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Zayo (ZAYO) Chosen by Infrastructure as a Service Provider

Per media reports, Zayo Group Holdings, Inc. ZAYO has been chosen by a global infrastructure as a service provider for space and power in a zColo East Coast data center. The fiber optic bandwidth infrastructure company did not disclose its latest customer’s name or the financial terms of the contract. Notably, this avant-garde solution, which has about 2,000 square feet of space and multiple hundreds of kilowatts of power, is likely to be an extension of one of the company’s facilities in the Southwest. In fact, it will support the customer’s mission-critical processes.

Reportedly, Zayo’s zColo portfolio comprises 51 data centers in more than 30 markets. The company provides multi-layer physical security in its zColo facilities. Also, it adheres to rigorous controls that have been validated through independent audits. Zayo’s ability to deliver flexible and customized data center colocation solutions has helped it win this deal. In this case, the company’s Ashburn facility will provide the customer with the scale required for its East Coast business expansion. Zayo intends to expand the relationship and provide additional space and power in other key cities.

Zayo’s extensive network footprint, diversified product portfolio and ability to penetrate in different markets are laudable. The company continues enhancing 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.

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 split into two publicly traded companies to focus better on its business operations. 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. It is assessing multiple options to achieve its long-term objectives while boosting shareholder value.

Zayo is well poised to 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 boost 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. These are likely to deliver strong free cash flow yields and attractive returns on invested capital. For 2019, the company expects the network business to deliver 4-6% growth while sustaining more than 56% EBITDA margin and at least 20% adjusted unlevered free cash flow margin.

Driven by diligent execution of operational objectives, the stock has recorded an average return of 22.1% compared with the industry’s rise of 27.1% in the past three months. It is to be seen if such in-demand solution 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 CommScope Holding Company, Inc. COMM, Ubiquiti Networks, Inc. UBNT and Calix, Inc. CALX. While CommScope and Ubiquiti sport a Zacks Rank #1 (Strong Buy), Calix carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

CommScope has a long-term earnings growth expectation of 4%.

Ubiquiti has a long-term earnings growth expectation of 20.4%.

Calix has a long-term earnings growth expectation of 6%.

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