Zayo Group (ZAYO) Q2 2019 Earnings Conference Call Transcript

ZAYO earnings call for the period ending December 31, 2018.

Motley Fool Transcribing
Motley Fool Transcribing
Feb 8, 2019 at 2:42PM
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Zayo Group (NYSE:ZAYO)
Q2 2019 Earnings Conference Call
Feb. 7, 2019 5:00 p.m. ET


Prepared Remarks:


Thank you for standing by, and welcome to Zayo Group Holdings fiscal-year 2019 second-quarter earnings call. My name is William, and I will be your operator for today. [Operator instructions] As a reminder, this conference call is being recorded today, Thursday, February 7, 2019. And I would now like to turn the conference over to Brad Korch.

Please go ahead.

Brad Korch -- Investor Relations

Good afternoon, and thank you for joining. Today's call will be led by Zayo's Chairman and Chief Executive Officer Dan Caruso; and Chief Financial Officer Matt Steinfort. This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended December 31, 2018. For a link to the webcast, please visit the Investor Relations section of the Zayo website,

The slide presentation and earnings release are directly available on the site. Please turn to Page 2 of our earnings call presentation while I review our safe harbor statement. Statements made on this call and contained in the earnings materials available on our website that are not historical in nature may constitute forward-looking statements. Such statements are based on the current expectations and beliefs of management.

Actual results may differ materially from these forward-looking statements due to risks and uncertainties that are described in more detail in our filings with the SEC. We undertake no obligation to publicly update or revise these forward-looking statements, except as required by law. I will now turn the presentation over to Dan Caruso.

Dan Caruso -- Chairman and Chief Executive Officer

Thanks, Brad. December '18 was a solid quarter, and both bookings and net installs showed momentum. The $8.3 million net bookings was the second strongest in our history, and the $7.8 million gross installs was also the second highest in our history. Churn was down from the prior quarter, and net installs implied a 4% growth rate.

Our revenue increased 5%, and EBITDA increased 7%. Our EBITDA margins are very strong at 56%, and a very key metric for us is adjusted unlevered free cash flow, and that's also very strong at 22%. This has been very consistent numbers for us quarter in, quarter out. We have positive leverage free cash flow at $22 million.

This quarter was the second-highest bookings quarter in our history at $8.3 million, and if you look at our last four quarters rolling average, that also was $8.3 million and reflects an 11% year-over-year increase over what we did in 2017. The bookings had a solid capital profile, very strong payback profile of 17 months, and 17 -- or 71% of our net sales or close to $6 million has less than a 12-month payback. All those were very strong numbers, reflecting not just a high-bookings quarter but a very high quality as well. The prior quarter, we announced investments in some new long haul routes that were done in coordination with some of our large customers.

At the time we did it, there was a speculative component associated with that project. We since signed up a second anchor tenant, and with that second anchor tenant, we now have fully funded that route, and the cumulative IRR based on just these contracts is in the mid-single digits. So the Columbus to Ashburn route, very valuable because both Columbus, and especially Ashburn, are key data center markets, and this will be a very direct path that connects the Ashburn clusters, not just to Columbus but on to Chicago, down all the way through a low-latency path through to the West Coast. Likewise, the Dallas to Atlanta path is a very direct path between those two very important cities and provides connectivity all the way from the West Coast over a low latency route through to Atlanta.

So very key strategic investments, the kind of investments that we will be leveraging for further value creation for many years to come. This was also the second-highest gross install quarter for Zayo at $7.8 million. In addition, we're projecting that the quarter we're in right now is likely to be above $8 million. Our service activation pipeline, which is the amount of revenue that's been sold but not yet installed, is increased by 11%.

The churn declined from the prior quarter, came in at $6.2 million. That remains at the 1.2% range, and we expect that 1.2% to continue through some or all of calendar year 2019. We continue to believe that the long-term kind of profile of churn for the type of customer base we have, particularly in the network business that we will discuss, is likely to be more like 1.1% over time. The annualized growth rate from net installs was 3.6%, just below 4%.

We're going to talk a little more about the network business in a few slides. The network business actually came in at closer to 5%. Our revenue and adjusted EBITDA were up 5% and 7%, respectively, quarter over quarter. We do have an FX effect that has dampened our recurring revenue in the last two quarters just due to the exchange rates, but we'll continue to grow the recurring revenue on a consistent basis.

We maintained a very healthy 56% adjusted EBITDA margin. And from a cash flow standpoint as well, we generate a healthy 22% adjusted unlevered free cash flow. A lot of our capital program is offset by upfront fees that we get from our customers. It's a big part of what makes Zayo capital-efficient.

The upfront fees have been commonplace for us, pretty much every year of our existence. It's been a significant and material offset to the new capital we deploy, and importantly, allows us to continue to build deep, dense network that has very long-term value and have a portion of that, in essence, funded by kind of our strategic customers. So you can see on adjusted unlevered free cash flow, the range has been in the low to mid-20s pretty much throughout the last calendar year. Unlevered free cash flow was down.

We have a cyclical interest rates where every other quarter, we have more interest payments than the other quarters. So pretty much aligned with the June quarter from where the interest payments were similar. So I'll talk a little bit about unleash. We talked a lot about unleash on the last earnings call.

