Zayo Group Holdings (ZAYO) Dan P. Caruso on Q2 2016 Results - Earnings Call Transcript

| About: Zayo Group (ZAYO)

Zayo Group Holdings, Inc. (NYSE:ZAYO)

Q2 2016 Earnings Call

February 12, 2016 10:00 am ET

Executives

Kenneth desGarennes - Chief Financial Officer

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Analysts

Philip A. Cusick - JPMorgan Securities LLC

Colby Synesael - Cowen & Co. LLC

Amir Rozwadowski - Barclays Capital, Inc.

Simon Flannery - Morgan Stanley & Co. LLC

Brett Joseph Feldman - Goldman Sachs & Co.

Nick Del Deo - MoffettNathanson LLC

Frank G. Louthan - Raymond James & Associates, Inc.

Operator

Good morning and welcome to the Zayo Group's Fiscal Year 2016 Second Quarter Earnings Call. My name is Susan, and I will be your operator today. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded, Friday, February 12, 2016.

Today's call will be led by Zayo's Chairman and Chief Executive Officer, Dan Caruso; and Chief Financial Officer, Ken desGarennes. This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended December 31, 2015.

For a link to the webcast, please visit the Investor Relations section of the Zayo website, www.zayo.com. The slide presentation and earnings release are directly available on the site, and the 10-Q filing and supplemental earnings material will be posted on the site later today.

With that, I will turn the call over to Ken desGarennes. Please go ahead, sir.

Kenneth desGarennes - Chief Financial Officer

Thank you. Good morning, everyone, and thanks for joining. Please turn to page two of our earnings call presentation, while I review our Safe Harbor statement. Statements made in this call are contained in this earnings material available on our website that are not historical in nature may constitute forward-looking statements. Such statements are based on the current expectations and beliefs of management. Actual results may differ materially from these forward-looking statements due to risks and uncertainties that are described in more detail in our filings with the SEC.

We undertake no obligation to publicly update or revise these forward-looking statements except as required by law. Now I'm going to turn it over, the presentation, to Dan Caruso, our Chairman and Chief Executive Officer.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Thank you, Ken, and welcome everyone to the earnings call. This is our 25th consecutive quarter of growth on the revenue side and our organic recorded revenue growth was 6%, would have been 7% if not for the foreign exchange. And as you recall, from our leading indicators, such as net installs, they've been – that's been point towards 7%. So the actual results came in very much aligned with that. We had record gross installs quarter of $6.4 million and we're at a near record net installs of $2.2 million. In fact, the $2.2 million has been pretty consistent each of the last three quarters, and bookings, a very strong bookings quarter of $6.8 million.

Both the Viatel and Stream (sic) acquisitions were closed and we signed – Allstream acquisition and have since the end of the quarter closed it.

Quick look at Zayo at a glance. Our international network, as of now, is extending beyond just what's on this map by adding candidate to that. But it continues to grow into one of the most robust footprints in both North America and in Western Europe. The building block of Zayo is really the unique metro fiber networks, one example, which we show on this page, deep dense in the metros but also a very large regional footprints, connected together by our intercity fiber networks, very strong data center portfolio, and a product mix that is very much focused on infrastructure solutions.

A relatively small number of customers for the size business that we are – the core part of our business is doing more and more business, with kind of our anchor customers. As their needs expand and as our geographies and product set expands, that's our natural pull toward growth. We've been a leading consolidator on both the fiber side and on the data center side. Our financials continue to be very strong with a very strong EBITDA margin. As I mentioned, we continue to grow organically and inorganically and we have created a lot of equity value throughout our history.

Slide six gives you a view of the business based on segments and products. The business is more than a third dark fiber solutions, which has a very healthy EBITDA margin, but it's also the area which we're investing the lion's share of our capital program, and most of that is driven by the big and local infrastructure opportunities. So you could see from a unlevered free cash flow standpoint, that's the one area that we're significantly investing in and we continue to do so as you'll see from our sales results, we continue to invest in those types of projects.

Our network connectivity business is a significant portion of our revenue, close to 50%, a very healthy EBITDA margin and a very strong free cash flow profile. In our cloud and colo business, a smaller portion of our business at about 16%, also very strong EBITDA margins and very strong cash flows.

On slide seven, most of our business, 98% of our business is recurring revenue in nature and the overall revenue growth is 3%. Now that's – always will move up and down because one-time items will either help or pull back in any given quarter-over-quarter. In this case, the one-time revenue was lower than the prior quarter. The thing to pay most attention to is we've emphasized in all of our calls, is the annualized recurring revenue growth and that came in at 6% and 7% at constant currency. Adjusted EBITDA was 7% overall growth. And again, if you adjust out for the one-time impact, it would have – it was 12% organic revenue growth, so very healthy trajectory.

On the investment side, purchase and property of equipment, the amount of capital we spent went up a bit. That's a direct leakage to the sales that we've been making in recent quarters and the amount of capital we've been committed. So, as you file that each quarter, you could see that, that amount of investment primarily in fiber network is going up as we're winning these big anchor tenant deals.

