Zayo Group Holdings, Inc. :ZAYO-US: Earnings Analysis: Q1, 2018 By the Numbers : November 15, 2017

Zayo Group Holdings, Inc. reports financial results for the quarter ended September 30, 2017.

We analyze the earnings along side the following peers of Zayo Group Holdings, Inc. – CenturyLink, Inc., Windstream Holdings, Inc., Cogent Communications Holdings Inc and Frontier Communications Corporation Class B (CTL-US, WIN-US, CCOI-US and FTR-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 643.50 million, Net Earnings of USD 23.20 million.
  • Gross margins narrowed from 38.15% to 34.76% compared to the same period last year, operating (EBITDA) margins now 44.72% from 45.26%.
  • Year-on-year change in operating cash flow of 15.46% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 643.5 638 550.2 506.7 504.9
Revenue Growth (%YOY) 27.45 25.76 15.1 37.09 37.65
Earnings (mil) 23.2 23.2 27 19.8 15.7
Earnings Growth (%YOY) 47.77 175.08 239.9 283.33 203.29
Net Margin (%) 3.61 3.64 4.91 3.91 3.11
EPS 0.09 0.09 0.11 0.08 0.06
Return on Equity (%) 1.61 1.68 2.05 1.56 1.27
Return on Assets (%) 1.05 1.07 1.4 1.16 0.93

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Market Share Versus Profits

Revenues History
Earnings History

ZAYO-US’s change in revenue this period compared to the same period last year of 27.45% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that ZAYO-US is holding onto its market share. Also, for comparison purposes, revenues changed by 0.86% and earnings by 0% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 34.76% to 38.15% for the same period last year, while operating margins (EBITDA margins) went from 44.72% to 45.26% over the same time frame.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ZAYO-US’s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently -11.81 days, compared to last year’s level of -16.83 days.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

ZAYO-US’s change in operating cash flow of 15.46% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s operating (EBIT) margins contracted from 17.83% to 16.11%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from 4.42% to 4.44%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Zayo Group Holdings, Inc.

Company Profile

Zayo Group Holdings, Inc. provides bandwidth infrastructure services in the U.S. and Europe. Its products and services enable mission critical, high-bandwidth applications, such as cloud-based computing, video, mobile, social media, machine-to-machine connectivity, and other bandwidth-intensive applications. The company operates through the following segments: Fiber Solutions, Transport, Enterprise Networks, Zayo Colocation, Allstream and Other. The Fiber Solutions segment provides raw bandwidth infrastructure to customers that require more control of their internal networks. The Transport segment provides lit bandwidth infrastructure solutions over metro, regional, and long-haul fiber networks. The Enterprise Networks segment provides communication solutions to medium and large enterprises. The Zayo Colocation segment provides data center infrastructure solutions to a broad range of enterprise, carrier, cloud, and content customers. The Allstream segment provides Voice, SIP Trunking, Unified Communications and scalable data services using a variety of technologies for businesses. The Other segment is primarily comprised of Zayo Professional Services (ZPS). ZPS provides network and technical resources to customers who wish to leverage its expertise in designing, acquiring and maintaining networks. Zayo Group Holdings was founded by John Louis Scarano and Daniel P. Caruso on November 13, 2007 and is headquartered in Boulder, CO.

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