Over the last three months, we had an opportunity to get a lot of feedback. Some of the feedback was based on a whole lot of internal analysis that took place. Some of it was based on talking to customers and investors, and some of it was just seeing the market conditions, particularly as they evolved in the December and January time frame. From an internal analysis, a lot of it went -- had to do with the customer-by-customer analysis, and as we did that, it became increasingly clear to us the importance of keeping the Layer 2/3 products as part of our core network business.

The December '18 quarter metrics, particularly when you look at it through the lens of the network business, signals that we are on a path to accelerated growth. The feedback from our customers was pretty clear. They -- our strategic customers love what we do for them, and they love that we have deep, dense fiber networks across lots of regions and that has international reach, and they like that we put together solutions. Sometimes it has to do with dark fiber or dedicated fiber.

Equally as often, it has to do with wavelengths or Ethernet or IP as the combination of those abilities that leverage kind of the deep, dense fiber footprint is what they value the most. The public investors like the notion of an infrastructure focus, a clear pathway toward a REIT and simplicity, but they expressed concerns about disruption and distraction that a reorg that we described earlier would take place. And then, lastly, with the market conditions, Zayo's in a strong cash flow position, and we recognize stability is important, especially to the extent that the market conditions were volatile a couple of months ago and may, at some point, return to volatility. As we went through the analysis, we retain a very strong conviction about our key tenets.

We need to simplify our execution. We need to focus on our network business because it's our crown jewel. We need to expand the scope and independence of zColo, and we need to advance Allstream's path to value creation. As we do this, the board and management are evaluating all available alternatives for achieving these goals and for maximizing shareholder value.

So let's start with a simplifying execution. A big part of that is taking the Fiber Solutions transport and enterprise business and classing that together into a network business run by Jack Waters. It has an internal benefit because there's lots of granularity of external reporting, like for example, transfer prices that we use internally for measuring and understanding performance of some of the higher-layer product units like transport and enterprise, that all gets collapsed and no longer becomes something that external investors either have visibility into or need to understand. Our network business, in essence, looks just like many of the other fiber-focused business models that have transacted in recent quarters.

The external benefit from all this is that it's just -- it allows us to have more straightforward communications. So let's talk a little bit more about focusing on the network business as our crown jewel. First, I would focus on kind of the financial pro forma that EBITDA margins for the network business is actually higher than the rest of the business, so the EBITDA margins will be 56% plus for that business. The adjusted unlevered free cash flow margin is also very robust for that business at 20% to 25%, with a little bit of upside there as well.

And the implied growth from net installs is already at 5%. So that alone kind of constitutes a very strong business. We think there's upside in what we're doing there, but we think the profile as it exists today is compelling. It's got stable, recurring revenue model with predictable cash flows.

It's got a global fiber footprint with unparalleled metro and regional depth and international reach, which is a very strong competitive moat. One of the hidden values of Zayo is its customer base. We have a diversified blue-chip customer base that is comprised of the largest and most sophisticated users of bandwidth. And they love what we do for them.

And then, as we've discussed many times, the secular tailwinds that apply to data and bandwidth and cloud impact a whole sort of trends, all of which make fiber a relevant infrastructure for years and decades to come. The expand scope and independence of zColo. zColo already operates in a fairly stand-alone basis, but we're going to take that a little further. We want it to operate even more in a stand-alone position, and we want to combine the cloud infrastructure, which is relatively small business of Zayo that came with some of the acquisitions, move it into zColo.

There's also certain network services that really are attached to customers who are only zColo customers. We want to move those network services into the zColo platform so that the zColo team can have a more intimate and complete relationship with their customers including, where it's appropriate, upselling services such as the cloud and network services that are associated with the colo business. Positioning for REIT optionality remains a priority for us. We continue to treat the work associated with it as front and center, and the REIT potential remains for both the network and the zColo business.

We're still awaiting feedback on the PLR request. The shutdown, we think, is a factor in the timing of it. But it's important to remember that we have no material federal cash taxes until 2024 or 2025, and we have ample time to resolve the Allstream prior to the REIT conversion. The earliest possible REIT conversion is 2021 or 2022.

Maintaining the strong 56%-plus EBITDA margins, and again, slightly higher in the network business, and the strong 20% to 25% adjusted unlevered free cash flow margin while continuing to be leading into customer-driven network expansion remains kind of our theme. We want to grow the network business at the current 5% rate and beyond, while scrutinizing the expenses to drive further Netex and OPEX efficiencies, and we will continue to maintain the emphasis on less than 12-month payback deals while we lean in to strategic investments such as E-Rate deals, mobile infrastructure and long-haul fiber. These deals leverage our existing assets in conjunction with new builds. They deliver strong free cash flow yields and attractive returns on invested capital.

With that, I'll turn it over to Matt.

Matt Steinfort -- Chief Financial Officer

Thanks, Dan. I'll start with our high-level guidance for calendar year 2019. We expect the network business to deliver 4% to 6% growth through 2019, as Dan previously highlighted. The network business is already operating at 5% growth in the December 2018 quarter.