Now, a lot of that capital is spent in advance of the financial benefit of that, the final benefit naturally rises as you build a network. You build the network, spend the capital and get financial benefit, a little bit after the fact. They're pretty close correlated in time, but there is a time lag. So it's a good and leading indicator of where revenue growth is leading to as well.

Our net AFFO, very strong at 27% of revenue. Net AFFO is kind of a measure of, if we only sold business that had a less than 12-month payback, how would the cash flow profile of the business look. So 27% of revenue would drop to the bottom line and if we only sold less than 12-month, the business would be flat or grow slightly based on the metrics that we report.

Our levered free cash flow was just under breakeven. There were a couple events in the quarter on the debt side that had a little bit of a drag effect on that, that were just fluctuations that take place in the normal course quarter-over-quarter. So we've got that list in the footnote.

From a gross install standpoint, you can see it's been our best quarter at $6.4 million. I said in the last call that we would set – that I was pretty certain we would set records in both the gross installs, net installs and bookings lines sometime within the subsequent three quarters. So one of those three, the gross installs was set here. We do expect gross installs to continue to set records as you look forward the next few quarters. Now, that's not every quarter, but we do expect this number to be going up based naturally on what we've been selling, what's been in our pipeline, and what's working its way through the system. So although we set a record here, we think we'll continue to kind of set a couple more high watermarks in the subsequent quarters.

From a churn standpoint, it came in at 1.2%. If you look at the pattern over the last eight quarters as reported here, and even more so, if you look back a couple quarters, you'll see that the percentage churn has slowly but steadily gone down with some ups and downs over time. We can – we expect that trend to continue, that is we expect to be in the 1.1% to 1.2% range. Hopefully, with a little bit of upside relative to the percentage. So we're feeling good about kind of where churn is and where it's tracking toward.

Net installs, we came in pretty much at the same number as the last two quarters at $2.2 million, ever so slightly less than last quarter. I'll reaffirm that I expect that number to be setting some new records in the coming quarters, again, driven by gross installs naturally going up because bookings have been strong and churn staying at about the same level from a percent standpoint. So our expectation is you're going to see net installs continue to go up from here and probably set at least one new record in the next two quarters, maybe two new records in the next two quarters.

From a last day of quarter run rate, very consistent with the net install numbers and with the organic revenue growth if you remove the one-time items at the 6%, excluding the acquisitions and 7% in constant currency, so very consistent. And the service activation pipeline continues to grow, that is we sold a little bit more than we installed, which means the pipeline goes up and we have more to work on and get installed into the future. And that's really the engine, the service activation pipeline combined with the health of each quarter's sales that suggests that our gross installs will continue to go up in the near future.

The net bookings stratification in this particular quarter, the December quarter, you can see there was a bigger proportion of what we call speculative projects. Now, speculative projects mean that, almost in every case that there is a significant customer deal that is driving us to take a deal. That customer deal may or may not pay 100% of the incremental capital. If it doesn't pay 100% of the incremental capital based on the contract value of the deal and other expenses associated with it, we classify it as speculative. We're going to show a couple of those deals, but those deals did bring with them a lot of revenue and they're resulting in a lot of additional network being built out as a result. But also, very strong quarter from sales of less than 12 months, very consistent with the last couple, three quarters, and a good amount of sales that have a greater than 12-month positive IRR, which is the blue category.

I'm going to go through a couple of commercial highlights. One of the big projects for the quarter was a significant expansion of our land and network, which has been done in conjunction with one of the major wireless carriers. It will increase by about 1,000 route miles the size and density of our network, adding 500 towers and it does require us to spend $100 million of committed CapEx to build out and bolster that network itself. So this will be kind of a platform that continues to become more special, more unique in the greater Atlanta area, an investment that we'll be earning returns off of for many, many, many years to come.

A big quarter for small cells. We show our small cell ramp over the past couple years. We've been talking about small cells for a while, but it was a very small portion of our overall business, a year ago, two years ago. You could see that as small cells have become more of an implementation as opposed to a kind of an experiment, it's starting to ramp up significantly. We expect this ramp-up to continue. It may not continue every quarter at an increment up, whereas the pattern here looks like it's been a steady increment, but we do expect there to continue to be kind of step function increases in the number of small cells that we're winning and installing. So what's inherent here is the commitment to build 1,000 incremental small cells. It's about $75 million of committed capital that will go into that. That's across multiple markets.

We also thought we'd show a couple other just examples of the kind of deals that we do that leverage kind of these networks that are being put in place. One of these is a municipal government, our customer, that's in one of the markets that we announced a major fiber-to-the-tower project a couple quarters ago. It – so leverages an in-process fiber-to-the-tower build, so they're leveraging the capital investment together. They're migrating from a legacy lit service to Zayo dark fiber solution and this is a $121,000 a month contract for many years. It's a greater than 12-month payback and a very profitable project because we're leveraging investment that's being made also for the fiber-to-the-tower build.

And then another example here, this is an Internet services company, a content type company that leverages existing network again from a fiber-to-the-tower build. In this case, it's multiple, diverse 100 gigabit wavelengths that are being used for their data center and headquarters' footprint, $75,000 a month. This is an example of one where it's a very quick pay back, very quick because it's directly leveraging network that is largely already in place. And so each quarter, when we're reporting sales with some combination of these types of projects, that make up the less than 12-month payback, the greater than 12-month and positive IRR and the investment type projects, the speculative projects.

