execution that can be enhanced by reducing the overall complexity of the Zayo business.

So, a refresh on what is Zayo today. Zayo is four segments that are part of what we call Communications Infrastructure plus the Allstream segment. And in each of these segments there is a series of product groups underneath them that do related things but different things that form the solutions for which Zayo brings to its customers.

On the Communications Infrastructure side, they share a sales organization and they share some functions like customer service and IT. For the most part, though, each of these business units is -- has a comprehensive set of functions that prosecute their individual business plans.

So as we talk about separating Zayo into two public companies through a spin-off of Enterprise Co, which is an infrastructure company that is laser-focused on fiber, colo and kind of large Transport solutions. So, we have the five fiber regions, zColo, Wavelength, our Tier 1 IP Transit network, and Media Networks, which is where we serve some of our largest media customers with a platform that exploits the fiber network but delivers video-type services for our customers. So the Infrastructure Co1 separated, it will have its own sales team and its own customer service and IT function.

Enterprise Co consist of two groups, one is focused on direct-to-enterprise services, especially centered around WAN and IP-VPN, DIA and related security services and cloud implementations. There's also a carrier unit that provides services to carriers that make up the services help those carriers customers deliver services to customers. That includes Ethernet Tails, Wholesale Voice and SONET services. So each of those subcomponents would be run as kind of stand-alone business divisions within Enterprise Co.

So both of these businesses when split benefits both focus and simplification. The Infrastructure Co becomes an extraordinarily unique fiber-focused infrastructure provider that has deep dense networks, as well as broad international geographic reach. So, very powerful business, very unique and very focused, and it's -- the customers who need big underlying infrastructure. Enterprise Co, on the other hand, has a strong product portfolio and customer base centered on higher bandwidth services -- connectivity services to enterprise locations, including the public cloud and SaaS providers. So more about the product set, the N10 (ph) enterprise experience that also leverages infrastructure but does a lot more than that. There'll be a long-term master customer agreement in place and Infrastructure Co might end up maintaining a 9.9% or less percent ownership in that Enterprise Co business.

So, let's review the rationale for doing this. The first one is it addresses what I call the scale and scope paradox of telecom. What we find in telecom is that, companies that are most focused tend to perform better than the companies that end up with a full range of services, that was into growth to that original thesis of Zayo. It was why when we describe Zayo, we always say we're focused on the infrastructure or defining a company around the infrastructure-based properties. But as we did acquisitions, you end up with lines of business that stretch the definition of infrastructure. Both lines of business still use the infrastructure but for them to be successful they do a lot more than that and they serve a wider range of customers.

So if I'm splitting into two businesses it reduces the complexity of each of the businesses and enables more focused execution by each of the businesses. It also allows for increased innovation, as well as management control and accountability for their business. And it further formalizes the existing intercompany relationships by putting them into more arm's length agreements.

We also believe that as we split the companies, the Infrastructure Co will benefit from an improved cost of capital. They are likely to trade at a higher multiple and potentially a lower cost of debt. This creates a strong currency for further M&A, which has always been one of the hallmarks of Zayo.

This structure also improves the path through REIT. Although we are marching down the path of REIT in our prior structure, the resulting REIT -- if we would have been able to get the appropriate rulings, the resulting REIT still would have been complex. It still would have been a lot going on with the REIT. And one of my concerns was that that REIT -- that form of REIT might have had some trade-offs. It might have had some advantages but it might also have some disadvantages just by the sheer complexity of it and the fact that we were stretching -- would have been stretching kind of the parameters of what have been the basis for REITs in the past. We believe we could still likely accomplish that but there still -- there would have been uncertainty down that path.

On the other hand, when you look at Infrastructure Co, Infrastructure Co turns into a readable property that's very clean. It's very straightforward. It's very easy to understand. And importantly, it's also unique. So it's got that combined advantage of being a property that would be both unique as a REIT but also straightforward for REIT investors to understand and view as a real estate asset. So we think that has advantages and we think that there's a stronger peer group for the REIT that is of that nature. So we think as a result of all this we'll unleash a lot of latent value. Investors will be able to value each business separately based on their respective strengths, their performance and the long-term prospects and it increases the degrees of freedom for further consolidation under both platforms.

So, looking a little deeper into Infrastructure Co -- Zayo Infrastructure Co. It's a compelling business. It's the leading communication infrastructure asset that's focused on fiber and it has a very inherently strong competitive moat in the form of the deep dense extensive fiber networks. The global fiber footprint is unparalleled in its metro/regional depth and its international reach. All the secular trends that benefit bandwidth will be more directly reachable by the Infrastructure business.

The customer base that this group will have is both diversified but also blue-chip. It's the largest and most sophisticated users of Communications Infrastructure, including webscale companies, wireless carriers, financial institutions, et cetera. And a stable recurring revenue model will yield an attractive and predictable cash flow.

