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Zayo Group Keeps Broadening Its Business

By Dan Caplinger - Sep 18, 2015 at 9:10AM

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The bandwidth infrastructure specialist continued to make progress in capturing more customers. Will the trend continue?

Source: Zayo Group.

The Internet has become a part of everyday life, yet there's a huge infrastructure that hundreds of companies have helped build and maintain that make the Internet possible. Zayo Group (ZAYO) is one of those companies, having acquired a wide swath of fiber and data center assets and leasing them out to large customers like financial institutions and telecommunications companies.

Coming into Friday morning's fiscal fourth-quarter financial report, Zayo investors were hopeful that the company would produce at least a modest profit and keep growing in its key focus areas. For the most part, it delivered on that promise, and it's optimistic about future prospects. Let's take a closer look at Zayo Group to see how the company did and what's ahead in the near future.

Zayo looks skyward
Zayo Group's most obvious numbers showed the extent to which the company has aimed at a rapid expansion. Revenue jumped to $361.9 million, up 22% from the year-ago quarter and matching the consensus forecast among investors. The company posted a modest profit of $5.1 million on a GAAP basis, reversing a year-ago loss of more than $72 million, and adjusted pre-tax earnings climbed 23%.

Looking more closely at the report, Zayo saw a lot of progress during the quarter. The company had a record amount of net installations at $2.2 million, as Zayo was able to control its churn from disconnecting former customers and boost its installations of new services to unprecedented levels. Moreover, Zayo has even more business to come, as its installation pipeline of $13.7 million in monthly recurring revenue also represented a record level.

In particular, Zayo has focused its efforts on major service expansions in key metropolitan areas. During the quarter, it highlighted its large fiber expansion projects in Seattle and Nashville, with the Seattle project adding 340 miles of fiber routing and 350 new cellular nodes to bring its total exposure there to more than 900 miles. In Nashville, the expansion is even more impressive, quadrupling its route-mile network to 490 miles and adding 150 new cellular nodes. In addition, Zayo is also building long-haul routes, with its latest projects linking Atlanta and Washington, D.C., and connecting Dallas to Phoenix and Omaha.

Overall, Zayo has a well-balanced portfolio of services generating revenue and profit. The biggest is its dark-fiber leasing, which brings in more than a third of pre-tax operating profits. But Zayo also gets almost half its revenue from various cloud-computing and connectivity services, and that could become an even more important source of business in the future as customers demand more from their IT systems.

What's next for Zayo Group?
One of the most interesting initiatives Zayo has taken on was announced just last week, when the company said that it would team up with cloud provider Salesforce (CRM 1.92%) to link up Zayo's network to various Salesforce services. The move aims to help Zayo provide better service to customers who also have a relationship with Salesforce, and as Zayo Senior Vice President Dennis Kyle noted, "We are enabling customers to create this dedicated connectivity to their Salesforce environments simply, securely, and cost-effectively."

At the same time, though, Zayo also continues to work on consolidating its acquisition of colocation and Internet infrastructure company Latisys Holdings earlier this year. The transaction dramatically increased Zayo's capacity to provide data center services, and by opening up new markets such as Denver, Orange County, and London, Zayo has expected Latisys to play an increasingly vital role in defining its growth trajectory going forward.

Finally, Zayo investors will be pleased at the fact that the company has extended elements of its lockup agreement with pre-IPO shareholders for another year. Essentially, the new deal allows sales through what Zayo calls "coordinated block trades," with a scheduled release of lockup restrictions between now and October 2016. With the agreement, Zayo is aiming to demonstrate its commitment to an orderly transition without disrupting the market for Zayo shares.

Zayo has done an admirable job in its first year as a public company, and although the stock hasn't soared, it has held its own in a tough market environment. If Zayo can keep operating effectively to expand its reach and integrate its acquisitions, then it has every possibility of continuing to treat long-term investors well in the future.

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