Zayo looking forward to landing bigger deals and to advancing its REIT plans.

August 22, 2018

3 Min Read
Zayo Sets Sales Goals, Reiterates REIT Plans

Zayo Communications today posted earnings numbers that beat analyst expectations but didn't match the company's sales goals, according to CEO Dan Caruso, who promised that a sales reorganization and other changes would drive revenue higher. Nonetheless, Zayo stock traded higher after the announcement. (See Zayo Posts Upbeat Q4 Earnings.)

Caruso and CFO Matt Steinfort also devoted significant time on the company's call with analysts and investors discussing Zayo Group Inc. (NYSE: ZAYO)'s plan to convert parts of its business to a real estate investment trust (REIT), something first discussed a year ago, and now apparently still 18 months or more away, despite what Caruso called "major progress."

Caruso kicked off the earnings call by saying that Zayo expected to post quarterly sales of $8.5 million or higher, yet only came in at $8 million, owing to a couple of factors, including lower colocation sales and a lack of what he called "larger deals."

"We do see momentum based on recent go-to-market initiatives we have been investing in, so the traction is there, and we expect to be on the track that we have been foreshadowing," he said. Caruso added that there is a "sense of urgency" within Zayo to start hitting those higher marks.

Among the changes he referenced is a change of leadership at zColo, where Bruce Garrison is now senior vice president, and a move to reorganize the sales force to a vertical sales structure. "We are giving that a chance to get fully baked in," Caruso said.

For larger more complex deals, including those around 5G and small cells, Zayo did create a separate organization lead by Brad Daniels and reporting directly into Jack Waters, CTO and president of Zayo Fiber Solutions.

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On the REIT front, Zayo is now in direct talks with the US Internal Revenue Service and is seeking a private letter ruling from the IRS, but doesn't expect that until 2019, Steinfort said.

"We are very comfortable with the REIT-ability of our fiber business and colo business, particularly as newly constructed with Ethernet transport now included in the transport business," he said. "That is called the line of scrimmage."

It is in the transport area that Zayo, Uniti Fiber and others are in "active conversation," he clarified, adding that he hasn't seen Uniti's PLR filing.

Zayo would retain its enterprise sales outside the REIT, Steinfort added, as well as the Allstream voice and SMB sales. He later said the earliest he would expect Zayo to be able to create a REIT if the IRS ruling is favorable, would be early 2020.

— Carol Wilson, Editor-at-Large, Light Reading

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