At the same time, we'll be unleashing value for Enterprise Co. Now, if you can imagine within Zayo, the things we do on enterprise side are interesting and important but they -- because of our nature of being infrastructure focused, we were fitting them within the construct of what is Zayo, by separating them out, it allows the Enterprise Co to focus on what it does, which is deliver a bundle of value-added services to its customers. It will start out with significant scale and a very strong product portfolio, as well as a broad geographic coverage footprint. A customer base that's tenured and solid and a long-term relationship with Zayo that provides kind of certainty of access to network at a solid cost.

The customer base is diversified, only 17% of the revenue comes from its main customers. And as a complementary wholesale enterprise service, that will allow it to scale and get the right economies for the services it offers. So it's a good balance between growth focused and cash flow-generating businesses.

When you think about Enterprise Co, I think it's important to think of it as two separate but complementary divisions. Separate in that each one can operate as a business in its own right. So the enterprise division, which is where the majority of the revenue would be is about that innovating around SD-WAN and IP-VPN products, DIA and unified communications, particularly voice over IP. So, a large customer base spanning both small customers, medium and larger enterprises.

The carrier division is a very focused business that has three main product areas. One is, providing Ethernet Tails to its carrier customers, a set of wholesale voice products, as well as the legacy SONET service. So the customers that it will have is the leading wireline, wireless and other regional carriers and service providers.

We pro forma it out what the two businesses would look like. The majority of the revenue and EBITDA falls under Zayo Infrastructure and they both are produced solid adjusted unlevered free cash flow. There's also the leverage capacity we pro forma it out here as well, which will provide each of the companies quite a bit of flexibility.

When we talk about the execution path. So, Zayo has long divided its business into segments that were pretty autonomous. We kept balance sheets, income statements, had transfer prices between the various segments. So a lot of autonomy already exists. That is extraordinarily important when it comes to execution because most of the segments or major product groups stay intact. People don't change. Processes don't change. Most of what they do is the same as what they were doing before.

The BSS would be more challenging but manageable. Manageable because a lot of what we do at BSS gets concentrated in a very small number of systems, which are based on software-as-a-service. So Salesforce.com, Tranzact, Workday is -- are capturing a significant portion -- and Oracle, a significant portion of our overall workload.

We think that dis-synergy from breaking it apart is going to be very modest. We think we actually gain offsetting synergies by further focusing on each of the businesses. There is no issues that we can see with existing debt covenants. And the way we're envisioned this is a taxable spin of Enterprise Co. And the reason to do that on a taxable base is it preserves our REIT optionality. To offset the taxable spin we have NOLs, so we don't think it will result in any cash payments. It will just use up some of our NOLs that otherwise are unlikely to be used for a number of years. And we'd expect this stock split to be distributed in late 2019.

I will now turn it over to Matt, our CFO, to talk about the most recent quarter.

Matt Steinfort -- Chief Financial Officer

Thank you, Dan. For the quarter, net bookings of $7.3 million were below expectations. As Dan indicated, this is disappointing and has resulted in us further assessing the execution initiatives we've put in place in the last several quarters. Our conviction about the size and the nature of the addressable market remains very high. We firmly believe our unique platform and comprehensive product set supports selling more than $8.5 million consistently per quarter. We also have strong conviction of the quality of service we provide to our customers.

Our NPS score for our top 500 customers is 26 and rising, which is strong particularly for the technology industry.

Our bookings performance is not the result of losing opportunities to our competitors. Our sales leaders are strong. Nonetheless, it is taking longer to get full productivity from the ramped up organizations and this extends to the business development functions within the fiber groups. The result is Zayo not yet being as engaged as we need to be with newer customers, or with buying groups within our customers that are outside our traditional relationships.

From a channel perspective, our bookings were held back by lower results in the carrier channel and in our agent and partner program. Carrier is in part due to industry dynamics that are shorter term in nature. The agent partner is expected to improve in the near term as a result of the launch of a new program which took effect on October 1, 2018, with our largest partners.

zColo was also lower than historical performance. We expect this to rebound in the December quarter. Looking forward, December 2018 quarter is a holiday quarter which always creates a bookings headwind. Having said this, we still expect that our December 2018 quarter bookings overall to be materially stronger than the prior quarter and more likely than not above $8 million.

One factor in our decision to launch Project Unleash was our recognition of the complexity associated with having a wider product set that is applicable to a broader set of customers. We believe sales productivity will be enhanced by separating our businesses, empowering each of these to focus their sales team on their respective customers and products.

Capital commitments increased materially in the quarter driving our average payback on sales to 30 months. The higher capital commitments, though, were driven by several strategic new long haul route developments that were anchored by some of our most valuable customers, and for which, we anticipate meaningful near-term incremental demand. While these deals increase the near-term capital commitment, they also create valuable additional network for us to sell into upon deployment. To that end, the return profile on our less than 12-month payback deals was better than recent history with materially negative net capital, which demonstrates the compelling economics we generate by selling into our existing network.