Few other examples, the subsequent page. One showing an Ethernet private line, this is an international law firm. The data requirements and the security requirements for law firms now are extraordinarily high. So they need to put much more robust private networking solutions in place. This network leverages both our intercity solutions, but also our metro solutions connecting up 11 offices, $71,000 a month for multiple years, greater than 12-month payback, but a positive IRR project.

And IP services, a content infrastructure type company who has multiple nodes where they house their applications and distribute their service out of. It's a combination of IP via very large ports and significant upgrades at the data center locations itself. And this is our add-on service to an existing customer. It's also a demonstration of that. And then lastly, what we call an alternative carrier. So a non-traditional carrier, a newer upstart that has a kind of special solution that they're deploying with them. We provide dark fiber connectivity into nine markets that involve both the U.S. as well as Europe. So leverages our international footprint, again, a $59,000 a month deal, because it heavily leverages our network, a less than 12-month payback.

So, with that, I will turn over to Ken to take you through some of the financial highlights.

Kenneth desGarennes - Chief Financial Officer

Great. I'll start on slide 16 and just quickly reiterate our financial results for the quarter. Total revenue grew quarter-over-quarter by $2.8 million, despite a decrease in other which is generally non-recurring and non-contractual revenue of $2.9 million and a slight FX headwind as Dan mentioned.

Each of the three main reporting segments grew quarter-over-quarter and the total net loss for the quarter was $10.8 million with adjusted EBITDA reaching $218.9 million and representing a 59% margin. Again with each of the three primary segments contributing to that growth and despite a decrease in EBITDA associated with that other revenue of about $2.8 million. So, overall, growth continued at the pace we expected and in line with all of the leading indicators that we spoke about on our last call.

Turning to our recent acquisition activity, both Viatel and Allstream are transformative in the scope of the fiber assets they bring and the opportunity to expand our infrastructure business throughout Europe and into Canada.

Viatel closed at the end of the quarter, and while the acquired assets and liabilities are included in our balance sheet for December 31, 2015, Viatel was not included in the results of the operations for the quarter.

The acquisition price of approximately $100 million represents a high multiple of EBITDA given the relatively small amount of EBITDA that we did acquire. But with the cost synergies that we've planned on and we expect to realize in 2016 or in calendar year 2016, it brings the post synergy multiple down to around nine times.

Again, Viatel added quite a lot of fiber throughout Western Europe, adding about 4,700 intercity or long haul miles and 560 metro miles of fiber. Similarly, Allstream was very expansive across Canada. Again, Allstream was signed in the quarter but did not close until the quarter ended and is not reflected in either our balance sheet or the results of operations for the quarter.

The acquisition price is about $300 million, represents a sub-four times LQA multiple of EBITDA. Again, Allstream brings substantial long haul and metro fiber assets throughout Canada, brings to bear for us to expand our infrastructure business.

Lastly, we did close – signed and closed a small data center deal in the quarter like Viatel was closed at the end of the quarter. Therefore, included in our balance sheet but not the results of operations. Added about 36,000 billable square feet to our data center footprint, and that gave us more capacity in Dallas. Notably in that deal, we did enter into a lease with the former owner right after that acquisition signed, so that provided a healthy EBITDA multiple for us.

Talk a minute about equity on slide 18. This is just an update to what we discussed a little bit more fulsomely in the last call. But since throughout the quarter, we did see some additional private equity transfers reducing the amount of the pre-IPO, private equity ownership during the quarter. We also purchased 356,000 shares under the previously announced repurchase program.

From a balance sheet perspective, at December 31, we continue to have significant liquidity in both the form of cash and revolver capacity and our gross leverage declined to 4.3 times.

Now, subsequent to the quarter in January and in conjunction with the closing of the Allstream transaction, we did issue $400 million of incremental term loans, that again were used to fund Allstream, that incremental issuance of term loans was leveraged neutral to the 4.3 times.

On slide 20, quick reminder on the stock-based compensation expense. It's comprised of two components, the non-cash and non-dilutive cost run out from the pre-IPO plan and the post-IPO RSU plan with the associated dilution impact of that.

And finally just a quick comment on M&A going forward. As you can see the history here, we maintained a fairly regular pace of acquisitions inclusive of last calendar year, having closed five. We continue to remain active and opportunistic about how we will pursue acquisitions, but clearly, our first priority is operating the business on an organic level and integrating the companies we've recently acquired.

So we will open up to Q&A here. I just want to reference in the slide decks we prepared today, we included segment level results in terms of financial and some operating metrics in the back of this. We won't reference them right now, but they'll be available for us to reference during the Q&A.

With that, operator, can you open up to Q&A?

Question-and-Answer Session

Operator

Thank you. And the first question is from the line of Phil Cusick with JPMorgan. Please go ahead.

