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Zayo Group Hopes for Faster Growth

By Dan Caplinger – Aug 26, 2016 at 11:43AM

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The internet infrastructure specialist suffered a loss but made progress on its long-term strategy.

Image source: Zayo Group.

Small up-and-coming companies always face challenges with profitability, and even the interest in cloud computing and network infrastructure that has helped Zayo Group Holdings (ZAYO) grow, in its short history as a publicly traded company, hasn't yet filtered down into bottom-line success. Coming into Thursday's fiscal fourth-quarter financial report, Zayo investors wanted to see further signs of growth but were nevertheless patient about the pace at which that growth would materialize. Zayo's results weren't everything that investors had hoped to see, but the company's long-term vision remains intact, and its strategy has led to some short-term successes. Let's look more closely at how Zayo Group did and whether consistent profits are right around the corner.

Zayo posts record net installations, GAAP loss

Zayo Group's fiscal fourth-quarter results were mixed in the eyes of investors. Revenue soared 40% from the year-ago quarter to $507.3 million, which was about $10 million higher than the consensus forecast among those following the stock. The company posted a net loss of $30.9 million, but that figure included one-time items related to debt refinancing and offsetting reductions in provisions for income taxes. Zayo reported a per-share loss of $0.13, but after taking extraordinary items into account, adjusted earnings of $0.01 were more or less in line with what most investors had expected to see.

Taking a closer look at what happened with Zayo during the quarter, company management highlighted several aspects of the business, some of which went well and others of which went poorly. Zayo reported record net installations of $2.4 million, and the company said that it not only increased overall installation activity during the quarter but also kept its churn rates under control. Recurring revenue growth came in at 7% on a pro forma basis, and Zayo celebrated another quarter of revenue and pre-tax operating profit growth. However, net bookings of $6.4 million were less than the company had expected and were down from the year-ago quarter as well as sequentially from the fiscal third quarter. Zayo said that the cancellation of one unusually large order played a role in the net bookings disappointment, but the company added another large project during the quarter to offset that loss.

From a fundamental perspective, Zayo has moved forward aggressively with strategic moves to bolster its business. In April, Zayo bought Texas-based cloud infrastructure services provider Clearview International for $18.3 million in cash, and the integration of its data center assets has increased Zayo's exposure to the key Texas market. At the same time, Zayo made what it called "material progress" on integrating its Allstream acquisition.

CEO and co-founder Dan Caruso was generally pleased with the company's progress. During the conference call following the announcement, Caruso pointed to the high potential of the overall movement toward 5G network technology, saying, "I can't think of one macro trend that doesn't play in favor of having deep, dense fiber networks and a communication infrastructure strategy." That should bode well for the company's overall business.

What's next for Zayo?

The nice thing about Zayo's situation right now is that it has time to move forward at a healthy but measured pace. Thanks to its debt restructuring, Zayo has bought considerable time to consider expansion plans, with its new offering of notes maturing in 2025 allowing for longer-term strategic thinking. It's true that the quarter's GAAP loss was largely due to the immediate impact on Zayo's financial statements that the extinguishment of the restructured debt had. But the long-term impact to Zayo's business prospects should be extremely positive going forward.

Giving some of Zayo's moves a higher profile would be one good way to bolster future growth. The company entered into an agreement with the Denver Public Schools system, connecting 153 sites and two data centers using more than 600 miles of network assets. An even larger school-district network in Texas also helped Zayo identify what could become a growth niche as education requires greater connectivity.

Zayo shareholders didn't seem entirely convinced about the company's future, sending the stock down as much as 3% early Friday following the Thursday afternoon announcement. Given all the competition in cloud computing, Zayo will need to demonstrate its sustainable competitive advantages in order to secure its place among key players in the industry over the long run.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Zayo Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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