Slide 20 illustrates one of these larger deals and capital commitments that we signed during the quarter. This deal included the sale of fiber on nine different long haul routes spanning 5,000 miles of network and including the commitment to build two new strategic long haul routes. One between Columbus and Ashburn and another between Dallas and Atlanta. Columbus and Ashburn both have a high concentration of data centers and our network will be the shortest route between them bypassing major network congestion and overlap points. Dallas to Atlanta connects two key metro markets and will be the lowest latency route to date.

Gross installs were also down slightly quarter-over-quarter and were lighter than our projections, predominantly due to lower bookings in the September quarter. Both our Transport and zColo businesses, in particular, convert a meaningful amount of each quarter sales to in-quarter installs and we're negatively impacted by lighter and later sales in the quarter. Based on our beginning installed pipeline and projected December 2018 quarter sales, we anticipate a stronger December quarter for gross installs and more likely than not resulting in gross installs that exceed $8 million.

As we discussed in the last quarter and on the earnings call, we expect the churn to remain elevated in the 1.2% range for the quarter. Again, our NPS scores are strong and, as such, churn is not the result of customer dissatisfaction with Zayo service. On the contrary, our recent efforts of ensuring more fulsome engagement with our embedded base accounts has gained traction and it is one of the factors in this strong NPS score. This will help reduce avoidable churn in the future. Looking ahead, we continue to believe churn will remain in the 1.2% range in the near-term but remain committed to driving churn lower to the 1% to 1.2% range in the medium-term.

Digging a little bit deeper here. Despite a stable Transport churn, which saw a decline in churn over the last three consecutive quarters, churn in the Fiber Solutions segment was elevated as lit to dark conversion weighed on the near-term results and we saw anticipated churn from expiring legacy ultra-low latency contracts in our spread business. Despite this churn, the spread business is ahead of plan and is generating material value for Zayo.

Enterprise churn remained elevated as we work through a large number of legacy WAN contracts that are being brought to market pricing in order to bring them under longer-term contract and we do continue to see some churn in our cloud business. zColo churn was above historical levels for the second consecutive quarter as we continue to unwind the global carriers' tandem switch that we highlighted in the prior quarter's call.

Lower gross installs coupled with the elevated churn resulted in an implied growth of 2% versus our 6% to 8% target.

Total revenue was down slightly quarter-on-quarter impacted by lower non-recurring revenue and FX headwinds of $2.4 million at the Communications Infrastructure level. Recurring revenue and EBITDA were flat and slightly higher, respectively, which is generally in line with our implied growth from net installs.

Zayo continued to deliver strong adjusted unlevered free cash flow of $116 million at a 22% margin for the quarter. Levered free cash flow increased quarter-over-quarter, helped by seasonally lower interest payments and lower capital expenditures.

Communications Infrastructure revenue were $536.1 million represented 84% of Zayo's revenue, while CI EBITDA of $298.6 million represented 93% of consolidated EBITDA. Communications Infrastructure also contributed 89% of total adjusted unlevered free cash flow.

Turning to our reported financials. Zayo Group revenue was $641.1 million for the quarter with EBITDA of $319.4 million. At a total Company level, reported annualized revenue and EBITDA growth rates include an impact from the sale of Scott-Rice Telephone and non-recurring items, such as the large equipment sale reported in the June quarter. As we look ahead to the December quarter, note that the reported financials for Zayo will include one additional month of impact for the sale of Scott-Rice Telephone. This additional month of impact is approximately $1.25 million of revenue headwind based on our public disclosures.

And finally, turning to our capital structure. Our balance sheet remains very strong. With a gross leverage ratio of 4.6 times, we remain within our target leverage ratio of 3 times to 5 times adjusted EBITDA. The six-month buyback program that we launched in May expired upon the market closed today, November 7. Through market close on November 6, we had purchased 15.7 million shares at an average price of $31.55 for a total consideration of $496 million.

With that, I'll turn it back to Dan.

Daniel Caruso -- Chairman and Chief Executive Officer

We also announced today two changes on our Board. I want to thank Nina Richardson, who completed her term. And I also want to thank and recognize, Phil Canfield from GTCR. Phil joined us as the lead of our Series C around with the GTCR investment. He was integral in a lot of what we accomplish at Zayo, many of the deals that we did. He was a direct partner of ours in both evaluating and executing on the transactions, including AboveNet. And he's just been all around a very valuable board member to us. So thank you, Nina, and thank you, Phil, for your contributions to Zayo.

I also want to welcome our two new Board members, Scott Drake and Yancey Spruill. Scott and Yancey have extensive backgrounds as operators, as CEOs of publicly traded companies or CFOs of publicly traded companies, who have had successful exits. So, we're very excited about Scott and Yancey kind of adding to the broader capabilities and diversity of our Board and serving with us for the next several years.

