As it continues to integrate last year’s acquisitions into its business, Zayo is redefining the possible EBITDA margin potential for the fiber sector. In today’s quarterly earnings numbers, they saw sequential growth in EBITDA that exceeded that of revenue in gross terms, bringing margins up to 58.1%. Here’s a quick table of their numbers in context:
| $ in millions | Fiscal Q3/12 |
Fiscal Q4/12 |
Fiscal Q1/13 |
Fiscal Q2/13 |
Fiscal Q3/13 |
|---|---|---|---|---|---|
| – Zayo Bandwidth | 74.8 | 76.4 | 152.1 | 158.7 | 167.6 |
| – Zayo Fiber Solutions | 19.6 | 22.7 | 65.9 | 71.5 | 74.9 |
| – zColo | 11.8 | 11.7 | 15.3 | 15.4 | 15.9 |
| Total Revenue | 105.0 | 109.6 | 229.7 | 243.5 | 251.4 |
| Adjusted EBITDA | 53.9 | 57.5 | 122.6 | 137.5 | 146.1 |
| Adj. EBITDA Margin | 51.3% | 52.4% | 53.4% | 56.4% | 58.1% |
| Capex | 42.7 | 21.4 | 66.7 | 58.9 | 95.7 |
| Buildings on-net | 5,431 | 6,055 | 10,258 | 11,104 | 11,740 |
Revenues grew 3.2% sequentially, but some of that came from the full quarter’s contribution from the First Telecom and Litecast acquisitions. Going forward, they are futher bifurcating their reporting of what used to be Zayo Bandwidth, but is now Zayo Waves, Zayo Sonet, Zayo Ethernet, Zayo IP, and Zayo MIG. (That last one stands for Mobile Infrastructure Group.) I’ll start tracking those independently next quarter.
Operationally, Zayo spent $95.7M in capex while bringing 636 building on-net – a big number by any measure and all organic. That gives them 11,740 in all now, of which 3,045 are now cell towers.
While the SEC filings are out, the earnings supplement with further detail is not – will wait for the call for any further details.
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I love hearing about the EBIDTA and how large it is…YAZO
Zayo adds the money it takes out of the bank accounts of the companies they just conquered and uses that toward their bottom line. On the day they take over the newly conquered company , they fire everything with a pulse. Then if they feel there is a need, they will hire the recently fired people back. There is no compassion in this company. they are just a money machine that is using telecom and fiber to make their zillions. its a shame to people who are trying to use telecom to make a living and feed their families.
How they use the money of the companies they purchase, would seem to be a vindication of their model, based upon the published quarterly information.
I would even assume that the management that sold the company(ies) were paid for their stake – do you hold them accountable as well?
doesn’t minimize your feelings or your commitment, I know, and sorry that the change affected you in a personal way…
BEST VIDEO EVER
Well, let’s be honest, the EBITDA IS pretty f’in good both in terms of percentage and growth.
Any more info Rob?
Revenue growth is probably slightly lower than they would like but ebitda growth of ~6% seems pretty darn good.
Also not sure how many Q’s in a row they have posted revenue and ebitda growth but it is quite a few.
I just looked at the earnings supplement and Zayo has grown revenue during each of their 18 quarters. Zayo has grown EBITDA each quarter, as well, and EBITDA margin has expanded during every quarter but one.
(See slides 9 & 10 at http://www.zayo.com/sites/default/files/FY13%20Q3%20Earnings%20Supplement.pdf)
Don’t you want to know about Yazo Networks and their massive EBITDA
It is, occasionally, useful to support assertions with facts. http://www.telecomramblings.com/2012/05/abovenet-surges-effortlessly-past-estimates/. Not seeing your comments reflected in reality…
Let’s not be hasty here. I’m sure there is some organic growth or salespeople wouldn’t be getting paid (and from what I hear, they like that sort of thing). That said, I’d like to see the numbers without the fiber to the tower included, as those are HUGE accounts that may be skewing the data. Additionally, how much of the “growth” is customers switching from a lit product to DF or a customer going from a ABVT or 360 contract to a new Zayo one? Whether a baseless accusation or one based on a modicum of truth, the Yazo video seems to point out that this may be happening.
