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Why Is Zayo Group (ZAYO) Up 15.3% Since Last Earnings Report?

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It has been about a month since the last earnings report for Zayo Group (ZAYO - Free Report) . Shares have added about 15.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Zayo Group due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Zayo Earnings and Revenues Miss Estimates in Q1

Zayo reported lackluster first-quarter fiscal 2019 results, wherein both the top line and bottom line missed the respective Zacks Consensus Estimate.

Quarterly earnings came in at $22.1 million or 9 cents per share compared with $23.3 million or 9 cents per share in the year-earlier quarter. The year-over-year decrease in net income was primarily due to higher provision of income tax. The reported earnings missed the Zacks Consensus Estimate of 12 cents.

Revenues remained relatively flat at $641.1 million and missed the Zacks Consensus Estimate of $649 million. Operating income improved to $122.8 million from $95.5 million in the year-ago quarter owing to lower operating expenses. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) increased $3 million to $319.4 million.

Segmental Details  

Revenues from the Fiber Solutions segment totaled $220.9 million, up from $198.4 million in the prior-year quarter. It represented 34% of the company's fiscal first-quarter revenues.

The Transport segment generated revenues of $168.4 million, relatively flat year over year. It represented 26% of revenues in the reported quarter.

The Enterprise Networks segment's revenues were $82.6 million, down from $85.4 million reported in the year-earlier quarter and accounted for 13% of the company's quarterly revenues.

Revenues at the Zayo Colocation segment were up to $59 million from $58.4 million. It represented 9% of fiscal first-quarter revenues.

The Allstream segment generated revenues of $105 million, which represented 16% of revenues in the reported quarter.

The Other segment's revenues were $5.2 million, accounting for 1% of the company's fiscal first-quarter revenues.

Liquidity & Cash Flow

As of Sep 30, 2018, Zayo’s cash and cash equivalents were $353.9 million, with long-term debt of $5,691.3 million. Net cash provided by operating activities was $241.8 million for the reported quarter compared with $268.8 million a year ago. Adjusted unlevered free cash flow was $130.4 million with $241.9 million borrowing capacity under the revolving credit facility.

Share Repurchases

During the quarter, the company repurchased 6,229 shares at an average price of $34.00. Subsequent to the quarter end, Zayo repurchased approximately 13 million shares at an average price of $31.02. The company currently has $4 million worth of shares remaining under the $500 million share repurchase authorization.

Plan to Split Into Two Separate Entities

In concurrence with the quarterly results, Zayo announced plans to separate into two publicly traded companies to better focus on its businesses. One of the two entities will focus on providing core communications infrastructure while the other will leverage infrastructure to provide solutions for a broad set of enterprise customers. The company expects the process to be complete in late 2019, with each Zayo shareholder owning shares of both the entities.

Dubbed InfraCo, the infrastructure-based firm will have a broad geographic reach throughout North America and Western Europe and will include the current Fiber Solutions and zColo business segments along with the Wavelength and IP Transit businesses of Zayo’s current Transport segment. The other division named EnterpriseCo will be centered on higher bandwidth connectivity to enterprise locations, including to public cloud and SaaS providers, and will comprise the current Enterprise Networks and Allstream segments, along with the SONET and Ethernet businesses of Zayo’s current Transport segment.






 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 16.44% due to these changes.

VGM Scores

At this time, Zayo Group has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Zayo Group has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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