So with that, we'll turn it over to Q&A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the Q&A session. (Operator Instructions) Our first question is from Amir Rozwadowski of Barclays. Please go ahead.

Amir Rozwadowski -- Barclays -- Analyst

Good afternoon, folks. A couple of questions, if I may. First on the split of the business. Dan, can you talk about what inspired the decision to do this? Was this sort of generated out of the process of converting to a REIT in terms of clearing up the assets? Or do you see this as a sort of strategic in nature allowing you to sort of focus on the infrastructure side of the business in order to grow that business going forward? Any color there would be really appreciated.

And then in thinking about sort of the demand environment, given the metrics for the quarter, how do you think about sort of the overall demand environment? When we look at one of your peers in the fiber arena, they had talked a bit about growth being a bit lower than what your aspirational targets have been. Is this sort of a new demand environment right now, trajectory of the business, or do you believe that, given your expectations for the fourth quarter, you could see sort of a pickup and a return to those sort of aspirational growth targets? Thanks a lot.

Daniel Caruso -- Chairman and Chief Executive Officer

Thanks, Amir. So, on the what inspired the split? Both the REIT and the strategic in nature were elements of it. But let me expand on that a little bit. So, as you know, because you've followed us for a long time, we've long talked about kind of the paradox of scale and scope in our industry. And I've long admired the companies who have been very focused on parts of our value chain have done extremely well, ranging from companies like Akamai and CDN, Cogent, who is focused on IP. Tower companies who are focused on towers. Colo companies that focused on colo, et cetera. And even very fiber-focused companies, many of which we acquired, were successful because of their laser-focused on fiber itself. So, that's been kind of out there for a long time and it's part of our core investment thesis and something I spoke often about.

We recognized over time that we were branching into more and more lines of business and that was making it harder to execute kind of our laser-focused strategy. We've pondered many times over the last, especially year or two on what would be the path to simplifying the business to breaking into more pieces. And we weren't quite sure what the best way was to do that. We explored various alternatives. So, you have that line of thinking.

And then in parallel with that is the whole question of REIT. We've been marching down the path of a REIT. We were optimistic that we would probably get the rulings necessary to become a REIT, but there were some hesitancy, as many of you deducted from me, and OK, if we get those rulings, would it then make sense for us to become a REIT. And I would say, well, I'm not sure. I want to get the rulings first. I want to make sure we fully evaluate it and understand the trade-offs of whether or not to be a REIT. And one of the things knowing the way was, man, we could end up with a pretty complex REIT. So complex business by REIT standards and one that might create a lot of inflexibilities relative to what to do with the business. So didn't know whether or not it would be such that that would prevent us or delay us from being a REIT because we didn't know what the final ruling of REIT would look like. But it was a concern.

So you overlaid that and say, OK, well, is there a way to both simplify the business and create a business that fits much more neatly into kind of the positive attributes that are ascribed to REITs. And that's kind of led to this thought process, well, maybe there are some opportunity to do a taxable spin-off of the business that is focused on enterprise, give them an opportunity to, I'd say them, that business, I'll talk about both of them in that way, give that business, that team of people, which includes a lot of our current Zayo people, give that team of people the opportunity to go prosecute a business all around kind of the product solutions, which our interesting businesses, our product innovation, product bundling, serving enterprise customers in more fulsome way, while at the same time, give the infrastructure portion of the business an opportunity to regain its laser focus and be more on the offensive than the defensive while also better positioning itself to be a REIT. So it's a combination of those factors that led to the decision on this path forward.

Relative to demand, the demand environment is fine. There is nothing that anyone at Zayo talks about relative to the demand environment. We talk about as, man, there is demand out there and we are so uniquely positioned. We should be capturing more of it. And I think we're on the path to do it. And I think that will improve itself in the near-term, we have to prove it though. We have post the numbers. One reason is, we've always been transparent with our bookings, our installs and net installs is so that our investors can see how we are doing on the leading indicators that then flow into the financials over time. But we believe the demand environment is strong. We believe we're extremely well-positioned. We strongly believe that the service that we provide to our customers is recognized as being far stronger than the industry norm. And we think we're getting better at it at the same time. We think as far as doing the split that will simplify each of the businesses and empower each of them to maybe be more effective at capturing that demand, but there is nothing we're seeing out there that is anything but encouraging relative to demand.

Amir Rozwadowski -- Barclays -- Analyst

Thanks very much for the incremental color.

Operator

Thank you. Our next question comes from Colby Synesael of Cowen and Company. Please go ahead.

John Blackledge -- Cowen and Company -- Analyst

This is John on for Colby. Thanks for taking the questions. In terms of bookings of $7.3 million, were there any verticals in particular that were a lot weaker than you anticipated, or is it simply a broader based? And what gives you confidence and seeing the improvement in bookings in the December quarter? Thank you.