Also, as a side point, I can only imagine that breaking up Zayo into more business groups will only get more confusing for customers. When they have to talk to three different sets of salespeople, engineers, and ops employees if they wanted an IP, Ethernet, and Wave solution, that gets complicated, and I know I would rather work with one sales guy and one ops team. I know the confusion is already happening with the current breakdown of business units, and will probably get only worse with these future plans.
Dan- On a personal note, I hope your recovery is well on track, and I look forward to your remarks to this thread. Manufactured or not, 58% is a damn good number.
The numbers are all provided on their supplemental file.
I love the transparency and the ability to benchmark against their model.
Fibermancer, thanks for the personal note. I am well down my recovery path.
As Herpity Derp, Check It, and Yes point out, we provide industry-leading transparency into our numbers. The good, neutral, and bad will all show up in the numbers, as we want investors to be well-informed.
The Yazo video makes many claims. If you compare their claims to the published numbers, you will learn how factually ridiculous they were. The video was made by legacy Abovenet California sales people. We uncovered some very bad behavior in this group — which is outlined in a filed lawsuit. We also reduced the scope of certain individuals — which they apparently didn’t take kindly to. We also made it clear that the executive and product teams were going to be heavily involved with customers — which some apparently viewed as intruding on their turf. Instead of reacting in a professional manner, they made silly videos with inaccurate (and in some cases libel) claims.
“Anonymous” claims “no organic revenue growth again”. I encourage anyone who wants to know what is happening to simply look at our earnings supplement or listen to our earnings call — in it, you will discover that our organic growth (once one-time revenue fluctuations are normalized) continues to be solid. Important to note is that any other telecom consolidator wouldn’t even attempt lay out numbers to provide insight between inorganic and organic activity.
Fibermancer — a couple more points. (1) “Growth” (or lack thereof) is a measure of revenue change. Hence movement from one product to another would not contribute to positive growth. “Net Installs” is a very direct leading indicator of growth, where movement between products is zero’d out. As such, you can understand our growth without wondering about the effects of product movement. (2) Our sales team reps all products. We do not have separate teams. A couple years ago, we did. Our colo unit had its own dedicated staff. When we launched dark fiber, we had a small dedicated staff. We changed this quite a while back.
I’m happy to talk directly to anyone who wants to understand our situation better. Just shoot me an email and we will set up a call. I will share only public information — given how transparant we are, there is plenty of info to share.
I’m a long time Ramblings and Rob fan. That said, and in my opinion, there is no value to tracking EBITDA and EBITDA margins for a levered roll up. Next up, the company could pay a trillion dollars for a corner store and show more EBITDA. But so what ?
anon says “there is no value to tracking EBITDA and EBITDA margins for a levered roll up”. This comment shows a lack of business understanding. To believe that so much focus is placed on EBITDA by professional investors despite “no value” is naive. The “levered roll up” qualifier does not make this statement true.
anon is correct in the subsequent statement. That is, a higher EBITDA does not automatically imply success. If you pay $20 for a $1 annual increase in EBITDA, value was almost certainly destroyed. The same is true for revenue — a revenue increase doesn’t automatically imply value creation.
At Zayo, we measure ourselves against equity value creation. Specifically, our goal is to increase the value of our equity at a pace of 30% a year. We call this Equity IRR. Let’s say an investor owns $100M of Zayo equity. We strive to make this $100M worth $130M a year later.
EBITDA plays an important role in the math. The value of a company like Zayo can be approximated by multiplying the annualized EBITDA by number. The number is a subjective, but based on comps, 8 – 12X is a reasonable range for LQA EBITDA. We use 9X internally, which we view as conservative leaning.
