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Why Zayo Group Holdings, Inc. Stock Plunged Today

By Steve Symington – Nov 8, 2018 at 4:33PM

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The communications infrastructure leader punctuated a rough quarter with plans for a taxable spinoff.

What happened

Shares of Zayo Group Holdings, Inc. (ZAYO) fell 25.6% on Thursday after the bandwidth infrastructure services company announced disappointing third-quarter 2018 results and plans to split itself into two companies.

More specifically on the former, Zayo Group's quarterly revenue declined 0.3% year over year to $641.1 million. That translated to a 5% decline in net income to $22.1 million, which was flat on a per-share basis at $0.09. Most investors were anticipating a slight increase in revenue to generate higher earnings of $0.12 per share.

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So what

During the subsequent conference call, CEO Daniel Caruso admitted Zayo's bookings (down $0.3 million from last year, to $7.3 million) and installs (up $0.3 million, to $7.6 million) were lower than expected. 

But the big news was that, in conjunction with today's report, Zayo also unveiled plans to separate into two publicly traded companies -- one for the infrastructure side and one to handle the enterprise services business.

Caruso, for his part, called it the "logical next step in the evolution of Zayo," explaining that the move should significantly reduce complexity, sharpen each company's focus on its respective area of expertise, more effectively foster innovation, and improve management control and accountability.

Now what

Zayo doesn't provide specific forward financial guidance. But assuming all goes as planned -- which means passing regulatory muster and board approval -- it expects the separation to be completed as a taxable spinoff of the enterprise company from Zayo in late 2019. 

Of course, it seems the market is skeptical about whether the separation will cure Zayo's ills and help the two businesses once again find sustained, profitable growth. But after coupling the news with today's underwhelming report, it's no surprise to see Zayo stock pulling back in response.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Zayo Group. The Motley Fool has a disclosure policy.

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