Daniel Caruso -- Chairman and Chief Executive Officer

Yeah. So, look, we cited the carrier vertical as a vertical that is lower than the norm. And there is some what we see as kind of near-term kind of situations there that are not headwinds or challenges to the situations that just kind of -- we think of the nature that resolve themselves. I don't want to go into much detail on those. But just based on the pipeline of activity, the funnel of activity, the relationships we have, we don't see that as being kind of an ongoing issue. It's just a lower quarter. Those tend to be -- when you have big quarters in carrier, there tends to be some bigger deals that help make those bigger quarters. So, carrier is the one segment. But there's also the fact of earlier in the year we had large portions of the E-Rate, particularly in the first quarter. E-Rate will pick up again next year, but it doesn't contributed in the last two quarters of the year. That's another example of this segment.

And then on our colo business, the colo business in last quarter and this quarter have had lower bookings than the norm. We are fairly optimistic that we're going to see a higher bookings quarter in the quarter we're in right now for colo.

The other areas that we think we have an opportunity to deliver more on is in the agent partner channel. Those are bigger contributions earlier in the year but that was largely tied to E-Rate. But we've been investing a lot in that area, redeveloping a program, but the program got put in place through kind of signed agreements with our bigger partners at the very end of last quarter, literally the last couple of days. So, now that that's launched in place, we think that provides the proper motivations and incentives and collaborative environment that will lead to that being a contribution of our overall bookings.

So -- but when I would say overall, the reason why we think this quarter is going to be stronger is just based on what we see, actual funnel activity that is near-term and marching through the process. Caveat it somewhat by the fact that this is a holiday quarter, which is always difficult. But at the same time, we're seeing a level of activity that we think will likely -- more likely than that map to a number that's north of $8 million.

John Blackledge -- Cowen and Company -- Analyst

Great. Thank you.

Operator

Our next question is from Nick Del Deo of MoffettNathanson. Please go ahead.

Nick Del Deo -- MoffettNathanson -- Analyst

Hi, thanks for taking my questions. How would the long-term agreement between the businesses be structured? And do you worry at all that the Enterprise Co might garner a depressed multiple because you'd still heavily reliant on Infra Co's network and investors could foresee potential renewal risk associated with that down the road?

Daniel Caruso -- Chairman and Chief Executive Officer

So, there will be long-term agreement. A lot of that will be based on -- so we actually have in place today kind of unit-based transfer pricing between the business units. So, to a fairly high degree of precision, so fairly in precision it sounds like I'm offsetting words, but much, much, much more precise than it's the telecom norm. We -- each of the units and those would buys from other units. And those what fiber buys, what labeling buys, and what price it's paying for those components. Okay? So there's some work to get that more ironclad, which would take place over the coming months. But the framework and the operational practice is already in place and is already operational.

So, part of it is you paid for what you use. And then part of it is kind of a long-term nature of that protects both companies, both the enterprise company where it maintains the long-term access and portability relative to what it's using. And the infrastructure company so that it maintains kind of the revenue stream overall in return for providing those services. So part of the goal during the split process would be to structure and weigh that's durable and flexible from both environments.

You asked about the multiple. We do think that the multiple that is likely to be deemed appropriate by investors for the Infrastructure business is likely to be much higher than kind of our weighted average multiple now. We've long communicated that we think from a some of the parts perspective, our Infrastructure businesses are of the nature that the multiple you describe to them is just higher than our average multiple. And I think we see that in the pure-play kind of deals that are done out there, where there is real pricing dynamics, people buying and selling companies of that nature.

At the same time, we think that the Enterprise business will garner a lower multiple in aggregate. Now, we think over time the Enterprise business has an opportunity by executing real well to solidify a multiple that would maybe be higher than what might be ascribed out of the gate but that will be done as the results are produced and the transparency into its financial performance kind of gets solidified over time.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay. And then I wanted to get a bit into the comments you just made about demand. You said the demand is there and it's not going to competitors. But you're not growing at much more than a low single-digit rate, the market doesn't really seem to be growing. What's the disconnect there?

Daniel Caruso -- Chairman and Chief Executive Officer

Yeah, I think you're right. There appears to be a disconnect. I think part of it is the industry. When you're in the telecom industry, including on the infrastructure layer, I think part of it is as it has restructured itself and consolidated and there is still a frenzy of a lot of investment that's being put out there. And when there's a lot of companies investing, it creates kind of pricing dynamics that kind of will settle over time. And we're still in that mode. There's still -- even though there's fewer competitors in certain parts of the business, there still is more competitors in other parts and the industry still needs to kind of learn how to operate in the world where I think we have more commercial leverage relative to some of our customers than has been the industry norm in the past.

So I think the amount of value that we, as an industry, deliver to our customers, particularly the big sophisticated customers, I think we deliver a lot more value, and frankly, we get paid for. And I think it's up to the industry to figure out how we are able to take full advantage of the unique infrastructure assets that we have and how that translates into the type of growth that you would expect to see ascribed to the services that we provide. And I think that will happen naturally. I think that's an artifact of kind of the long kind of transformation the industry has been going through from one of the late '90s and maybe a little bit before that to what it's going to look like four or five years from now.

