ZAYO: “Chapter Three” Centers Around the Focused and Determined Hiker
May 1, 2023 | Earlier this year at the MetroConnect conference in Fort Lauderdale, there seemed to be some concerns about Zayo.
These worries centered around many things. Integration of 40+ companies was harder and longer than hoped: despite Zayo’s size and scale, Zayo was still struggling with the ‘dumb pipe’ syndrome, leverage was too high, cloud spending was lumpy etc. While some of these issues still exist, peeling back the onion, one would conclude this is not a company sitting still.
Since that January conference, Zayo is seemingly showing some baby steps in a positive direction. On April 20th, it announced a significant network expansion and (perhaps, more importantly) enhancements to its services offerings. These services include security enhancements and provisioning of on-demand wavelengths. It is providing these services on some of its most important routes including Ashburn to NYC, Atlanta to Dallas, and LA to San Jose.
The company is deploying these services while at the same time being quite front-footed in its network expansion. Specifically, last year Zayo added 5,200 route miles (resulting in more than 1.35 million fiber miles) to its network. The current plan for 2023 calls for the addition of 708,000 more fiber miles. While this represents a 50 percent decline from 2022 levels, Zayo is taking a pointed and focused look at its network. In 2023, it will roll out 32 new routes in its Tier 1, 2 and 3 markets. Additionally, it plans to augment five of its current dark fiber routes. It has also aligned a deeper management bench, including the announcement of a new vetted CFO from Verizon.
Simply put, Zayo finds itself at the cusp of a very important new “Chapter”; specifically, the page has been turned to Chapter # 3. In an interview with Telecom Ramblings last month, Zayo President Andrés Irlando coined this phrase for Zayo’s current period of development. (Chapter One was the roll up stage and Chapter Two was the going private transaction). In describing his “Chapter Three” marching orders right now Irlando noted the following:
“Chapter Three involved a resetting of the operating model. There was a recognition that this was a great asset with a great customer base, all of which was really well-positioned for external tailwinds. But there was a lot of work to do to transition from the roll-up strategy to an optimization strategy. A lot of work in this chapter involves centralization, putting into place a model that can scale and that can be optimized. We are aggressively getting after things like technology stack tools and even our human capital integrations — making sure that integrations that had been done before were done more fully across all of those previous companies that were part of that roll up. …. We are transforming every aspect of the company. Our focus during this newest chapter is really to become as customer-centric as we possibly can…. the focus is on driving operational excellence and accelerating the organic growth of the business.”
Zayo’s founding fathers knew more than anyone that scale matters in fiber. They put their money (and that of others!) where their mouth was and built this scale through a lot of sweat equity (acquiring 45 companies over 12 years!). While this scale is a huge hurdle to get beyond, benefits are only realized if there is a successful operating business and services that sit on top of it. Since it went private, Zayo has invested a significant amount of capital expenditures to build and nurture this operating business. In a separate interview with Fierce Wireless last month, Irlando indicated that since going private, Zayo’s cap-x has been ~ 20 percent+ above its prior levels while a public company. Given much of the heavy capital lifting is behind it, Zayo expects cap-x to decline to “below historical levels” this year. If it does this, positive free cash flow (a key metric for any bond holder) could be in its sights.
While we acknowledge Zayo still has some uphill climbing to do, the hiking gear is on and it is looking UP the mountain, not down into the abyss.