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Zayo Poised on Diversified Product Offerings, Risks Remain

Zacks Equity Research

On Dec 26, we issued an updated research report on Zayo Group Holdings, Inc. ZAYO.

The bandwidth infrastructure solutions provider’s extensive network footprint, diversified product portfolio and ability to penetrate different markets are laudable. It remains optimistic regarding the growth prospects of its largest business segment — Fiber Solutions — as it is witnessing a very strong momentum.

The company expanded its fiber networks in four European markets, including London, Paris, Dublin and Amsterdam to deliver fast, high-capacity fiber to key centers of technology and commerce. It also announced that Quantum Xchange has selected its services for a dark fiber solution to power the first Quantum Key Distribution network in the United States. The 530-mile route will extend from Boston to Washington D.C., leveraging Zayo’s existing network along the eastern corridor.

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.

One of the divisions dubbed, InfraCo, will have a broad geographic reach throughout North America and Western Europe. This infrastructure-based firm will include the current Fiber Solutions and zColo business segments along with the Wavelength and IP Transit businesses of Zayo’s current Transport segment. The other division named EnterpriseCo will be centered on higher bandwidth connectivity to enterprise locations, including public cloud and SaaS providers. It will comprise the current Enterprise Networks and Allstream segments, along with the SONET and Ethernet businesses of Zayo’s current Transport segment. Moreover, the company's strong liquidity position adds to its strength. It remains committed towards increasing wealth of shareholders through share repurchase program.

The company’s shares have declined 44.1%, compared with the industry’s decline of 47.9% in the past year.



Risks

Zayo’s business is exposed to foreign currency translation risk, given its strong presence in international markets. The company’s top line remains highly volatile owing to continued strength of the dollar compared with other foreign currencies. This apart, its domestic and foreign operations are subject to competitive pressure and require constant work on communication infrastructure service quality, customer service and pricing.

The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. Although these investments will eventually help reduce service delivery costs to adequately support broadband competition, rural coverage and wireless densification, short-term profitability is likely to fall, leading to earnings dilution.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock.

Stocks to Consider

A few stocks in the broader industry worth considering are Arista Networks, Inc. ANET, Vocera Communications, Inc. VCRA and ARRIS International plc ARRS. While Arista and Vocera sport a Zacks Rank #1 (Strong Buy), ARRIS carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.          

Arista has a long-term earnings growth expectation of 21.7%.

Vocera has a long-term earnings growth expectation of 18.7%.

ARRIS has a long-term earnings growth expectation of 6.5%.

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