So, the opportunity is there. I mean, the need for what we do, not just we, Zayo, but as an industry, the need, the demand, the value that we provide, I think will show up in the financial numbers that our industry produces. But there is some murkiness there today.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay. Thanks, Dan.

Operator

Thank you. Our next question is from Michael Rollins of Citi. Please go ahead.

Adam Ilkowitz -- Citigroup -- Analyst

Hi, thanks. This is Adam Ilkowitz on for Mike Rollins. Two questions really to the spin. First, can you help us understand the direction of the revenue at the Enterprise Co and at the Infrastructure Co? Has Enterprise been stable? Has it been declining in terms of revenue?

And then second, as you've explored these options, how would you consider a sale of the Enterprise Co either post-spin or even pre-spin? Thanks.

Daniel Caruso -- Chairman and Chief Executive Officer

Sure. So, let's start with the Infrastructure Co, and we did not put out revenue growth expectations. But if you look at kind of our fiber business and then if you look at our wave business, so wave is a component transport, both of those are growth businesses and have been growth businesses. Whether the growth businesses in the mid- to higher-single digits or the lower-double digits depends on what quarter you would have been looked at. But we think they have the potential to grow at the high-single digits and maybe north thereof. So those are the primary components.

So we do think the colo business, which is part of the Infrastructure business should return to the medium-single digits type growth projection in the not-too-distant future. So, we think the Infrastructure Co is interesting from both a growth perspective, but also from a cash generation perspective. And also from the perspective the opportunity to both reinvest capital organically or cash flow organically, as well as continue to do M&A type transactions. So, we just think it's a really strong platform is what that will merge as.

Enterprise Co, there's two divisions of Enterprise Co as we articulated. One a carrier division; and one an enterprise division. Now, the carrier division has some elements of that that will have long-term durable kind of value. So the Ethernet Tails as an example, the carrier voice services as an example, our long-term kind of businesses within the carrier division of the enterprise-oriented company. The SONET, as well as parts of wholesale voice will be declining businesses. So, you'll have kind of a declining revenue stream on that, while you also have kind of a long-term durable product that will persist.

On the Enterprise side of that, the Enterprise segment that was part of Zayo is more or less a flat revenue business, strong EBITDA margins, strong cash flow, flat business but we think that has an opportunity to be a growth business. Now, that gets overlaid with a lot of the small and medium, particularly small kind of customers that were part of the legacy ELI, legacy Allstream business, those will tend to kind of be a declining business over time.

So the Enterprise business will take a while for that to demonstrate the transparency of the financial results, but what you will see, I believe, is strong cash flow production from that business, while certain parts of the business becomes long-term durable very interesting businesses, while other parts kind of decline over time.

Yes, if we consider the sale of Enterprise Co, the most important thing as far as what we're doing is, we have to focus on separating the two businesses and establishing a track record for each. I do think in both cases those businesses will either be consolidated for us or would be combined into other platforms over time. I think that's just the ark of the industry that we're in.

Adam Ilkowitz -- Citigroup -- Analyst

And sorry to follow-up on that. Can the sale of one or either division happen pre-spin? Or could it be like you do one sale and it functions as the spin of it?

Daniel Caruso -- Chairman and Chief Executive Officer

You never know how things kind of shape out, but I think that's unlikely that one of them would be sold before we would do a spin because I think you've got to go through the work of fully separating the businesses, getting them operating as separate businesses. And we have a pretty clear path to doing so. I think if there was an attempt to combine one of the businesses into something else, in the meantime, I think that -- who knows but that tends to be kind of a not a great path relative to what we're doing, which is, hey, let's get each of these businesses on solid ground, as independent businesses and let them go off and create value.

Adam Ilkowitz -- Citigroup -- Analyst

All right. Thank you very much.

Operator

Thank you. Our next question is from Phil Cusick of J.P. Morgan. Please go ahead.

Philip Cusick -- J.P. Morgan -- Analyst

Hi, guys. Thanks. That was helpful. Sorry to push but to follow-up on Nick's question. Can you give us roughly how much of the Infrastructure Co revenue would be coming from Enterprise Co to start?

Daniel Caruso -- Chairman and Chief Executive Officer

I'm not sure if we gave an idea on that or not.

Matt Steinfort -- Chief Financial Officer

No we haven't.

Philip Cusick -- J.P. Morgan -- Analyst

Okay. Got it. And then --

Daniel Caruso -- Chairman and Chief Executive Officer

We will show pro forma to that, so.

Philip Cusick -- J.P. Morgan -- Analyst

Okay. It sounds like you have a rough -- a pretty good idea of what it looks like. Okay. And then on the buyback side, I was surprised that you could buy back so much stock since the end of September, especially when you're working on a major transaction. Now, that the spin is announced you've put it on hold. Was that -- is that a requirement, or is that something you've chosen to do?