We plan to do this while sustaining healthy 56%-plus EBITDA margins and 20% to 25% or greater adjusted unlevered free cash flow margins, which will keep adjusted unlevered free cash flow positive -- at positive levels, consistent with 2018. We expect near-term EBITDA improvement to be offset by seasonal increases in property and payroll taxes in the March '19 quarter. zColo is projected to improve its recent growth performance and deliver flat to low growth through 2019. EBITDA and cash flow margins are projected to remain generally consistent with recent performance, with margins impacted modestly by the addition of the lower-margin cloud business.

We continue to move toward full separation of Allstream and are working to reduce its reliance on the network segment. In calendar year 2019, we anticipate this segment will generate $8 million to $10 million in quarterly cash. Taking a look at the December quarter results under the current reporting structure, Communications Infrastructure revenue of $542.3 million represented 85% of Zayo's revenue. CI EBITDA of $303.6 million represented 95% of consolidated EBITDA.

Almost 86% of overall ZGH EBITDA and 89% of adjusted unlevered free cash flow came from the fiber, transport and enterprise network segments, which together form the core network business. Turning to our reported financials, Zayo Group revenue was $639.1 million for the quarter, with EBITDA of $321.2 million. At a total company level, reported annualized revenue and EBITDA growth rates include the impact from the sale of Scott-Rice Telephone in the September 2018 quarter and the foreign exchange headwinds that Dan mentioned from the strengthening U.S. dollar.

Our balance sheet continues to remain strong. Our gross leverage ratio is up slightly quarter on quarter to 4.8 times, primarily due to the use of the revolver for share repurchases completed during the September -- or the December quarter. We remain within the target leverage ratio of three to 5 times EBITDA. With our $1.9 billion of net operating loss carryforwards, we are not projected as a material federal cash taxpayer until 2024, 2025.

And finally, we believe we have the opportunity to simplify how we communicate with investors and provide more focus on the key drivers of our business. Beginning with the March 2019 quarter results, which will be presented in our May earnings call, we will simplify our external disclosures. By reporting at the segment level for the network business, zColo and Allstream, we will minimize any impact of transfer pricing between the fiber solutions and lit product groups, and investors will have segments with more clear public and private company peers. For the network and zColo business, we will continue to report the most critical operating metrics as well as the financial results.

In addition to revenue, EBITDA and cash flow metrics, we will disclose net installs and implied growth from net installs, which together are the two most direct indications of our progress toward our growth goals. As do many of our peers, we will provide color on the high-level bookings, installs and churn trends, as appropriate. Before we start the Q&A, I will now hand it back to Dan.

Dan Caruso -- Chairman and Chief Executive Officer

So we announced that Zayo Analyst Day taking place in mid-March here in Boulder, recognizing it is spring skiing season, so hopefully, that will be a draw to get many of you out here. The theme of the Analyst Day is we are only getting started. There's a sneak preview we provided to this theme during the Metro Connect, and I invite you and encourage you to take a flip through that presentation. We will use the Analyst Day to reintroduce you to a broader set of Zayo's key leaders as well as dive into the many different areas that we think are consistent with the theme of we have a lot of opportunity in front of us, we are only getting started.

Before turning it over to Q&A, I will address the speculation about potential interest in our company. In accordance with our responsibilities as publicly traded company, Zayo's board and executive team is fully committed to considering alternatives that would maximize the value of our company. Investors should be confident that our board would engage with any party that makes a credible proposal that appropriately values the company. At the same time, our team remains focused on creating shareholder value by executing our strategy.

Whether public or private, whether stand-alone or part of a larger entity, Zayo's forward-looking opportunity is tremendous. So until and unless our situation changes, we will focus on creating shareholder value by executing our strategy as a stand-alone company. We'd like to focus today's call on our Q4 results, so respectively, we ask that you limit your questions to that topic. I thank you in advance for your cooperation.

And with that, we're happy to take questions. 

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Questions and Answers:


[Operator instructions] And the first questioner today will be Philip Cusick with JPMorgan. Please go ahead.

Philip Cusick -- JP Morgan -- Analyst

Hey, guys. I wonder -- a couple if I can. First, the zColo, can you talk more about the contribution to bookings this quarter, the outlook and the sort of building momentum in that business? And then, second, if you can talk a little bit about the first quarter last year, E-Rate was a big contributor, and I wonder if you can talk about how that's going so far.

Dan Caruso -- Chairman and Chief Executive Officer

Sure. So yes, booking -- zColo did have a strong December quarter, but it did have a tough year. So the colo group had a tough year, both in terms of some -- losing a little bit of booking momentum but also having a fair amount of churn that was above normal. Likewise, the cloud business that is part -- will be part of zColo had a year where there's a lot of adjustments in its revenue and product as well.

There were several meaningful colo deals closed in the quarter. Some of which we disclosed in press releases, and they included a large colo deal with a technology manufacturer, where we provided a large square foot space solution as well as dark fiber connectivity. We've been talking about the need for better execution in the colo business, and a lot of that is the normal blocking and tackling from being closer to your customers and working through the sales prospects. This quarter provide evidence that we're on the right track.

I want to commend kind of the team for what it's been doing the last six, seven months there to get that business on much more solid ground. A lot of times, when we're selling colo, there's a network component, either directly attached as part of the opportunity, or it's part of a broader relationship we have with the customer, where network is a big part of that relationship. So a lot of the colo traction that they had in the quarter was leveraging the fact that we have an extraordinarily strong network business and a good colo platform. You asked about E-Rate as your second question.

