Zayo Plots Separation

November 12th, 2018 by · 11 Comments

Zayo’s earnings last week didn’t go over too well.  Revenues were down sequentially on all fronts, and the stock fell sharply as a result.  But the less immediate part of the company’s announcements will have more significant long term effects.  First though, here are Zayo’s fiscal Q1 numbers in some context:

$ in millions Fiscal
Total Revenue 643.5 653.5 649.4 657.6 641.1
 – Fiber 195.5 200.5 210.3 225.6 220.9
 – Transport 119.1 117.3 117.2 169.9 168.4
 – Enterprise 85.4 93.9 86.1 85.0 82.6
 – Colo 58.4 59.9 59.6 60.3 59.0
 – Allstream 127.7 123.5 117.7 111.0  105.0
Adjusted EBITDA 316.6 329.9 319.6 324.9 319.4
Adj. EBITDA Margin 49.2% 50.5% 49.2% 49.4% 49.8%
Capex 193.4 193.4 195.1 208.8 182.5
Buildings on-net ~31,600 32,793 33,954 34,901 35,639

Margins were fine, but service activations stalled, installs and on-net building additions slowed, and churn increased.  Ugh.  After its long M&A-fueled growth run, a rough patch was inevitable, but it surely can’t be fun.

But Zayo’s response to all this is, if nothing else, dramatic.  The company plans to split itself in half, with infrastructure going one way and enterprise services going the other.  We had expected the Allstream portion to be split out somehow, but not quite this way.  In the past Zayo has spun out various bits of itself that didn’t fit the whole, but since the AboveNet deal they have embraced a dual wholesale and enterprise approach.

They divided things up internally and have reshuffled the deck multiple times, looking for the right combination.  But they never really found it, and it seems that with last week’s announcement they have now decided to give up trying to serve two masters.  Many others have lost their mojo trying to do both before, and Zayo is looking to regain its own via the split.  Perhaps the lesson here is that focus is everything in this business, if you lose it you will find yourself adrift sooner or later.

Zayo Infrastructure, or “Infraco”, will operate the fiber solutions and zColo business segments as well as the wavelengths and IP transit pieces of the Transport segment. It will have a clear path to become a REIT, and will represent an infrastructure pure play led by current Chairman and CEO Dan Caruso.

Meanwhile, EnterpriseCo (no other name for that part yet) will take on the rest – the Allstream CLEC stuff, the enterprise networks business, and the Ethernet and SONET pieces of the transport business. It will also have a carrier division aimed at helping carriers serve the enterprise markets.  EnterpriseCo, which will surely get a brand of its own at some point, will be led by current COO Mike Strople and SVP Tyler Coates.

Should all go according to plan, both will be publicly traded companies.  That being said, this isn’t a done deal yet.  As envisioned it won’t be done for a year, and perhaps we may see a suitor appear for EnterpriseCo in the meantime.


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Categories: CLEC · Fiber Networks · Financials

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11 Comments So Far

  • Anonymous says:

    “perhaps we may see a suitor appear for EnterpriseCo in the meantime.”

    Correct question.

    I feel for the remaining line level employees.

    • Matt S says:

      Agreed. Will be interesting now to see how everyone responds to this quarter’s 49% payout for compensation with the RSU’s now trading 30% below strike price. Employees are losing money working for this company. Caruso will continue to praise RSU’s and “employee ownership “ as it saves him $$.

  • Anonymous says:

    This is a failure of management. A Split is just an admission of failure. I don’t understand why Dan remains CEO. He and the rest of the management team should have been removed months ago. Now EnterpriseCo can be picked off.

    • Anonymous says:

      I think the “Enterprise” piece being picked off is their hope, though we would all have a good laugh at the buyer. Its pretty obviously a carve out of the non-performing BU’s.

      Its amazing to me that companies (and telcos are especially notorious) fail to realize the simplest principle: when you treat your entire staff like dogshit, they stop caring at all about the company or its success. And that leads very quickly to poor sales and high churn as customers realize that they have no partner.

      These guys are good for an IRU, and literally nothing else.

    • Anonymous says:

      Management is inept. Dan isn’t respected internally and micromanages every minute aspect of the company to a point where it’s just plain weird. Every deal of significance still has to go up to him with no power given to management team. He continues to screw his employees. He surrounds himself with yes men including his little lapdog Jack. The arrogance of those two is also amazing given their results. Until the board finds a real CEO and a competent product head for dark fiber this company will never succeed.

      • Anonymous says:

        Amen. This company is screaming for an activist investor to clean house and split out parts for an acquirer. Dan obviously isn’t the right person to lead. Problem is he’ll nevet admit with that ego.

  • Brent Neader says:

    I remember Dan’s comment on this post here.

    “I am more of the mindset that we should pull a big fiber cable through the conduits, light up the carrier hotels and data centers, and sell bandwidth at half the going-rate.”

    Certainly things have changed a lot in the last 10 years and Zayo is not the “Scrappy” company they once were, i suppose that was inevitable, but we have certainly seen some challenges from the customer facing side.

    Pricing – Couldnt even get them to match pricing on a comparable deal from 2016, meaning DIA pricing was higher than 2 years ago.
    Sales – They seem to have taken many customers away from the “named” regional rep and centralized their rep’s to the Tranzact team, before that our named rep had changed twice i believe. Given that, i will admit the tranzact rep we have now seems pretty great.
    Support – Had one circuit down for hours that never went into alarm/ticket status. Once we opened a ticket, no one had grabbed it after several hours, i had to call back in to push the issue. At least in some markets, they dont even have their own tech’s for dispatch, they contract through local/regional 3rd party support/tech providers.

    Honestly from the enterprise/DIA side, i am not sure what their competitive edge is anymore?

    Given the numbers certainly i can see where they felt the need to make a change, though at least from the support side i have trouble understanding how this would do anything but make it worse. AKA where AT&T has to dispatch/send the ticket to the LEC, in areas where they are the LEC, person you are talking to doesn’t have access to the on site equipment, etc.

    I always try to have the loop/access and internet/bandwidth be from a single entity, anytime they are separate (aka Type II access) it tends to prolong the troubleshooting process. I could see this getting even worse if enterpriseco is bought out as well.

    I will be cautiously waiting to see where this all goes and the impact on the customer experience.

  • John M. says:

    This split should get Zayo, at least the interCo side, back to focusing on what they are good at. The problem with them is they refuse to admit their customer service stinks. I used to be a customer of Abovenet and Zayo immediately raised their price after they acquired Abovenet. The last straw finally came a couple years ago when my circuits were down for 48 hours and my team spent hours trying to reach the Zayo NCC, which is horrendous. When they were Abovenet they delivered their services quickly, for a good price and they jumped on outages and were calling me before I could call them. Where has that service gone? They were so arrogant when I called to cancel- telling me I wouldn’t find a better deal anywhere else and if I stayed, they would consider not raising my price. I sent my salesperson an email telling him which company I was switching to and told him they were half the cost of Zayo. Two months later, that salesman left Zayo and went to my new provider! Zayo needs more than a split, they need an attitude adjustment. My salesman told me once that his boss asked him what his priorities were and when he answered he wanted to please his customers, his boss jumped down his throat and said something about revenue being more important than any customer. Um. Okay.

  • Riddler says:

    Looks like Zayo REIT being positioned as a AMT or Crown Castle acquisition target 2019

  • JK57 says:

    In one hand I have a cookie, in the other…a turd.

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