Financially-sophisticated Telecom Ramblings readers can do the math for Zayo. We publish all the inputs. Anyone want to take a shot at doing the math?
Sounds like we agree. EBITDA, alone, isn’t instructive. If i follow your approach, you take EBITDA, plug a multiple and back out debt and equity. Once you involve the balance sheet (debt, equity, etc) then you have added the other legs of the stool. my original point was to compare the EBITDA of a levered roll up with other types of companies helps illustrate nothing.
By the way, i might debate your 8-12x multiple range. No doubt the market is currently on a run, but historically i think telecoms and clec’s trade for less. Even the big guys (VZ, T) trade for mid single digits… wonder how the value creation looks if some of the “equity” is written down and the multiple is 6.5x
Anon, I’m happy to continue the convo directly. If you are interested, email me at dan.caruso@zayo.com.
EBITDA has nothing to do with leverage. EBITDA means “Earnings before interest…”. EBITDA comparisons matter a lot. It informs about the business model, profitability, available cash flow for capital or stakeholders, and a lot more.
EBITDA, however, is not the whole story… just a very important component of the story. If you are running a telecom, ignoring this will lead to a short career.
Telecom companies are vastly different than one another. Tower companies trade at high teen multiples, colos and low teens, bandwidth infrastructure companies (like Lightower, Zayo, Abovenet) at 8 – 12X, CLECs at 4-7X, and wholesale voice at 3 – 5X. Cash flow conversion and growth opportunities are vastly different, hence the differences. To compare Zayo to VZ/T is akin to comparing mustard to ice cream. They are both foods, but they don’t share much else in common.
You are correct that differences of opinion can exist on EBITDA multiples. Zayo raised $780M of equity from smart money that believes 8 – 12X is reasonable valuation. However, we consistently are focused on true cash flow characteristics of our companies, not some magical EBITDA multiple.
I don’t know what you do for a living. Perhaps you manage a hedge fund and perhaps you are investing on your belief that all telecoms are worth 6.5X. If so, i suspect your portfolio is struggling. 🙂
LOL. I think that pretending i don’t know what i am talking about is more convenient that addressing the legit questions i proposed. Again, the point is that when one borrows money to buy EBITDA, looking at earnings before Interest (and the D and A) is pointless. You seemed to agree and noted that you track “equity value creation”. Which would have to take account of the debt and equity that went into buying the EBITDA.
I am sure you are really smart but calling others dumb isn’t going to help your returns. And I am still waiting for anyone to mention the name of a levered telecom roll up that worked. i can name “a few” that have not…
And if the posters here are correct that sales and service costs were cut, that would increase EBITDA Margins. And i believe that you track “Adjusted EBITDA” which further adjusts out charges. So very hard for anyone outside of the company to know whether: integration charges help absorb costs, renewal rates are static/improving, whether current levels of capex are sufficient to maintain EBITDA, etc. Lastly, the company has almost $2B in intangible “assets”, and also tangible assets – some of which may well have been booked up at acquisition. As such, until the company does a year or two of pure organic growth it is hard to guess at stabilized returns.
If comparing Zayo to ATT is mustard/ice cream, what is comparing it to a tower. no similarities at all with that real estate deal ?
But you know all of this…
Sorry Anon. I wasn’t meaning to take a jab at you. No need to get defensive. I am addressing your points. I am also offering to address them more directly, by offering to spend time with you on the phone. If we did, I would have the opportunity to explain our earnings supplement, as it would address some of the erroneous info above. Why not take me up on this?
I did not compare Zayo to Towers. I was simply point out the wide array of telecom services. Dark Fiber, however, is very tower-like in its characteristics. Leasing a fiber that is part of a strand has a lot of real estate (and economic) similarities to leasing space on a tower.