So E-Rate -- it is E-Rate season, so for those of you who don't understand E-Rate season, in the first part of the year, particularly the first quarter and spilling into the second quarter, that's when government-backed kind of commercial deals are awarded to build our fiber-to-school districts. Zayo played a very significant role in that last year, I think probably winning as large a share of the fiber-based deals, larger than perhaps any other entity out there. And we're very active this year as well. We're into early February, so too early to tell how that will play out.

It is the government, so they don't always stay on their timing schedule. But we are working through it, and we are optimistic that we will have a good "E-Rate season".

Philip Cusick -- JP Morgan -- Analyst

If I can follow up on the zColo side, given -- I assume the colo management team will be running that cloud business as well, giving them more responsibility. Is that an endorsement of how the last six months has gone?

Dan Caruso -- Chairman and Chief Executive Officer

Yes. It is true that cloud business will be part of zColo, and the strength of that colo team, colo executive team, is giving us confidence to, one, give them more independence. So we want them to have more direct ownership and engagement of the customers that are primarily colo customers while still working with our broader sales channels. So a lot of our largest customers in the colo area are one and the same as our strategic customers and our core business.

So there is a partnership between the core sales channel and the sales experts that reside within zColo. But there's also a longer tail of colo customers that are primarily just colo customers. Sometimes they have some network associated with their colo, and we want the zColo team to have more autonomy to really run its business and own more directly its engagement with customers.

Philip Cusick -- JP Morgan -- Analyst

Thanks, Dan.


And the next questioner today will be Michael Rollins with Citi Investment Research. Please go ahead.

Michael Rollins -- Citi Investment Research -- Analyst

Hi, thanks. Two if I could. First, Dan, I was wondering if you could bridge some of the comments you made on the last earnings call, where the opportunity we discussed to improve execution with the separation and change the focus between some of the fiber infrastructure products and the enterprise segment. And if you could bridge that to where you are now in terms of bringing this stuff back together and operating as one larger unit, and maybe what's changed internally to get you to these new conclusions.

And then, secondly, can you confirm if Zayo is currently evaluating any offers or any potential monetization of assets or the sale of the company at present, just given some of the statements that you read earlier?

Dan Caruso -- Chairman and Chief Executive Officer

On your second point, I think the statements I read earlier are -- kind of are what I would ask you to focus on. We are a public company. We always evaluate kind of various alternatives, and we are committed, both from a board level and management level, to evaluate all strategic alternatives that would maximize the value for our shareholders. Relative to the other question, yes, we did a lot of work over the last three months relative to unleash.

And we -- a lot of that work was internal analysis that was literally customer by customer. A lot of it was spending time with customers and with investors and with employees, and some of it was just observing kind of the more general market conditions and kind of how the December quarter played out. The network business is where super majority of our uniqueness resides. And financially, it's an incredibly strong business.

And as I talked about earlier, the EBITDA margins are in the upper 50s, and the adjusted unlevered free cash flow is in the 20s, and the implied revenue growth from recent performance is 5%, and we see an opportunity for that to accelerate. Fiber-rich business of this type, as you know, with kind of the product mix we have, kind of growth profile, they trade in multiples of mid- to high teens. And so two key tenets of the unleash strategy is simplify execution, which we're doing; and focus on the network business as our crown jewel. And although the network business is already performing well, we believe we can enhance its performance by simplifying the execution, providing the added focus and extracting further benefit from the various go-to-market initiatives that we've been implementing throughout 2018.

By establishing the network business, it also has the added benefit, we think, of making it easier for investors and analysts to understand the true value of the Zayo platform. It'll provide a clearer understanding of the financial performance and improve the ability to appropriately value the business. Moving a modest number of customers and revenue into Allstream removes some of the distraction from the network business. Around the edges, particularly in what we're calling previously our enterprise business, there were things that were causing distraction from the core, how do we put the fiber to work with a Layer 2/3 set of capabilities.

The cloud and colo, colo was -- I'm sorry, cloud was one of those that was causing a bit of a distraction, but the colo and cloud together are businesses that are complementary network business, but at the same time, they're different. So establishing the stronger independence will simplify execution on the network side but also kind of puts the colo business in a better position to kind of own its own destiny. So it's really from all that feedback, all the observation that we believe that we're going to end up with a much simplified execution, simplified messaging and, frankly, better overall performance.


And our next questioner today will be Brett Feldman with Goldman Sachs. Please go ahead.

Brett Feldman -- Goldman Sachs -- Analyst

Thanks for taking the question. Dan, on the last call, I think you had made a point that you felt that the demand environment was substantially better than what was being reflected in your performance, and that was one of the reasons you're looking at ways to streamline and simplify the company. I guess, I just want to come back and revisit that in terms of could you maybe just provide for us sort of an overview of what is driving demand for the network business in particular, what you think you're not getting. When do you think you'll be in a position, based on some of this internal work, to take advantage of it? Because as great as it was to see the bookings improvement this quarter, if we look at the supplemental, it does seem that the large majority of that was in the colo side, meaning that the network side really hasn't quite inflected yet where I think you probably think it can be.

