Rising competitive fiber operator Zayo Group (news, filings) reported its fiscal Q1 earnings yesterday in the wake of Zayo Bandwidth COO John Scarano's recently announced departure. There were few surprises but a bit of more accurate information on the AFS deal. Because of Zayo's frequent M&A activity, it is always rather difficult to find an apples to apples comparison. In this case though, Q1 included a full quarter from the former AGL Networks, whose acquisition closed on July 1 and whose revenues all went toward the ZFS segment along with $1.4M of dark fiber revenue transferred from Zayo Bandwidth. With that in mind, here's a quick table summarizing their performance alongside the prior quarter:
|$ in millions||Fiscal Q3/10||Fiscal Q4/10||Fiscal Q1/11|
|–Zayo Fiber Solutions||
Revenue: AGL's contribution went entirely toward ZFS, and was apparently about $6.1M, which means that organically Zayo as a whole added about $1.1M during the quarter. If Zayo Bandwidth still had the $1.4 it transferred to ZFS, it would have grown by $2M sequentially or 4%. However Zayo Enterprise Networks fell back $1.1M, cutting into that growth. Zayo also said that with the new year it will be transferring Zayo Enterprise's bandwidth and colo customers to ZB and ZColo, leaving it with just managed services and CLEC revenues. That will of course make apples to apples comparisons even more difficult, however it suggests that Zayo didn't find a benefit in segregating itself by customer size, and will instead do so by function.
EBITDA: Costs remained in check as adjusted EBITDA margin surged, but part of this was due to the inclusion of AGL's revenue, which is of the high EBITDA margin variety. Nevertheless, Zayo's current levels of 39% continue to rise, and following the AFS integration I would not be surprised to see them above 40%.
AFS Details: Zayo said that pro forma revenue including American Fiber Systems would have been $76.3M, which allows us to derive AFS's Q3 revenue to be approximately 7.7M during the quarter, for a $30M annual run rate. At approximately 40% EBITDA margins, that would be $12M in annual EBITDA. The purchase price of $114.5M therefore appears to have been at an EV/EBITDA multiple of about 9.5. However, that is probably skewed by the valuation of AFS's ownership interests in US Carrier.
Summary: Zayo is a tough one to keep up with, but I try to keep track as their rise has been so rapid. Organic growth hasn't been stellar of late - still in the single digits annually, but EBITDA margin expansion has been quite good. In his departing comments, John Scarano seemed to indicate that the days of big change at Zayo may be ending. Does that mean the M&A run is over or that the company is big enough that further M&As won't be that big relative to the whole? I suppose we'll just have to see.
Another possibility is of course that the company's backers will themselves look to cash in. Zayo's adjusted EBITDA will enter 2011 at a run rate of about $120M, for which a multiple of 8-10x would bring them a very nice profit on the money they've put into the company. But I doubt Caruso himself would want to sell at this point, it's just getting interesting.
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