Philip A. Cusick - JPMorgan Securities LLC

Hey, guys. Thanks. Two things if I can, so first, Dan, you talked about the potential for accelerating growth. I continue to struggle with the level of CapEx in the company, not just today, but more if I look back to a year ago. And how it's not translating into what I would have expected to be faster growth at this point. So can you help to quantify what the acceleration in revenue could look like over the next few years, should we think of this as a 7% or 8% maybe becoming 8% or 9% or could this become a faster growth company, especially given the accelerating levels of CapEx? And then second on the small cell side, it seems like you're coming up the curve and is somewhat related to be a strong player in the industry. Can you talk about what that industry looks like in terms of pricing, competition and ROI? Thanks.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Sure. Thanks, Phil. Yeah, if you look at – for us to grow at 10%, our net installs need to be about $3 million, okay? So $3 million as opposed to the most recent quarter, $2.2 million. So, to break the question down, do we think we can get to an above $3 million in net installs in the relative near-term and the answer is, yeah, we think we can. We think that we're on track to do that. We think the amount that we're selling and have been selling for the last several quarters suggest that's the path we're already on. So it's not – what we – we don't need to sell materially more than what we're already selling.

It's really the pipeline that's been built up and you could see as it's gotten bigger that it's been kind of the leading indicator of gross installs going up and net installs following along with it. So our expectation is based on the amount that we're selling based on the amount of investment we're putting in the ground and how that investment kind of – investment happens in front of kind of the full revenue growth. You get out of it just because when you build a network, you're spending capital while you're building the network, and not until portions of the network, sometimes significant portions are complete, does the revenue actually get installed. That's why the pipeline is built up.

So I agree with the nature of your question that, given the capital that we've been investing, you would anticipate and expect the growth rate of the business to be higher than 7%. And, yeah, I would agree that it should be higher than 10%, and I'm cautiously optimistic that, that is what we're going to be seeing in the not too distant future.

And your second question on the small cells. Small cell pricing is very much tied to the nature of a particular deal it's felt. And how much collaboration there is between the fiber provider and the customer, the wireless carrier. These wireless carriers, who are able to work closely with someone who has a lot of network in the ground and use that collaboration to be very kind of deliberate about where to locate the small cell sites so that the cost of getting from the small cell site to a fiber splice point is low. The incremental cost is low. Therefore, the customer benefits because they get a better price per unit and we benefit because we get a better IRR because we're leveraging a lot of the investment that's already in place.

So a lot of the deals that we've been seeing particularly recently and what's going on in the sales funnel itself is much tighter collaboration, where the buyers are getting much more tuned into how to leverage our network in order to get deals that work for them and work for us.

Philip A. Cusick - JPMorgan Securities LLC

That's great. Thanks again, Dan.

Operator

The next question is from the line of Colby Synesael with Cowen and Company. Please go ahead.

Colby Synesael - Cowen & Co. LLC

Great. You gave some color on the amount of shares your private equity shareholders have sold. I think you said $30 million. Can you give us a little color on what that number is in terms of what the total could ultimately be? I appreciate it's not the full amount of shares being owned by a private equity, but any color that would give us a sense of how far along we are with at least those who might be less price sensitive to wanting to sell the stock. That would be helpful.

And then the second question. You've talked about how you're investing pretty heavily across a multitude of markets, a lot of that tied to mobile deals that you've won either backhaul to the tower or for small cells. Seems like that's kind of a phenomenon taking place across the industry, more of a renaissance, if you will, in terms of these big metro buildouts happening. How far along are we in terms of how many of the markets are being spoken for, and could we see you at these elevated CapEx levels perhaps for the next year, two years, three years? Just walk us through how big of an opportunity this could ultimately be for you guys. Thanks.

Kenneth desGarennes - Chief Financial Officer

Colby, this is Ken. I'll take the first question regarding the shares. I would refer back to slide 18 because I think the graph on the left tries to depict the answer to your question. So you can see private equity and management own a little over half of the total shares outstanding. But you have to dig a little further in terms of ownership to understand how much of that, to your question, is more likely to be sold than not. And our best way of conveying that, and which is still not perfect information, is the difference on the bar between the blue and the gray, is the blue, just given the nature of those owners and their timeline, is more likely to sell than the gray. So the way I think about it, and again, we don't have perfect information either, is that the quantum represented by that blue is what you should think about as the true overhang that's left in the business.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

And Colby, this is Dan. And your question about the – where we are in the stage of these large buildouts. There's a couple dynamics, maybe three or four dynamics that all interplay with one another. One is kind of the bigger anchor tenant initial deals. Secondly is how much of our existing network will we leverage over time. And third is where are the wireless carriers when it comes to small cells, dark fiber-to-the-tower, C-RAN type investments that they need to make over the coming years.

So, from an anchor tenant standpoint, most but not all of the major markets have either been awarded or are in the process of being awarded to at least the initial anchor tenant. But at the same time, the subsequent anchor tenants, most of what they have to award is still in front of them. So there's some combination of, in any given market, there may be significant activity, but quite often it's just one, maybe two of the carriers that have significant activity in that market but the other one or two or three might be coming in on top of that over time.