Dan Caruso -- Chairman and Chief Executive Officer

Yes. So the network business, the net installs imply a 5% growth, so that doesn't benefit from the colo side at all. OK. So it's important to recognize that the 5% is -- and that's true not just in the recent quarter, but that's kind of how it's been operating.

On Analyst Day next month, the theme there is we are only getting started, and for those of you who had the opportunity to be there for the Metro Connect presentation or flipped through it, there's multiple different reasons why we believe there's a lot more opportunity to sell more against the core network asset, ranging from, if you look at our fiber networks, we are doing a really good job kind of leveraging some of those fiber networks and frankly, many of the most important of those fiber networks. But we also know that we're still ramping up to get a much -- to be able to leverage the full extent of the network that we have in place in the ground and the opportunities that presents. Likewise, from a sales organization, we've been ramping up the sales organization over the last year or so. But as we sit here today, we still have about 50% of our sales resources that are not fully tenured.

Now that's something we don't feel good about, to be honest with you. We feel like that number should be higher at this point. We think more of our salespeople should be tenured and in place and productive. So we need to kind of refocus kind of our attention from a management team and a sales leadership team to get to the point where we have a much stronger and more balanced participation of the sales force.

And to some degree, that holds true with our business development functions as well. The fiber biz dev functions which we've been staffing up over the last year or so, we have most of that staffing in place, but many of those resources, likewise, are relatively new to the challenge that's in front of them. The -- many of them are very productive and contributing in a significant way, but just as many are still getting up the learning curve and seeing if they're the right fit for kind of the roles that they're in. It's kind of a newer role and one that is -- takes a little bit more to be fully effective in.

Even as we look at our overall senior team, which we're very proud of and we're going to feature during the Analyst Day, our senior team is still coalescing around getting fully tenured within their roles, how to work together in order to fully leverage the platform. Those are some examples, and there's many more, of why we think that despite the fact that we've increased our overall bookings year over year by 11% -- and by the way, to increase the growth rate beyond the 5% on the network business to numbers higher than that, pick your number, does not take that much more bookings or that much better revenue retention. Yet the combined effect of everything I'm describing suggests that we have a lot of upside available to us that is really tied to making our execution plan just more tightened, stay more focused and really hone in on where we have the real strong capability that is our kind of unique and expansive fiber footprint.


And the next questioner today will be Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analyst

Thank you. Matt, I wonder if you could just update us on the REIT a little bit more. You seem to take 2020 off the table. What's the thought process there? Is it just right around the work streams? And how do we think about '21 or '22? And then on the zColo and becoming more independent, is this more of an operational and a kind of financial reporting? Or are you changing your view on whether network and zColo need to be in the same business? We've certainly seen some of the other telcos dispose of their colocation assets.

How are you thinking about that longer-term strategy?

Matt Steinfort -- Chief Financial Officer

OK. So thanks, Simon. From a REIT standpoint, we don't have much of an update on the REIT front given we've not gotten feedback yet from the IRS. And as you could expect, the government shutdown, we believe, is -- had added a couple of months to that process.

So there's an element of physics involved in that it becomes increasingly difficult to sprint to try to accomplish a REIT conversion, which would entail a fiscal year conversion in the midst of all of the other efforts we have under way. But more importantly, I'd say that I'd focus back on we're not going to be a federal cash taxpayer in any meaningful way till 2024 and 2025. And so until we resolve Allstream, it's just -- it's not something that's likely to occur in the very near term.

Dan Caruso -- Chairman and Chief Executive Officer

On the zColo, you said -- I think you used the word necessary. Is it necessary for zColo to be part of Zayo? A key unleash tenet is to simplify our execution and to focus on where we have the most unique and durable competitive edge, and that is our expansive fiber networks. Now the expansive fiber networks do interplay with colo. As I said earlier, where we're winning in colo, it's where network and colo kind of have a relationship or we have a strong relationship with the customer that really is centered on the network, and then colo gets brought into it.

So colo does not need to be part of the entity that controls the network. It's helpful at times. And certainly, we get leverage from that at times, but those do not need to be attached to each other. They don't need to be under the same business umbrella.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thank you.


And our next questioner today will be Colby Synesael with Cowen and Company. Please go ahead.

Colby Synesael -- Cowen and Company -- Analyst

Great. Thank you. You mentioned in your press release that you're evaluating multiple options that are core to the tenets that you talked about in November. When are you expecting to resolve or finalize that evaluation process? And I apologize for being so blunt, but are you not splitting the company now? I just want to be perfectly clear.

And then, I guess, just back to Simon's question, I didn't hear the answer, but are you splitting or intending to split out the zColo business as a stand-alone company or you just haven't made that decision yet? And then, also, you're having an Analyst Day on March, I think it's 14th. It seems like a lot of these things are still being figured out. Why have an Analyst Day before potentially resolving all these things to a month or 2 later be explaining to investors why things are different than what you just said at your Analyst Day?

Dan Caruso -- Chairman and Chief Executive Officer

How many questions was that?

Colby Synesael -- Cowen and Company -- Analyst

Four or five.

Dan Caruso -- Chairman and Chief Executive Officer

So -- well, good, because most of them have the same answer, which is we're a public company. We always will be evaluating options. It's not going to have an end date, unless something were to happen. So as you know, because you follow a lot of public companies, you're always in a position where the board, the management team are looking to maximize shareholder value.

