Businesses across every sector of the economy have needed to modernize their information technology capabilities in order to keep up with their peers, and the companies that help to connect networks by providing key infrastructure assets have had a huge opportunity to cash in on those needs. Zayo Group Holdings (NYSE:ZAYO) has put together an impressive set of communications infrastructure assets in order to help its clients establish and maintain useful connections to take advantage of cloud computing, data analytics, and other important initiatives.
Coming into Monday's fiscal first-quarter financial report, Zayo investors were expecting the company to keep growing at a strong pace, continuing the positive momentum that it had seen in previous quarters. Zayo did grow, but the extent of that growth didn't quite live up to the hopes that its shareholders had for the communications infrastructure specialist. Let's look more closely at how Zayo Group Holdings did and what's coming down the road for the company.
Zayo's growth decelerates
Zayo Group's fiscal first-quarter results showed significant gains, even if they weren't as great as hoped. Revenue was up 27% to $643.5 million, which was only the slightest bit slower than most of those following the stock had expected to see. Net income was higher by roughly half, at $23.2 million, but the corresponding earnings of $0.09 per share fell well short of the consensus forecast among investors for $0.14 per share on the bottom line.
Many of Zayo's results pointed to continued success along the course of its long-term strategic plan. Bookings hit record levels for the second straight quarter, rising to $7.6 million and emphasizing growth in projects that quickly pay rewards for their initial investment. Gross installations were up 12% to $7.3 million, with double-digit percentage growth both in new installations and in upgrades and replacement services.
However, some metrics aren't playing out the way that Zayo wants. Churn levels remain elevated at 1.2%, with a key customer bankruptcy making up a significant portion of the increase during the most recent quarter. Much of the churn stems from Zayo's Canadian business, as well as the business that it took over in the acquisition of Electric Lightwave. Net installation figures fell to $1.2 million, down by half from year-ago levels and implying just 3% annual growth, but Zayo again noted that the negative impact of its key customer's bankruptcy was considerable at roughly $500,000.
Looking at Zayo's segments, mixed performance has presented challenges. In the enterprise networks business, Ethernet applications are doing well, but the managed wide-area network area has seen mixed results due to headwinds from the customers that Zayo has acquired recently. The cloud division suffered from its largest customer's bankruptcy filing. Meanwhile, although Zayo has said that its Allstream business isn't part of its overall core mission, declines in revenue could have future implications for the valuable cash flow that it generates. Zayo once again didn't bring in any large products in excess of $20 million during the quarter, continuing a troubling streak that has persisted throughout much of calendar 2017.
What's ahead for Zayo Group?
CEO Dan Caruso is excited about the way that the business has come together. "We have [fiber data centers and communication] infrastructure to offer to our customers in an environment where we're pretty unique," said Caruso, and "with Level 3 now being part of CenturyLink, we're the only focused communication infrastructure provider that has network assets across many geographies." The CEO also pointed to the way that Zayo's sales force is adapting to changing industry conditions in pursuit of better opportunities.
Nevertheless, Zayo chose to cut its guidance for the fiscal second quarter. The company now expects adjusted pre-tax operating earnings of $1.3 billion, down from $1.33 billion. Zayo has made it clear that its top priority is generating 6% to 8% growth in net installations, even if it means making sacrifices on the profitability front in the near-term.
Zayo shareholders weren't entirely comfortable with the news, and the stock fell 3% in after-hours trading following the announcement. To satisfy its investors, Zayo will have to keep ramping up quickly to take full advantage of its opportunity to serve customers seeking to upgrade their communications capabilities.