I do not agree that looking at EBITDA is pointless. This is where you and I disagree. I think it is an important part of understanding Equity Value Creation. And yes, Equity Value Creation takes into account the debt and equity it takes to fund a business (whether organic or inorganic).
There is some truth in your statement “until the company does a year or two of pure organic growth it is hard to guess at stabilized returns.” We are transparant in our reporting to help investors make sense of what is happening during the consolidation phase. That is, analyzing the data provides insight into the “hard to guess” part. If we had to sit on the sidelines for two years while consolidation continued, we would potentially lose out on value creation opportunities. This might make it easier to understand, but it risks leaving lots of equity value creation on the table.
Seriously, email me. Let’s talk through this!!
Abovenets organic revenue growth is ever so shrinking due to Zayo’s take over. Zayo has removed promotional pricing and INCREASED installation costs to above industry average costs for outside plant work. Not only doubling traditional installation times for onnet facilities for 30 days to 60 days but going from a simple sales process and quoting to a drawn out multi day to week(s)+ turn around time for specific products. Not only did their costs for installs/constructions build outs increase but they are increasing every quarter making it cost prohibitive to utilize Zayo in certain markets.
It use to be an absolute pleasure to work with Abovenet, now its like pulling teeth and Zayo has became nothing but another ILEC that is a royal pain to deal with. And every company I speak to has the exact same feedback as I do and we are all now seeking alternative solutions.
Chive on Zayo, We understand you are doing it for your ‘investors’ but without your clients and NSP’s pushing your circuits and finding alternative solutions you will quickly be finding your numbers getting harder to hit.
Zak T, I’m happy to discuss directly your experiences.
One of the “promotions” we ended went as follows. Abovenet used a PLUG as the cost for adding an offnet building, and they quoted a 30 day interval. Using these PLUGS, pricing was set, orders were taken, and commissions were paid upon order signature. Abovenet had its best sales month ever in June of 2012, the month prior to Zayo merger … in part by leveraging the expectation that Zayo would likely put an end to this “promotion”.
The true cost of construction averaged 2-3X the PLUG. The construction timeframe was longer than 30 days, as it typically is when construction is involved. Salespeople got paid commission, but customers were frustrated by the delays. Investors got a lousy deal.
We ended this promotion. This frustrated sales people because it made it harder to sell off-net. We expect to use a good estimate of construction cost and timeframe for off-net sales. Some customers were also frustrated, as they liked getting service at a price that didn’t cover costs.
Zayo is not perfect. Neither was Abovenet. We have daily evidence of the fine job our employees are doing for our customers. We know the ONLY PATH toward taking care of investors is by enamoring customers. We know that a committed and satisfied team of employees is what allows both customers and investors to prosper.
I’m sorry you have a sorry taste in your mouth. No doubt, we had challenges in the 2nd half of 2012 — hence we will take ownership of your frustations. If you genuinely want to establish a positive relationship with Zayo, please reach out to me.
I”m not exactly referencing construction, construction on 30 day intervals is onnet buildings. We all know offnet pricing takes 120+ days depending on the scope of the project. I’m not arguing about offnet construction work. Its the Onnet buildings we have problems with.
With the ending of that promotional pricing we all knew it was coming, We knew how it worked and the limits that were involved, at least we did. I’ve done my share of osp work and worked with contractors and bid jobs for fiber and conduit installs and to hear back that it takes 2-3x the actual cost is crazy. When you would take the cost and amortize it over the length of a contract that is acceptable, but building heavy profits into it is not.
I would love to be able to express what we have seen from a customer point of view, the good and the bad.
great. can you email me at dan.caruso@zayo.com? let’s talk Monday or Tuesday. Thanks for being willing to help.
btw, the Abovenet folks are the ones that immediately told us that the true costs were 2 – 3X the promotion cost, and the actual timeframes would be far longer than those that were committed. This was days after close, and I know this first hand because it came up in an all employee meeting in Washington DC. It was among the more peculiar experiences in my career.