And then there's a lot of infill. So even the anchor tenant itself in a given market might be building it out or dark fiber-to-the-macro-tower and only has dabbling in small cell today compared to where they'll be a year, two years, or three years from now. So there's a lot of subsequent business, add-on business that you win and expect to win from your anchor tenant and there's a lot of incremental tenants that you expect to win on top of that. They don't always go on the same pole. In fact, with small cells, they're usually on a different pole or building, but they're leveraging that same investment; that same fiber that's going in the ground is used to tap into and serve multiple carriers.

So I would expect that, from our perspective, our capital program will elevate a little bit more. And then it'll stay at kind of an investment level for a period of time where we're investing in more and more markets in parallel, but more and more of the deals that we're doing are leveraging network that's largely already in place.

So, if we're successful and if people keep putting more and more bandwidth on wireless devices, which I think is a pretty safe assumption, the opportunity inherent in mobile infrastructure is very significant in nature for a very long period of time. But as time goes on, the capital efficiency of it improves materially because we're leveraging investment that would already have largely been put in place.

Colby Synesael - Cowen & Co. LLC

Thank you for the color.

Operator

The next question is from the line of Amir Rozwadowski with Barclays. Please go ahead.

Amir Rozwadowski - Barclays Capital, Inc.

Thank you very much, and good morning, folks.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Good morning, Amir.

Amir Rozwadowski - Barclays Capital, Inc.

A couple of questions, if I may. If I take a look at the churn profile, then you had mentioned that churn should stay relatively at this sort of 1.1% to 1.2% level. But based on the data that you guys provided, it does seem like your hard disconnects have picked up just a touch this quarter. Anything that you can provide in terms of color around that would be helpful.

And then building upon Phil's prior question on the revenue growth side, I know you'd mentioned last quarter that your EBITDA margins would stay fairly close to where they were in the prior quarter, but how should we think about sort of the ability to grow EBITDA here? I mean, obviously you've got a mix shift, as you'd mentioned, you're putting a lot of capital to work on the dark fiber side of the business. But would love you to share your thought process on that front.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Sure. On the churn, at any given churn category to be fluctuations quarter-over-quarter, but I would reaffirm that as we look at our leading indicators on churn, we're confident that our churn number is in that 1.1% to 1.2% and maybe slightly better range at least in the near-term, near-term meaning the next couple quarters. We think that will continue beyond that, but we can actually see the flow of what's going on with churn income at the nearer-term. So we could speak with the higher level of confidence based on what we're actually seeing come into the system.

So any fluctuation you might have seen in that one category is not a trend. We don't think that – we think you're going to see kind of the general pattern, kind of continuing to kind of work its way, kind of downward from a churn percentage standpoint, noting that any particular quarter, there's a little bit up and down – and in particular, quarter-over-quarter, but it looks like kind of slightly downward trend from a percentage standpoint even as we look forward in time.

On the question about margin expansion, yeah, generally speaking, we do think EBITDA margins will slightly expand over time. Now, again, I caution that that's not going to be true every quarter, but the pattern we think will be true so long as kind of our mix stays similar to what our mix is right now. And we don't see our mix changing if our sales level is similar to what it is right now. If we start selling more of a different type of product that has a different kind of business profile, that could change over time, but that's not a near-term situation that we're dealing with. So we do think the nature of what we're selling, the amount that we're selling, pushes EBITDA margin up slightly over time.

Now, with some of these big fiber builds for the mobile infrastructure, sometimes there is the same type of slight lag effect as there is with the construction capital because when you put these networks in place, you're starting to incur some recurring expense charges for things like right-of-way and real estate taxes that slightly precedes the benefit of the revenue that gets put on there just because of the timing artifact of the work being completed before the revenue actually shows up. So there's always a little bit of headwind in that on a quarter-over-quarter basis, that we have to absorb. But as we look through that, we do think that the EBITDA margin is a slightly upward trend.

Amir Rozwadowski - Barclays Capital, Inc.

Thanks very much, Dan. And just one quick follow-up. You said that you'd use about $8 million of your $500 million authorization on the buyback. Seems like the expiration is fairly soon in the next couple of months. How do you think about sort of your buyback authorization given sort of where your shares have been performing?

Kenneth desGarennes - Chief Financial Officer

Yeah. Hey, Amir, it's Ken. Keep in mind what we said when we originally authorized and we announced the buyback was we did it in conjunction with releasing or waving some of the restrictions on pre IPO shareholders. And we thought or we anticipated that there could be a dislocation associated with that event. And we wanted to be in a position to take advantage of that. And that's what we went to the board with, and that's – there was rationale for receiving or putting in place the authorization. Really what we saw subsequent to the waiver was not too big of an impact, which I think is reflected in the relatively small amount that was bought back in the December quarter. The authorization is still out there. We would expect that there'll be some continued repurchases. But that the market has since moved and changed, since that time. So – and the rationale for putting it in place had seemed to have played out. And what we're seeing now is more of a general decline in the market. And that wasn't really the impetus behind putting it in place.

So, all of that, just as a refresher on why it was there, how it was used, going forward, we'd expect some usage, but we're not looking to – we don't – we never felt like we had to spend all of that money. And as Dan and my comments on this call reflect, we're very bullish on the organic opportunities in front of us. And that is the primary priority for our capital.

