Zayo sees small cell activity 'across the board'

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Zayo said it’s seeing small cell activity “across the board” as wireless carriers scramble to densify their networks. But some analysts aren’t convinced the alternatives to macrosites will help boost Zayo’s bottom line any time soon.

Zayo provides dark fiber and other offerings to both fixed-line and wireless operators. The company posted a quarterly loss of $31 million Thursday, but saw its operating income rise to $72 million, up from $57.5 million during the same period a year earlier.

A major factor in that loss was the cancellation of a small cell project in the Midwest from an unnamed network operator. The company didn’t disclose financial details, but MoffettNathanson estimated Zayo’s contract for the job was in the range of $35 million to $40 million.

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Reasons for the cancellation remain unclear, but the news underscores the challenges carriers face as they look to small cells to increase coverage and capacity while minimizing costs. Sprint, for instance, has slowed its effort to deploy up to 70,000 small cells across the country due in part to difficulties obtaining permits for the transmitters, The Wall Street Journal reported two months ago.

Regardless, Zayo said it is seeing increasing demand for small cells, although the company acknowledged the market is just beginning to emerge.

“On small cells, there’s activity… pretty much across the board,” CFO Ken desGarennes said during a conference call Thursday discussing quarterly earnings, according to a Seeking Alpha transcript. “The nature of activity varies widely from customer to customer. Their starting point is different. Their expectations of how quickly higher bandwidth, higher quality service, opportunities to develop, how else they might use (them)…. All of those vary and they’re all in the very early stages.”

Analysts agree that the market for small cells is just beginning to get legs. But some aren’t convinced it will gain real traction in the very near future.

“Zayo’s speculative capital projects are not driving the growth we would expect to see,” analysts at Pacific Crest Securities wrote in a research note. “In addition, we believe the overall opportunity for Zayo to provide dark fiber solutions to the large wireless carriers for their mobile infrastructure, such as small cells and macro towers, is in its infancy and one we feel will take several years, not quarters, for the carriers to build out. Zayo believes that providing dark fiber solutions for small cells could ultimately be a larger opportunity than macro towers, but expectations for carrier small cell build-out remain overly optimistic, in our view.”

For more:
- read this Seeking Alpha transcript

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