Whether pricing is acceptable or not is a different discussion than the expectation that costs should be known when setting pricing.
I would respectively disagree with Mr. Caruso’s characterization of AboveNet’s sales practices.
As the former Chief Administrative Officer of AboveNet and an executive who had direct involvement in AboveNet’s pricing policies and promotions, I can tell you that AboveNet won business because it was a well-run company, not because its policy was to lose money on sales to customers or promise delivery dates for service that it knew it could not meet. The outstanding financial performance of AboveNet over the years is evidence that the prices at which AboveNet sold its services provided an exceptional return on capital for its investors. The fact that approximately 2/3 of its sales was repeat business with existing customers is evidence that AboveNet delivered on its promises to customers.
In the month prior to the closing of the AboveNet-Zayo transaction, AboveNet’s management did not agree to bad sales deals with the intent of increasing sales commissions earned prior to the transaction closing. AboveNet was an organization run with integrity and at no time prior to the closing of the transaction did it enter into underpriced sales or make promises to deliver services that it knew it could not meet with the intent of taking advantage of the transition to Zayo control.
There are a lot of good people working at Zayo, and I hope that the Zayo is successful moving forward. Hopefully, Zayo can do so without unfairly denigrating AboveNet and its employees.
I agree with Rob. Abovenet was a very well run company. It did a great job taking care of its customers and its investors. It had (and has) a ton of great employees and management, including its senior most executive team.
I shouldn’t have shared this particular information, as it was isolated situation in the month or two leading up to closing. I think the intentions were appropriate. We did need to put a halt to it, because it caused unintended consequences. I felt the need to explain this practice that came to light immediately after closing, as it must have seemed like a sudden change to Abovenet customers.
how would you know if they had talented people? you layed half of them off the first day you took control?
Can we get a “Like” or even an “At-a-boy!” button here? 🙂
I’ll consider it.
Working closing our first deal with Zayo now and i am pleased thus far. Not sure what has changed, or if its just down to the fact that Zayo is being more aggressive on near-net build outs, but Zayo has lost out to Comcast and TWTC for multiple sites in the past, even though their fiber was basically on our property, because they werent aggressive enough on pricing. Started talking to a rep in Memphis last week for a site in the area there and we came to an agreement on price within only a few days of talking and it is pretty attractive. Taking a 5 year deal to do it, but thats common in my world of build outs. Pending redlining we will have a done deal. I hope this is sign the way things are heading with a willingness to spend capex and be aggressive on pricing, as other providers are doing the same. Certainly the latest capex numbers would suggest so!
The fact is that Zayo *has* either eliminated or driven out almost every technical resource that made Abovenet so successful. Who is left? Worse yet, they have been replaced by contractors and empty suits. I’m sure the passing of time will serve to pull back the curtain on the bait and switch accounting tactics and wildly optomistic projections, to fully expose the cost of replacing career professionals with cut-rate rookies and employing a “vendor agnostic” (read as: Duc tape and bailing wire) approach to building the network . How can you expect to retain Abovenet’s core customer base (major financials!) while blindly running an MPLS network that has started to run 30% over utilization best practices in prime markets, just to artificially boost EBITDA by not spending on needed buildouts and gear? The very management who is tasked with protecting the network and customer base, is unable to subnet a /24 into 4 x /26s…how long will it take the Bloomberg’s, NYSE,, and Lynchs of the world to realize that Abovenet’s service no longer exists and they now find themselves in the same leaky boat as the downtrodden victims of Arialink?
The current Operations and implementation model employed at Zayo is often and loudly decried as a transparent attempt at enabling the company officers to cash out with stock and bonuses before reality sets in. As time passes, the hope of someone like BT making the mistake of coveting those big fiber miles and breaking out the big checkbook, fades. Restructuring debt becomes more and more difficult without organic growth to convince the investors to pony up for another round. The smart customers look elsewhere.
I see this going the way of Worldcom, just on a much smaller scale.