Per media reports, Zayo Group Holdings, Inc. ZAYO recently announced that it has been chosen by a leading cloud infrastructure provider for wavelength connectivity. The fiber optic bandwidth infrastructure company did not reveal its latest customer’s name or the financial terms of the contract.
Reportedly, this cutting-edge long-haul wavelength solution will connect a new data center for the customer, situated on the West Coast. The solution comprises multiple 100G wavelengths, along with diverse connectivity, to meet the provider’s requirements for high capacity to support growth. Customers continue to migrate more of their storage and workload to cloud providers. As a result, providers are working on upgrading their capacity and improving core networks to meet the increasing demand.
Notably, Zayo’s fiber networks connect directly to the majority of third-party and enterprise-owned data centers, which places it as the partner of choice for cloud infrastructure providers. Its extensive network footprint, diversified product portfolio and ability to penetrate in different markets are laudable. The company continues to enhance global reach by expanding its fiber footprint and forging strategic partnerships with local providers. It has been experiencing broad-based demand across all the customer verticals, which should drive its top line.
In addition, Zayo is on a constant lookout for strategic acquisitions to improve its operating leverage, extend network reach and broaden customer base. In fact, the company announced its plan to separate into two publicly traded companies to focus better on its businesses. One of the entities will focus on providing core communications infrastructure while the other will leverage infrastructure to provide solutions for a broad set of enterprise customers. The company expects the process to be complete in late 2019. It is assessing multiple options to achieve its long-term objectives while boosting shareholder value.
Zayo should benefit from a diversified blue-chip customer base that comprises the largest and most sophisticated users of bandwidth. The company intends to grow the network business at 5% and beyond, while controlling expenses to drive OpEx efficiency. It maintains emphasis on less than 12-month payback deals, while leaning into strategic investments like E-Rate deals, Mobile Infrastructure and Long-haul fiber. Such deals leverage the company’s existing assets in conjunction with new builds. They are likely to deliver strong free cash flow yields and attractive returns on invested capital.
Backed by operational efficiency, shares of Zayo have recorded an average return of 28.5% compared with the industry’s rise of 30.2% in the past three months. It is to be seen if these offerings to enterprise customers can boost profitability in the coming days.
Currently, Zayo has a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader industry are Calix, Inc. CALX, Harris Corporation HRS and Motorola Solutions, Inc. MSI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Calix has a long-term earnings growth expectation of 6%.
Harris has a long-term earnings growth expectation of 8%.
Motorola has a long-term earnings growth expectation of 8%.
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