The Internet has evolved dramatically over the past 20 years, with the demand for greater bandwidth requiring immense investment in Internet infrastructure. In the 1990s, Cisco Systems (NASDAQ:CSCO) emerged as what some called the backbone of the Internet, but over time, the opportunities for worldwide Internet expansion have given a host of smaller companies exposure to the infrastructure arena. Zayo Group Holdings (NYSE:ZAYO) is one of the newest to go public, with its IPO just over a year ago, and coming into its fiscal first-quarter financial report on Tuesday, Zayo investors were hoping that the company would be able to put together two quarters in a row of profitability. Zayo didn't manage to accomplish that, but it did announce a couple of strategic moves that could put the Internet infrastructure company on a better footing going forward. Let's take a closer look at how Zayo Group Holdings did this quarter and whether it can get itself back into the black in the future.
Zayo Group can't quite make the connection
Zayo Group's fiscal first-quarter results weren't too bad, but they nevertheless weren't quite as good as investors had hoped to see. Revenue of $366.8 million was up 5% from the fiscal fourth quarter and 14% higher than the year-ago period, but that figure was slightly lower than the $369 million consensus forecast among those following the stock. Similarly, Zayo posted a net loss of $15.2 million, and although that was a lot stronger than the $110 million deficit the company suffered in the first quarter of the previous fiscal year, the resulting loss of $0.06 per share was a dime less than the $0.04 per share profit that investors had expected from Zayo.
Looking more closely at Zayo's numbers, the biggest reason for the much-smaller loss this year was a big drop in stock-based compensation, much of which had been included in overhead expenses in the year-ago quarter. Last year, Zayo reported more than $123 million in equity-based pay, helping to send overhead expenses to $156.8 million. This year, overhead fell to just $84.6 million, due largely to the fact that stock-based comp fell by more than 60% to $46.1 million.
Zayo is still spending aggressively to build out its network. The company spent $159.2 million on capital expenditures during the quarter, adding 1,629 route miles to its network along with 555 buildings. Zayo still has plenty of liquidity, with more than $345 million in cash and $440 million available under its revolving credit facility.
2 moves to boost growth
Along with its quarterly report, Zayo released two other news items. First, the company said it will make organizational changes within its current operations. Going forward, Zayo will have two main units, one focusing on Strategic Business Segments, and the other on Global Sales and Customer Success. Strategic Business Segments will include Zayo's network connectivity, colocation and cloud infrastructure, and dark fiber solutions businesses, while Global Sales will include a variety of sales, marketing, engineering, and security functions. As CEO Dan Caruso explained, "These changes will accelerate our positive momentum and intensify our focus on key global opportunities."
Also, Zayo said that it would acquire Ireland-based Viatel in a deal worth just over $100 million. The acquisition will expand Zayo's European fiber network, adding 12 new metro networks, seven data centers, connectivity to more than 80 buildings, and an 8,400 kilometer fiber network that spans eight different countries. Caruso noted how the acquisition will complement Zayo's presence in the U.K. and France, saying that "Our Pan-European infrastructure capability addresses new growth opportunities, including connectivity to key subsea cable systems delivering traffic to and from high-growth regions such as Asia and Africa." That growth track follows how Cisco Systems evolved during its heyday, as the networking giant gradually extended its reach throughout the world. Cisco now has global presence, and Zayo hopes to follow Cisco's lead in maximizing its worldwide opportunities.
Yet investors might have to deal with share-price volatility in the near term. Zayo also agreed to end a lock-up period effective Nov. 16, releasing restrictions on 156 million shares of stock. To help deal with the resulting selling pressure, Zayo approved a $500 million stock repurchase program. Yet with more than $4 billion in stock covered under the agreement, it's unclear whether the buyback will be enough to offset sellers.
Regardless of the short-term impact, though, Zayo's long-term prospects look promising. With plenty of competition, Zayo's success is far from assured, but moves like today's merger and reorganization could help it become consistently profitable and continue to grow over time.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Zayo Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.