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
|Adj. EBITDA Margin||49.2%||50.5%||49.2%||49.4%||49.8%|
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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