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.
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.