And doing so, especially for a property that is as valuable as a Zayo property, there's interest that is expressed in different ways from different parties at different times. So it's incumbent on us to always be asking the question, what's in the best interest of our shareholders from a value creation standpoint. Are we -- I think one of your questions was about, are we splitting into two public companies? The core tenets of unleash are unchanged, OK? The focus is on the network business as our crown jewel, OK? We're going to keep the Layer 2, Layer 3, the body of that and the services we provide part of the network or fiber business and form a network business around that. That's going to be where we apply more and more of our focus and attention, and as part of that, providing more independence to zColo inclusive of the cloud business and making sure there's clear separation between the two.

We've said for quite some time that Allstream, particularly in the context of being a REIT, Allstream is a business that is outside of what is the infrastructure theme of Zayo, so at some point, it was expected to see that kind of no longer be part of Zayo. But when that happens, it generates cash for us. And as we said, the advantages of being a REIT, which are somewhat tied to federal taxpayers -- we're not a federal taxpayer for quite some time, so we will resolve that, but we'll resolve it in a more natural course. So why are we having an Analyst Day? We've got a lot of new investors over the last six months.

There's been confusion around Zayo and what we're doing. It's incumbent upon us to provide more clarity about what our business is, why we have conviction in what we're doing, how we're approaching that. We want to give investors an opportunity to get to understand and meet the broader Zayo executive team and see what we're doing across multiple different areas of the business to unleash value for our shareholders.

Colby Synesael -- Cowen and Company -- Analyst

Thank you.


And our next questioner today will be John Hodulik with UBS. Please go ahead.

John Hodulik -- UBS -- Analyst

Just a couple of follow-ups and clarifications. First, I guess, so the plan is still to keep the rest of the company together but eventually spin off Allstream, and if you could just confirm that. And then, is the delay in that sale what really drove the delay in the REIT status or the REIT conversion? Because obviously, I don't think the tax -- your tax situation changed. And then, I guess, the big -- if you could just review one more time, what's the driver of sort of the reset here? I mean, obviously, is it just as you guys went through the separation process? And then, I remember sort of the narrative sort of changed that you were deciding -- you're talking to your larger clients and some stuff was going into NetworkCo, some stuff was going into EnterpriseCo.

You just realized it was just too difficult and causing too much disruption, so you sort of unwound that whole thing. If you could just review sort of what the drivers were? Because I think -- my initial impression was that it was sort of probably driven by the sales process, but it doesn't seem like that that's the case. It was more something the internal difficulties of separating the company into two.

Dan Caruso -- Chairman and Chief Executive Officer

Sure. Sounds like a few different things. So let me -- maybe address the REIT one first. Do you want to do that?

Matt Steinfort -- Chief Financial Officer

Yes. So from a REIT standpoint, and this is related to the commentary that Dan'll likely provide here, the fact that we were going to spin the company into -- EnterpriseCo into a public company was going to consume NOLs, which would then require us to pay taxes on a much earlier basis, which expedited the urgency of converting to a REIT. As we got into the analysis and discovered that more of the customers and the revenue was going to remain with the network business, it left us with a smaller Allstream or EnterpriseCo, and the potential feasibility of a public spin started to come into doubt, and therefore, the urgency around that REIT conversion wasn't there. You add to that the fact that we've had a delay in getting any feedback on the PLR from the IRS and the physics, as I said, start to come in, and it becomes less practical, and given it's not as urgent, that is really what contributed to the delay.

Dan Caruso -- Chairman and Chief Executive Officer

So part of what we went through over the last few months, including leading into the last earnings call, is kind of the reflection that we have this incredibly unique and valuable set of fiber assets that span deep and dense throughout the U.S. and Canada, also are deep and dense in Western Europe, and the only platform that is laser-focused on the infrastructure that has fiber in so many different geographies. As we reflected on that, we realized -- and there were some level of frustration that the external markets were having trouble fully understanding the complete value of that, and there was frustration internally that things were more difficult to execute than it seemed like they should have been. So we've challenged ourselves over the last few months to say, OK, how do we simplify the execution? How do we improve our messaging in a way to the public markets where they could get a better understanding of how the business is performing and then the merits of the financial performance of the business? So we do have to execute better.

We understand that. We think this positions us to execute better by focusing on kind of our core business, the part of the business that makes us most special and most unique. As we worked a lot with our customers through the process, it was abundantly clear that what they value from us is the full extent of the network-based products. They like what we do from their own colo, where that's applicable.

But what they need from us is the solutions that put our fiber to work. Some of those, as I said earlier, aren't literally dark fiber solutions. Some are lit solutions with dedicated fiber. Some are wavelengths.

Many are Ethernet-based. Many are IP-based. It's together the packaging of those different capabilities in a way that fully leverages our fiber that makes us so uniquely valuable, both uniquely valuable as an independent company, but also, we believe that network business is of extraordinary interest and value to others as well, whether strategics or perhaps private equity-type investors. So we want to -- what we came to the conclusion of is we need to just do a better job of focusing on our core business, tuning in our execution and improving kind of the communication with our investors so they can have a better understanding of the true value of the platform that we've assembled.

John Hodulik -- UBS -- Analyst

Got it, guys. Thanks.


And our next questioner today will be Matt Niknam with Deutsche Bank. Please go ahead.

