Zayo is preparing a new investor deck. The first section of the deck provides the strategic context that underpins Zayo. A core concept is the emergence of a segment of the telecom industry called “Bandwidth Infrastructure”. This segment looks more like the Colo business than the CLEC business. Today, I am adding completing the list.
1. During the Telecom Boom of the late 1990s, the Meltdown of the early 2000s, and Resurgence of the late 2000s, one thing was constant: Exponential bandwidth growth
2. Supply over-exuberance caused meltdown
a. Too many suppliers, as dozens of companies competed in most popular geographies
b. Too much capacity, as “build it and they will come” resulted in excessive pre-provisioned electronics on popular routes
c. Too many speculative customers, who disappeared during the .com and telecom implosions
3. In mid-2005, bandwidth infrastructure industry hit inflection point
a. Revenue growth changed from negative to positive
b. EBITDA margins exceeded 30%’s and were growing faster than revenue
c. EBITDA was sufficient to fund double digit revenue growth
4. The balance between bandwidth supply & demand is steadily improving
a. Continued consolidation is eliminating excessive competitive rivalry
b. New Entrant barriers are extraordinarily high i.e., moat is large
c. As industry leadership matures, return on capital is focal point – leading to rational pricing and prudent decision-making network expansions
5. All and all, fundamentals of bandwidth infrastructure are strong
a. Bandwidth growth huge and lasting tailwind
b. Double digit revenue growth
c. Strong cash flow
d. Strong ROI on incremental capital
e. Large moat
f. Highly durable revenue
6. Nonetheless, questions linger, in part due to poor transparency in reported financials
a. Do price declines offset bandwidth growth?
b. Does capex consume EBITDA?
c. Can investors tell how a company is/is not making money?
c. Is metro good and long haul bad, or is it the other way around?
d. Is Enterprise good and Carrier bad, or is it the other way around?
e. If producing bandwidth is so profitable, what is the story with Wholesale Internet Transit?
7. Moreover, high profile comps (i.e., comparable companies) perpetuate the industry’s troubled past…
a. Some larger industry players struggling with vertical complexity
b. CLECs are generally stable, yet aren’t experiencing the growth or high margins of bandwidth infrastructure companies
c. Some CLECs are experiencing distress
d. Cogent publicly acknowledges challenges in wholesale Internet transit product
e. Only public bandwidth infrastructure pure play—Abovenet—only recently re-emerged from its troubled past
8. Lingering questions result in opportunity being under-appreciated
a. Hangover from meltdown continues, causing flow of money into bandwidth infrastructure to be restrained
b. Tired investors/management teams want reasonable exit from 2000 vintage investments; exit objective constrains investment despite strong organic performance
c. Macro-economic woes add to anxiety
9. Uncertainty and anxiety creating opening for Zayo to prosecute strategy
a. Less competition for M&A
b. Less competition for longer payback deals, e.g., Fiber to the Tower
c. Struggling/de-focused competitors creating “execution” opportunity
10. A Bandwidth Infrastructure industry will emerge that is structurally as good or better than colo
a. Bandwidth growth strong tailwind for both
b. >40% EBITDA margins for both
b. Years worth of high ROI build outs remain (FTT, DAS, School & Hospital Networks)
c. Barriers to entry high for both, but higher for fiber networks than colo
d. Geography matters more in bandwidth infrastructure than colo, making existing assets less fungible
e. Network scale important for both, but arguably more important for fiber networks
These are the underpinnings of Zayo Group’s strategy. Please, no plagiarizing. What do you think?
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A topic close to my heart, as I’ve spent most of my career building fiber optic networks and data centers. Thought I’d pass along a couple of thoughts on this topic…
1. On-net buildings are the key to revenue growth. Most “low-hanging fruit” has been picked, however data center growth and development is still taking place, just lower-profile and enterprise-driven these days. Follow the power.
2. Cloud computing and virtualization are growing at 20-25% growth rates, nearly all from first-time customers. The economics make sense for small-medium sized businesses, and it places greater emphasis on network connectivity. Big opportunity for bandwidth infrastructure.
3. Look to capitalize on first-mover advantages into new facility developments. The existing, on-net provider is tough to beat.
Bandwidth infrastructure that has elements of colo and clec will be better than pure colo. Easier to provide a complete solution; which most business customers are seeking to buy.
The lingering questions – Tired investors/management teams want exit. If they do, then they need to consider their near net and off net access expense. In many cases management believes they have done all they can do. With a bit of change companies can tap the gold mine they are sitting with quick results.
Hi Dan, can you further expand on what a “Bandwidth Infrastructure” business is? You’ve said it is more like Colo than a CLEC, which helps. But what else about a bandwidth infrastructure business differentiates it from a CLEC, XO, Savvis, Cogent or Level 3? Do those companies fit the bandwidth infrastructure label?