Amir Rozwadowski - Barclays Capital, Inc.

Thank you very much for the incremental color.

Operator

Our next question is from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery - Morgan Stanley & Co. LLC

Thanks very much. I wonder if you could talk a little bit about the recent deals, the Viatel, the Allstream. Where are you on deal integration? And I don't think you've really talked about the synergy opportunity at Allstream, obviously, it came at a fairly low multiple. I think you've said it may take a little while, but as we think about Q – for the March quarter and the June quarter, what should we be expecting compared to the run rate coming in from those businesses?

And then maybe just a general comment on the M&A environment. This year, what is your kind of bandwidth from a financial and from a integration point of view and what do you see out there in the marketplace? Thanks.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Sure. Thanks, Simon. So let me talk about Viatel first. So Viatel is a lot of very interesting kind of asset and some good customer, good revenue. And we've been able to proceed very quickly in fully integrating that into Zayo. So it's largely kind of ingrained into Zayo already today, meaning it's in – we operate at the same way we operate the rest of our business. It's in salesforce.com, it's part of Tranzact, most of the (39:48) business has kind of played through pretty quickly, and we're already selling a significant amount on top of that network.

So I think what we would expect to see is that the financial benefit to Viatel, although small in the overall scheme of things because it's probably a smaller deal, the financial benefits kind of show up very quickly, probably quicker than we internally anticipated. But we don't want to shed any more light on that. I mean it's not, overall scheme of things, that material. But you should kind of keep an eye out on our kind of European business, and I think you'll see the positive impacts of that deal as it kind of rolls its way through those numbers.

Allstream is a very different circumstance. Allstream was bought at a very low multiple as you pointed out, and it's a very interest – we've gotten to understand a lot better in the last, especially couple three weeks since we closed the transaction itself because it's been about a month now. So we're deeply immersed in it right now. We're – the parts of it that have been very much a kind of positive, I won't say surprised because we sort of – we're anticipating that everyone has done the deal, but I'll say reaffirmation is the quality of the relationships they have with their customers and the nature of the customers itself where the lion's share of the revenue is.

So, although, they have lots and lots and lots of customers, 36,000 in total, if you look at the top thousand customers, that's where 80% of the revenue is. And these are very top tier customers, who have in many cases, needs that extend beyond Canada and who are providing very essential, who are buying very essential services from Allstream and they're very pleased with the services that Allstream had been providing to them.

So we feel really good about it and we feel really good about the asset profile of Viatel. So now we do have – the integration effort on that one is higher than is normal for the kind of things we buy. We think the price is bigger as well, maybe far bigger than a normal one because we think there's a lot of value to be kind of unleashed by kind of pivoting the business a bit toward kind of what we do. And we feel real good about kind of the prospects of doing that.

It will take a little bit of time. We do expect, in the not too distant future, to be more transparent with you guys on how you should expect that to roll through the business. So we've intentionally not set any expectations because we want to make sure we really have our arms around what we want to do with this and how we look before we point at a particular direction. But we do realize that we do want to provide to you kind of a more transparent view of how Allstream gets to stimulate within the business and that's something we'll be doing sometime in the next headquarter or so.

Simon Flannery - Morgan Stanley & Co. LLC

Great. And on the M&A environment?

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Yeah. So let me start by having Ken talk about the M&A capacity, which is part of your question and then I'll talk a little bit about the M&A environment.

Kenneth desGarennes - Chief Financial Officer

Sure. So, from a capacity standpoint it's just from a balance sheet perspective, we have fair degree of capacity to increase our debt. Again, we were at 4.3 times, so between 4.3 times and kind of where our covenants lie, provides us multiple billions of capacity to do deals. So I think, we have to have the financial wherewithal to pursue probably most of the things that are on our radar from a – you also asked about kind of integration capacity. Again, Dan – I'll just reiterate Dan's comments. Viatel largely integrated, but a fair bit of work to do on Allstream. So I think we'll take that into account as we evaluate deals, but as always, we're actively looking at things, but we'll just be very selective and opportunistic about what we choose to do. So back to the overall and then segues back to what's that environment look like. I'll let Dan finish the comment. Thank you.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

The environment is pretty interesting right now for what is pretty obvious reasons. There is one obvious that is the state of the financial markets, certainly translates to some kind of providers who are getting near their exit horizon to think a little bit more seriously about an exit.

But there's another dynamic that's been out there as well and that is some of the recent deals done in our industry, both on the fiber side and on the data side have been done at very strong multiples. Some of the fiber deals that were done in the second half of last year have been in the mid to high single-digit multiples or beyond for good properties. And some of the data center ones have been done in kind of similar priced zone. So you have the combination of those who are thinking about sellers, looking at what have been high recent prices from a multiple standpoint combined with the financial markets being kind of bouncy, we'll say right now, so it's creating an interesting dynamic of – so we commit our eyes on that, obviously, things need to settle down a little bit, across a lot of different fronts from a market standpoint and how people react to it. But we'll keep a close eye on things and continue to stay active in the meantime.

Simon Flannery - Morgan Stanley & Co. LLC

Great. Thank you.