Matt Niknam -- Deutsche Bank -- Analyst

Hey, guys. Thanks for taking the question. Can you talk at all about the macro backdrop you're seeing, whether there's been any noticeable change in the demand backdrop from your larger customer verticals? And then, secondly, on the cost side, I think there was talk about scrutinizing expenses to drive Netex and OPEX efficiencies. Can you just help us think about where the bigger opportunities lie within the business, particularly as you think about operating network colo and Allstream separately?

Dan Caruso -- Chairman and Chief Executive Officer

Sure. I'll address the second question first and then come to the first one. And I'm going to address it mostly in the context of the network business, although the same things apply to the other businesses. So we operate at a very respectable EBITDA margin, so 56% across Communications Infrastructure and higher in the network business.

So that's a very respectable starting point. What we do see opportunities quarter in, quarter out were leases to third parties, maintenance on equipment, extra network expense. We see opportunities to kind of take costs out of business either by putting more of our network to work or just by being increasingly focused in on where do we have opportunities to be more efficient. We do think by bringing the network business together, that's going to help identify further opportunities to take some costs out of the business.

But make no mistake about it, the way we're going to create value for our shareholders is not by bringing 56% or 57% EBITDA margin up a few points. We'd like to do that, and we're going to do our best to do that, but the way we're going to create value for our shareholders is going to be by putting the full value of our assets to work. It's going to be selling more into the opportunity -- the network opportunities that already exist. OK? On the capital side, similar as well.

We think we always have the opportunity to keep challenging ourselves to get tighter and tighter in how we manage our capital program. Again, that will help because more cash flow is good, but the primary opportunity available to us is continue to find the right customer deals that are largely backed by those customers, many of which have very short paybacks, put that network to work. That's the way we're going to create the most value. On the macro backdrop, man, there are so many different trends that all zero back into fiber.

It used to be that our primary opportunity was a relatively small number of customers who need a whole bunch of bandwidth. But as more and more companies, and I'm talking about sophisticated companies, some of which are newer companies, West Coast-style tech companies, but many of which are traditional companies who have to adopt the same type of kind of technologies in order to stay relevant and competitive in the world. So more and more companies from each of these categories need high-performance network. They need products that give them direct, kind of lower latency connectivity into their cloud providers or to connect up their data center facilities.

So part of what we're going to go through in Analyst Day is all the different examples of trends that, over time, produce more and more need for fiber and bandwidth.


And our next questioner today will be Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo -- MoffettNathanson -- Analyst

Thanks for taking my questions. First, to follow up on Simon's question earlier, how do you ensure that you don't disrupt any sales opportunities or relationships in a more holistic sense if zColo is going to operate more independently when you're saying a good chunk of the sales are tied to the network segment?

Dan Caruso -- Chairman and Chief Executive Officer

Thanks, Nick. That's a great observation. I mean, what's really important to us is to keep the momentum that we have across the board, and one thing that I should point out to the group as a whole is it sounds like we're talking about changing a lot of things. In actuality, we're not changing all that much at all from a people standpoint.

That is when we create the network business, as an example, most of that is already in place. We've already moved part of that, the transport part headed up by Randy Dunbar, to directly be part of Jack's organization. And the only other part that we're going to do that, and that's going to be effective tomorrow, is moving Tyler Coates and his Layer 2, Layer 3 responsibilities into that. So none of the -- internal to those organizations, there's not much change.

It's -- and in fact, we're making it more straightforward for them to execute, gives us less reliance on a lot of the intercompany dynamic. Likewise, from a sales team standpoint, they like what we're doing because part of what we've heard them express frustration is it's hard to navigate between the different business units. This doesn't completely solve that, but by putting them under one umbrella where we're primarily focused on the financial results of the network business, we believe it will be more straightforward for our salespeople to navigate between kind of the Ethernet, waves, fiber, that are all part of the solutions that they're providing to their customers. So this doesn't have an organizational change element for sales.

It allows their job to get done easier. Your specific question was about colo. Our coverage sales team continues to own kind of the accounts and the entire relationship with them, and that includes the colo relationship. So they will continue to facilitate on behalf of zColo and of the deals that involve the colo and cloud products.

At the same time, the same way we use fiber biz dev to kind of work their geographies, colo has similar functions. They have both a biz dev function, which is really a high-end sales function, and they really act as both the rainmakers to open up colo opportunities and also close them. But by having the larger sales coverage force to help them, they're able to be more productive across more opportunities. That will continue.

The part that we're moving in sales is more kind of direct coverage of the longer tail of accounts. That's primarily an inside sales function that gets assembled but is then directly attached to the colo business as opposed to spread across multiple different premier account sales teams. And that creates a much stronger direct alliance between those two. And then, lastly, we've introduced over the last sic months an asset management function within our colo business.

An asset manager is responsible for the financial and operational performance of those facilities that they own from a business standpoint, and that provides another layer of intimacy with the customers in those facilities, how we're doing for those customers, what more we can do with them. So another example where zColo has an opportunity to control more of its own destiny, in its direct relationships with its customers.

Nick Del Deo -- MoffettNathanson -- Analyst

OK. Got it. That was really helpful, Dan. Second, as part of your guidance, you noted that you want to reduce Allstream's reliance on the network segment in the coming year.