Matt Steinfort -- Chief Financial Officer

No, we -- Phil, this is Matt. We didn't put it on hold. It expired. So we had a six-month buyback program that was $500 million that expired today. And it just so happened that we were $4 million short of fulfilling the full $500 million.

Philip Cusick -- J.P. Morgan -- Analyst

Got it. Okay. Thank you.

Operator

Thank you. Our next question is from Davis Hebert of Wells Fargo Securities. Please go ahead.

Davis Hebert -- Wells Fargo Securities -- Analyst

Hi, everyone. Thanks for taking the questions. I just wanted to ask a couple from the credit side, if I may. On the mechanics of the spin, where would the existing Zayo bonds sit in the structure? Would those remain at Infra Co?

Matt Steinfort -- Chief Financial Officer

Yeah. The current intent is for them to remain at Infra Co. As Dan indicated in his slides, we think we can absorb the kind of full lending capacity at the Zayo Infrastructure side, which then creates an opportunity to potentially add additional debt at the Enterprise Co side, which would increase our borrowing capacity.

Davis Hebert -- Wells Fargo Securities -- Analyst

Okay. And if I could just take that a step further, would you possibly raise that at Enterprise Co to pay down debt at the Infra Co? Is that a step in the process?

Matt Steinfort -- Chief Financial Officer

That could be something we consider.

Davis Hebert -- Wells Fargo Securities -- Analyst

Okay. And then I'm curious if you talk to the rating agencies about the transactions and how you might expect the outcome from Moody's and S&P to look.

Matt Steinfort -- Chief Financial Officer

We're still exploring that and you would expect if you look at the cash flow profile of the Infrastructure Co business and that there would be certainly a good conversation that we could have with them in that regard. But that's -- we're early in that process.

Davis Hebert -- Wells Fargo Securities -- Analyst

Okay. And just one last technical question, if I may. The spin-off of Enterprise Co, would that be done through the restricted payment basket at the Infra Co?

Matt Steinfort -- Chief Financial Officer

Yes. We believe that we have sufficient capacity more than enough capacity to accomplish that. And as Dan indicated, while we're doing this as a taxable spin, we have $1.9 billion of net operating losses that we can use to shield any gains that we would show on that spin.

Davis Hebert -- Wells Fargo Securities -- Analyst

Okay. Very helpful. Thank you.

Operator

Thank you. Our next question is from Frank Louthan of Raymond James. Please go ahead.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. You mentioned, Dan, that you said either one of these platforms could be combined with something else. So would you potentially looking to eventually sell both parts of it?

And then as a follow-up, did you give consideration to the data centers of the separate division or asset sale, or is that just going to remain with the Infrastructure?

Daniel Caruso -- Chairman and Chief Executive Officer

Yeah. Let me clarify what I said earlier. What I said earlier is, each of the two businesses are -- would either consolidate other companies into them, or they would be consolidated to other companies that more likely one of those to happen over time just because that's the ark of the industry that we're in. Okay? So, our industry is consolidating. Our infrastructure platform would be extraordinarily unique. It will be the type that -- if there's opportunity to consolidate further, you would certainly lead into doing that, if you like those opportunities. So, I would expect that not to be a stand-alone business that doesn't kind of add to it through inorganic or be part of kind of a larger platform overtime one way or another. Just the nature of the industry that we're in.

Likewise, on the Enterprise Co side, I think you see those types of businesses also kind of combining into -- combined together into larger more scaled businesses that are focused on the services that they offer. So that two could be the result of that business buying other companies or perhaps have been combined into other companies that will happen overtime. But none of that is kind of the intent of what we're doing here. I think that's just the observation of what's likely to happen if you look forward in our industry.

Yes, about the colo business as well. We operate the colo business like we do our other segments as a stand-alone business. It has some balance sheet, income statement. Most of the people who work on colo are directly part of that colo business. There's some reliance on kind of sheered sales functions and some shared operations functions. But overall, 90% of what it does is a business unit in of itself with a full set of accountability. So, it is an Infrastructure business. It fits really nicely with the fiber business. It doesn't mean that's the only option that might play out overtime, but we do think you'll see more and more activity by the colo industry kind of recognizing that networking colo are an appropriate combination with one another. Whereas three or four years ago, colo wouldn't have -- would have seen themselves as, hey, once you got outside of our campus or our facility, that's something different. Now you're seeing more and more of them looked at kind of network-based compliments to what their colo platform is. And that's because the market is pulling us in that direction.

Frank Louthan -- Raymond James -- Analyst

Okay. Great. And I apologize if you mentioned this earlier. Did you say what kind of -- what sort of the capital structure might be? And specifically how much leverage the Enterprise business would look to have in (inaudible)?