Operator

Our next question is from the line of Brett Feldman with Goldman Sachs. Please go ahead.

Brett Joseph Feldman - Goldman Sachs & Co.

Thanks. Two questions. One maybe just a follow-up on some of the commentary around your appetite for using the rest of the buyback, I realize that the intension was to absorb shares that may have come into the market in a disorganized way and that might not be how you see it. But just on the pullback alone and in terms of pure value, why wouldn't you take advantage of the liquidity to buying the stock here?

And then just on the actual operating side of the business, there's a lot of concern around what the actual end market demand looks like in the enterprise space. I was hoping you can maybe give us a little bit of color if any of your verticals like energy are weak and maybe some more color in terms of where you're seeing real strength beyond the mobile infrastructure side. Thanks.

Kenneth desGarennes - Chief Financial Officer

Sure. Yes, I think I would stand by my comments on the buyback, which is it's still out there. We don't feel compelled to consume the entire authorization and we'll prioritize CapEx and organic growth opportunities over the buyback but that it's probably going to play out with some further purchases.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Yeah, and the mobile infrastructure and other segment question, it's important to note that we talk a lot about mobile infrastructure because that's driving a lot of the investment and expansion of platform and a lot of the future opportunity to take advantage of that investment that we're making. But the overwhelming majority of our sales are not to mobile infrastructure providers. The overall majority of our sales are to others who are leveraging the network, where the others tend to be focused on Internet content type companies, many of which are the household name, West Coast type companies, as well as other type of service providers, service providers that are associated with either cloud infrastructure or Internet infrastructure, kind of it's the next layer or two up from us. And then increasingly, toward traditional enterprises who are adopting data center strategies and cloud strategies and who are – have a heightened awareness around securities, so they need to build out kind of a much more private network environment that gets to more places because their bandwidth needs are growing, the need for high quality bandwidth, so stuff they can't just pump through the Internet. That's increasing. And the need to leverage kind of software-as-a-service providers and cloud solutions is becoming more of a part of their day-to-day business.

So most of the sales activity does not come from the mobile infrastructure carriers. That's why the business segments as a whole are growing and that's why they're growing at such a high kind of EBITDA contribution and such a high cash flow conversion. And we're seeing an acceleration in that type of opportunity, not a deceleration. And we're also seeing stability as evidenced by the churn profile slowly – already at good levels, already at very good levels, but improving modestly over time on top of that.

So this is one of the most unique times, where almost every leading indicator, in fact every leading indicator, is pointing toward the positives. I don't think I talked about kind of the sale, the bookings number as much when I went through it on a forward-looking basis. So we did $6.8 million this quarter. I had said in the last call that we expect to get to a new record level sometime in the next three quarters. When I'll reaffirm that, that I continue to expect that in the next two quarters now, we will set a new high watermark, which is kind of above $7 million and optimistic that we'll see numbers in excess of $7 million multiple times in the next, say, year or so.

And that's – those numbers are all excluding Allstream. So Allstream would be incremental to any of those numbers when we do roll them into our numbers. So the reference point is kind of the scope of our business today.

So we're feeling good both about kind of the bookings side of the various enterprise segments. We're feeling good about the churn side of it, the install side of it and the cash flow and EBITDA conversion of that revenue growth.

Brett Joseph Feldman - Goldman Sachs & Co.

Great. Thanks for taking the question.

Operator

The next question is from the line of Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo - MoffettNathanson LLC

Okay. Hi. Thanks for taking my questions. First Sprint has talked a bit about wanting to deploy more small cells and relying more on dark fiber for backhaul. If it's actually moving in that direction, it could be an incremental positive for you guys. But Sprint obviously has a far different credit profile than the primary anchor tenant you've had to-date. More generally speaking, can you talk about how you might approach deals with a riskier customer, especially if there's incremental capital involved?

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Sure. It's interesting how you ask that question, particularly the tailend of that question. As I mentioned, there is a dynamic now that is kind of to be expected but still good when you get there, and that is the much more tuned in kind of collaboration between those who are designing and buying solutions from a mobile carrier standpoint and those who have a lot of network in the ground and are trying to provide solutions to those customers such that the less incremental capital that needs to be spent, the better that is for everyone. And you can only do that if you're working with someone who has lots of fiber across lots of areas because a particular small cell does need to solve a solution on a very micro geography environment like this four block area. We need to solve this – we need a small cell there.

But where in that four block area do you put it and if you're working with a carrier who has fiber already in that vicinity as well as in most vicinities over that wide geography, there's an opportunity to optimize both from the provider perspective and our perspective.

So we might be less excited about making a big capital commitment if it's on behalf of a customer that has a lower credit rating. But I'm not sure that's a choice that we'll be faced with. I think the choice – the opportunity we're going to have is leveraging a lot of network that's already in place or is being put in place based on customers who have a very high credit profile but be able to leverage that for others where we're not taking on the type of risk you described.

Nick Del Deo - MoffettNathanson LLC

Okay. That's great. That makes sense. And then I guess to follow up on some of the prior M&A questions. A lot of the data center assets (52:53) in the market. At a high level, can you talk about what sort of characteristics make co-location assets attractive from your perspective? And are there certain attributes that you think will be more important with time or alternatively, some attributes that are currently viewed as particularly important that might be less important going forward?