What exactly does that entail?

Dan Caruso -- Chairman and Chief Executive Officer

Yes. There's a couple elements to that. First of all, Allstream is -- operation is separate today. We've been -- that was a big focus over the last year or so.

But as we went deeper into unleash analysis, we did identify certain customers with certain services that really are better associated with Allstream than they are with either network or colo. Typically, these customers have traditional WAN services or they have material off-net locations, or they have -- in some cases, they have specialty security services. So these are customers that Allstream is designed to serve, but it's been harder for the core Zayo, which is focused on kind of higher-end bandwidth solutions with a stronger component of on-net focus. However, they've become -- that has become more of a distraction for kind of the network business, whereas for Allstream, that's core of what they do.

So as we've gone through that, we want to move more of that into Allstream. We think the customers will be taken cared of better, and both Allstream and the network business will be more focused as a result. This is a modest amount of revenue and associated cost. So this isn't a big forklift.

It's more of a fine-tuning, but it's one where we just think that it will allow the network business to stay more focused and the Allstream business to control more of its own destiny.

Nick Del Deo -- MoffettNathanson -- Analyst

OK. So it's related to shuffling the revenues around a little bit, not necessarily trying to move traffic to other providers or anything like that.

Dan Caruso -- Chairman and Chief Executive Officer


Nick Del Deo -- MoffettNathanson -- Analyst

OK. Got it. All right. Thanks, Dan.


And the next questioner today will be Jon Atkin with RBC. Please go ahead.

Jon Atkin -- RBC Capital Markets -- Analyst

Two questions. One on M&A, in terms of the pool of assets that you might be considering purchasing. How does the landscape look given the other kind of moving parts around the business and the REIT conversion? And then, secondly, on levered free cash flow, levered free cash flow has been positive for quite some time. I think a couple of calls ago, you didn't say that, that was necessarily a goal of yours.

But as you think about underwriting new projects associated with some of your larger dark fiber deals, respectively, what are your thoughts or goals around free cash flow positive versus negative in any given quarter?

Matt Steinfort -- Chief Financial Officer

Thanks, Jon. So on the M&A front, we continue to be active in, I'd say, the tuck-in acquisition space. I mean, we've done a number of small asset acquisitions. You saw the announcement of the colo facility that we acquired.

We continue to be -- there's, I think, a still healthy pipeline there. And where we can take advantage of an opportunity to acquire fiber or conduit or data center, we will continue to be active. The larger acquisitions, clearly, there's not as much activity from our side. We've been more focused on the organic growth and, as Dan described, delivering that 5% or greater growth in the network business.

Dan Caruso -- Chairman and Chief Executive Officer

On the levered free cash flow and customer projects, the kind of customer projects that we've been fortunate to see and win on a consistent basis are ones that leverage a lot of our existing network but in many cases, result in us building new incremental network as part of the deal. And in many cases, those projects have some contribution from the customer who prefers to provide an upfront payment for part of the compensation as opposed to paying it all through recurring fees. That puts us in a position where we're able to support a high-investment program into long-term fiber assets while still generating cash flow. So the adjusted unlevered free cash flow has been a strong component of our funding for years and years, and we expect it to continue to be a strong component of our funding as we go forward.

So although we're not trying to manage the business to be cash flow positive, that's not something we set out to do, we are very tuned in to making sure that those investments we make are investments that we have a strong conviction, are going to produce value, return on equity for -- on our invested capital. One of the big values of our broad platform is it presents a lot of opportunities to put network to work in conjunction with incremental builds and therefore, increase the value of the underlying platform over time. One other question I want to address is about public spin. As we -- where we are right now from an unleash standpoint, the centerpiece is, as you guys, I think, are hearing loud and clear, the network business.

We have decided to keep the Layer 2/3 and the set of services we provide to our customers together with the fiber business itself. So the Fiber Solutions business that Jack has currently ran, plus the Transport business that Randy Dunbar has run, plus most of Tyler's business, those come together as the network business itself. So the Allstream business is not a business that long term, you'd expect to be part of Zayo, but it's a business that probably also isn't big enough or robust enough to be spun into a public company. So you would not expect -- although we'll continue to consider all alternatives, you would not anticipate that to be a candidate for a public spin.

The colo business, which is still part of our infrastructure theme, is still something that we see is a very valuable business that -- we want to make sure that business is not treated the same way internally as our core fiber network business. The core fiber network business is where we have significant competitive advantage that will just get enhanced over time. The colo business is valuable as a relationship, but as we said earlier, it doesn't necessarily need to be associated with that business. But from a spin standpoint, there's no near-term kind of expectation that we'd be calling a spin of that business.


[Operator signoff]

Duration: 60 minutes

Call Participants:

Brad Korch -- Investor Relations

Dan Caruso -- Chairman and Chief Executive Officer

Matt Steinfort -- Chief Financial Officer

Philip Cusick -- JP Morgan -- Analyst

Michael Rollins -- Citi Investment Research -- Analyst

Brett Feldman -- Goldman Sachs -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Colby Synesael -- Cowen and Company -- Analyst

John Hodulik -- UBS -- Analyst

Matt Niknam -- Deutsche Bank -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

Jon Atkin -- RBC Capital Markets -- Analyst

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