Please ensure Javascript is enabled for purposes of website accessibility

Zayo Focuses on Top-Value Clients

By Dan Caplinger - Feb 7, 2018 at 8:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Find out why the communications infrastructure company is making a strategic shift.

Most people in business understand that a relatively small number of important clients make the biggest contributions to an enterprise's success. That's true in the highly successful communications infrastructure space, where Zayo Group Holdings (ZAYO) is trying to give its clients the ability to participate in the revolutionary move toward cloud computing and other important initiatives that have the potential to make information much more valuable.

Coming into Wednesday's fiscal second-quarter financial report, Zayo investors wanted to see a restoration of solid growth that would reverse some of the troubling signs that they saw last quarter. Zayo delivered good financial results, and the method it's using to concentrate on its highest-value clients could pay dividends in the future. Let's take a closer look at Zayo Group Holdings and what its results say about the future.

Zayo store with sign on the left in front of a mountain landscape.

Image source: Zayo Group.

Zayo moves faster again

Zayo Group's fiscal second-quarter results restored confidence in the company's prospects. Revenue climbed 29% to $653.5 million, which was somewhat stronger than what most of those following the stock were expecting to see. GAAP net income fell by more than 40% to $11.5 million, sending earnings down to $0.05 per share. That fell short of the consensus estimate among investors for $0.12 per share.

The big hit to Zayo's bottom line came from tax reform. The company took a $44.1 million hit from new tax laws, which was only partially offset by a favorable provision for deferred tax assets of its foreign subsidiaries.

Fundamentally, Zayo still sees a mixed picture. On the positive side, the company reported a record $7.9 million in net bookings and $7.6 million in gross installs, which is getting ever closer to the company's $8.5 million goal. Yet churn levels remain fairly high at 1.2%, and the growth rate of 4% in net installs is well short of the 6% to 8% target that Zayo has set. To reach that range, Zayo would have to raise the roughly $1.6 million in net installs in booked in the fiscal second quarter to between $2.6 million and $3.4 million.

Zayo is being disciplined with the businessit's bringing in. Even as bookings have risen, Zayo has ensured that initial capital expenditures necessary to fulfill contracts remain proportional to the value of each contract. In the fiscal second quarter, Zayo's bookings had an average payback of about 15 months, which is in line with what the company has done throughout the past year.

From a segment perspective, the fiber solutions business has been the most important in terms of organic revenue growth, posting a 9% boost. Colocation and other businesses have been a bit disappointing, with the transport division seeing slight revenue declines on an organic basis.

Can Zayo move faster?

CEO Dan Caruso was reasonably happy with the way Zayo has performed over the past year. In his presentation the CEO characterized 2017 as a challenging year but noted that with a combination of acquisitions and internal reorganization, the company managed to weather a tough period for the industry at large.

The biggest news that Caruso shared was his vision for better managing Zayo's sales force. Now, global vertical sales team clusters will cover key areas, including carrier business, finance and professional services, media and content, and cloud and software. Each area will have quota-bearing headcount assigned to it, and clients will be ranked according to their importance to the company. With half of revenue coming from Zayo's top 100 clients, the company expects to devote considerable resources to helping those customers, sometimes devoting multiple sales reps as well as international assets toward ensuring that their particular needs are met.

Zayo is also hopeful that new acquisitions will pay off. The company highlighted Spread Networks, Optic Zoo Networks, and Neutral Path Communications. Spread opens the door to greater telecom flow between New York and Chicago, while Optic Zoo concentrates on Vancouver and Neutral Path has substantial Midwest assets.

Zayo shareholders seemed fine with the news, and the stock climbed about half a percent in after-hours trading following the announcement. Zayo still has a lot of work to do to make the most of its potential, but it has the opportunity to make a bigger splash in communications infrastructure if it can keep gaining momentum.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Zayo Group Holdings, Inc. Stock Quote
Zayo Group Holdings, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.