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Sure. And I'll answer that more from a Zayo perspective than an overall data center market perspective. Because our data center business tends to be heavily tied to our fiber and bandwidth business. And a lot of the bigger deals that we do and most of our sales in our data center business are bigger deals in nature sort of like – we're not selling kind of a rack or half of rack to a smaller business. We're selling it in a much more chunky fashion and we're selling it usually to – a typical, a very typical example is a kind of Internet content maybe gaming, maybe ad tech type company, who has multiple deployments. So they're looking at multiple different markets and it's part of a network solution where it involves, maybe intercity wavelengths, maybe it involves dark fiber, either directly in conjunction with that particular deal or the relationship with customers piecing those together over time.

So what makes data centers interesting to us is kind of these, the interplay between the network and the data center itself and the kind of customers that are right up to the middle of the fairway for our value proposition, those who have the highest need and appetite for high quality bandwidth solutions, because those tend to involve data center nodes that are distributed at the same time.

Nick Del Deo - MoffettNathanson LLC

Okay. That's great. Thanks, Dan.

Operator

The next question is from the line of Frank Louthan with Raymond James. Please go ahead.

Frank G. Louthan - Raymond James & Associates, Inc.

Great. Thank you. Dan, I just want to go back to your commentary about being able to get the $3 million for sort of the net install number. Any sort of timeframe of when you think that might happen? What you need to do differently to get there? Is it just general execution?

And then if you can give us some color on sort of Allstream and how that might affect the net install trends? Is there anything about the nature of their bookings, their backlog that would change sort of the pace of how that converts into revenues, as we think about that for modeling purposes? Thanks.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Sure. Time to – on your first part, so let me hit that one first, the timing and what we have to do differently to get to $3 million. We see $3 million as – and I want – I'm going to be a little bit vague on kind of committing to an exact timing. But we see $3 million as a nearer-term goal, not a medium-term or longer-term goal. That doesn't mean we're going to get there next quarter, so don't overinterpret that statement. But it's something that we would like to see happen in kind of the very foreseeable future. Okay, so – based on kind of sales that have already been made and are being installed and sales that are being made right now. So it's not a – jeez, we're going to try to get there a year or two years from now. It's our goal and our aspiration and frankly our expectation of ourselves is to hit – either hit that level or come pretty close to it in the relatively near future. I would not want you guys to over model it that way because I don't want you to – I want you to be pleasantly surprised when we hit that. But that is something that we view as a near-term, very realistic goal.

Relative to Allstream, I'm going to continue to just reiterate what I said before. Allstream, we're going to keep separate from kind of our earnings supplement and separate from our segment reporting data. You obviously see Allstream reported. But until we're ready to reveal kind of a more wholesome picture to you about how you should be thinking about Allstream as it interplays with the core Zayo business, I'd rather not kind of start to answer piece parts of that question. I will reiterate, we feel really, really good – am I starting to sound like Donald Trump? Really, really, really good about Allstream.

Frank G. Louthan - Raymond James & Associates, Inc.

Okay. Great. One sort of follow-up if I can. Could you maybe characterize – you've touched on it a little bit, but some of the discussions around the capital being deployed. And I think often times you get obviously compared to others who have different timeframes for the business model. Can you maybe give us a sense for how you think about sort of the length of time that you're contracting the contractual revenue is for the capital you deploy and how we should think about that and maybe that differs from others in the industry?

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Sure. Absolutely. I mean most of our capital deployment is tied to these big mobile infrastructure contracts or to, in some cases, and to a much smaller extent, some of these intercity routes that again are tied to customer contracts. These types of contracts are very long in duration, typically a minimum of 10 years, but quite often 15 years, 20 years, maybe the 15 years to 20 years is more usual than 10 years. And they're with very, very, very, very high credit rated customers.

And as I said earlier, as some of the capital kind of gets spent before the benefit of revenue actually shows up and specially when we're kind of in the ramp mode we've been in the last couple years. That self-corrects pretty quickly on any particular project, but the volume of projects that we've been winning and doing have been growing over time.

If we want to run the business for cash flow today, that's very straightforward to do. Obviously, we commit ourselves to projects that have to play their way out. So we'd let those play their way out. We just would not elect to win some of these other bigger deals. But we get better and better from leveraging network that's being put in place. So our – that does not necessarily imply that our growth rate somehow pulls back because we haven't even begun to leverage most of the opportunity for these networks that are committed to being built but not yet completed.

So we feel – I mean we feel like the exact right thing to do for us is to win these projects as long as we like the economics, put tons of network in place that are largely funded based on the contracts that we're winning. And we'll be able to leverage those for years and years and even decades to come.

Frank G. Louthan - Raymond James & Associates, Inc.

Okay. Great. Thank you very much.

Operator

I would now turn the call back to our presenters for closing remarks.

Dan P. Caruso - Co-Founder, Chairman & Chief Executive Officer

Well, thanks, everyone, for being part of the call and we look forward to telling you more and more about how Allstream will be ingrained into the organization in the not too distant future and subsequent reports. So thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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