Matt Steinfort -- Chief Financial Officer

Yeah. On slide 15 of the earnings presentation, we showed the range that Enterprise Co, if you just look at other companies in this space, we think we could have a very favorable leverage ratio compared to a lot of the others that you would view as peers in the kind of 2 times to 4 times range and still be generating material amounts of cash and able to cover that leverage.

Frank Louthan -- Raymond James -- Analyst

Got it. Apologize, I'll check the slides more carefully next time. Thanks a lot.

Operator

Our next question is from John Hodulik of UBS. Please go ahead.

John Hodulik -- UBS -- Analyst

Great. Thanks. Maybe first a follow-up on the revenue question. Either for Dan or Matt, can you guys give us a sense -- you walked through the piece parts of the revenue growth or declines. But can you give us a sense for the sort of gross change in Enterprise and Infrastructure if we just look at the sort of the third quarter? It sounds like Enterprise is declining. But if you can give us order of magnitude for what we could expect to see from either of those businesses, maybe starting with what actually happened here in the third quarter? That would be great.

And then maybe turning to churn. You've got -- it sounds like you got some decent visibility on bookings and gross installs. But if you look at the churn, it looks like Enterprise has ticked up again this quarter, colo ticked up again. Is there sort of light at the end of the tunnel where you have visibility that those are going to start to decline if we look out into the December quarter, or what should we think of churn in the forward quarter similar to what you gave with bookings and gross installs?

Matt Steinfort -- Chief Financial Officer

Okay. I'll take the growth rate. So if you look in the -- I think that probably the easiest way to do this is look in the supplement at the implied growth for each of the business segments. And as Dan indicated, the colo business has been growing at a healthy clip at in kind of the high-single digits, it was at 10% -- in the fiber business, it was a 10% in the June quarter. And on an applied growth basis, it dropped to 7% in the September quarter. But it's been in that kind of 7% to 10% range.

The other big element of the Infrastructure business will be the Waves business. And we said publicly before that the Waves has been executing in the high-single digits, kind of 8% to 9% range. So those two pieces of the business are a big chunk as you'll see in the pie chart, a big chunk of that business.

DIA -- I'm sorry, the IP Transit business has been growing more recently. And so, that we see as a high-growth business. So I would expect that that would carry forward in the coming quarters for both of those businesses.

On the Enterprise side, as Dan mentioned, you've got a mixture of businesses. You've got the SONET business in there that clearly has been declining, but it's a great source of cash. You have the Allstream business, which has been reported separately, so you can see all of the elements of that, which has been declining on both the revenue and in EBITDA basis. But there is good growth businesses within there, the cloud, VoIP business that was within Allstream is a great opportunity. And then there are certainly opportunities within the WAN and IP-VPN space to demonstrate growth over the medium-term. But I would expect that the Enterprise business is in the kind of flattish, potentially a slight decline over the coming quarters.

John Hodulik -- UBS -- Analyst

Got you. And on the churn side?

Matt Steinfort -- Chief Financial Officer

So, churn is something that -- if you -- to really dig into that you have to get into each of the segments because it's really different. And this again part of the nature of what is driving us to Project Unleash here is the drivers of churn, while there are some commonalities across the segments like industry consolidation and just our general need to engage in a deeper way with our customers. But each of the segments has its own specific issues that is kind of grappling with.

The fiber business, for example, in the near-term, while the percentage churn, it's only ticked up a little bit, it's one of our larger segment, so it contributes in a meaningful way to the increase in the dollars. It's going through a couple of quarters of lit to dark conversion, it started in the last quarter. And as we indicated that, we expect that to continue, with some of the big mobile infrastructure deals that we completed recently, as they turn up to fiber they're turning off Ethernet to the tower. And then some of that Ethernet to the tower is ours and we show that as a churn. That will certainly continue.

We also -- and I highlighted this in my comments, we also saw some churn in the near-term from our spread business, which we knew was going happen when we did the deal, there were some legacy contracts that were ultra-low latency that we're going to churn and they kind of work their way through the system. So, I think if you look at each one of the individual segments there is certain characteristics that we're working on and trying to improve on. But I'd say, our overall approach is just better engagement with our customers and trying to get out in front of that. And we think that that 1.2% is going to be the level we're at for the next couple of quarters. But we're working aggressively to try to get that down to that 1% to 1.1%.

John Hodulik -- UBS -- Analyst

Okay. Thanks, Matt.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for our questions. And that concludes the Q&A session. The conference has now completed. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 59 minutes

Call participants:

Brad Korch -- Investor Relations

Daniel Caruso -- Chairman and Chief Executive Officer

Matt Steinfort -- Chief Financial Officer

Amir Rozwadowski -- Barclays -- Analyst

John Blackledge -- Cowen and Company -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

Adam Ilkowitz -- Citigroup -- Analyst

Philip Cusick -- J.P. Morgan -- Analyst

Davis Hebert -- Wells Fargo Securities -- Analyst

Frank Louthan -- Raymond James -- Analyst

John Hodulik -- UBS -- Analyst

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