Zayo Group Holdings, Inc. (ZAYO) Q4 2018 Earnings Conference Call Transcript

Zayo Group Holdings, Inc. (NYSE: ZAYO)Q4 2018 Earnings Conference CallAug. 22, 2018, 5:00 p.m. ET

Prepared Remarks:

Operator

Thank you for standing by and welcome to Zayo Group Holdings fiscal year 2018 fourth quarter earnings call. My name is Austin, 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. To ask a question, please press * then 1 on your touchtone phone. To withdraw your question, please press * then 2. As a reminder, this conference call is being recorded Wednesday, August 22, 2018.

I will now turn the conference over to Brad Korch.

Brad Korch -- Senior Director, Investor Relations

Good afternoon and thank you for joining. Today's call will be led by Zayo's Chairman and Chief Executive Officer, Dan Caruso, and Chief Financial Officer, Matt Steinfort.

This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended June 30, 2018. 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.

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Please turn to page 2 of our earnings call presentation while I review our Safe Harbor statement. Statements made on this call and contained in the earnings materials 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.

I will now turn the presentation over to Dan Caruso, our Chairman and Chief Executive Officer.

Dan Caruso -- Chairman and Chief Executive Officer

Thanks, Brad. Our leading indicators are below the targets that we have set for ourselves and below what we think is the expectation as we look forward in time. Our target is to grow the business and our expectation is to grow the business at 6% to 8% growth. To get there requires that we sell and install north of $8.5 million and that we churn below $6 million. We're within shouting distance of the sales number and certainly exceeded it last quarter. We expect the bookings number for the quarter we're in right now to be stronger than $8 million, but we have work to do relative to having a consistent performance above the $8.5 million threshold.

Likewise to grow [inaudible] from the bookings, this quarter was a bit lower than we would've expected. Again, we expect the current quarter to be above this number, but we will have to work to do on a quarter in/quarter out basis to get a number north of $8.5 million. We still those are very reasonable targets, but we have to show we can get there and stay there. Our churn is $6.2 million. We'll talk a little bit more about that on the substance slide. Net installs at $1.5 million implies a 3% growth.

From an annual growth to actual revenue in EBITDA number showed growth during the quarter, both on a total basis and on an organic basis. The EBITDA margin, unlevered free cash flow and levered free cash flow all came in at numbers that were in line with what we would have expected. We did make substantial progress on some of the other corporate activities. The Allstream separation, where we completed most of the internal workstreams, made progress on the REIT. Matt will talk more about that. And the divestiture of Scott-Rice closed on July 31st.

On the sales side, the bookings side, as I said, it was an $8 million quarter, which was below our expectations of $8.5 million or greater. Now, we got there without much help from very large deals, so when you look at the quality of sales, you'll see it reflect that the number that we got to, we got contributions from all of the verticals, showing that each of the verticals is making progress. So, we had a diverse set of demand.

But to get to $8.5 million, we'd like to be able to get there through both a combination of a lot of singles and doubles, as this quarter reflected, but also contributions from larger deals. We do see momentum based on the recent go-to-market initiatives that we've been investing in. So, the traction is there and we expect to be on the track that we've been foreshadowing.

On the next slide, Slide 6, the payback at 13 months, again reflects the absence of large deals. So, if you look at the amount of capital we spent relative to the contract value, and then implied payback, all those point to very strong on-net sales profile. A good portion of the sales came in at the less than 12-month payback period.

We've continued to invest in quota-bearing resources, both in terms of our direct sales organization, which is up to about 254, as well as an investment in business development, both on the fiber side, as well as indirect quota-bearing headcount. We expect this to grow a bit more, but not dramatically more. So, most of the investment that we believe it takes to get to the higher bookings number is reflected in our numbers. The challenge that we have right now is how to get these new people fully productive and contributing to a higher overall outcome.

We included in this deck a little bit of information that shows how the maturing of the sales team leads to higher contributions. In this chart, we show for all the hires that joined us over the last 5 to 6 quarters, what their average productivity was like in the first quarter that they joined us, how that looked in the second quarter, third quarter, fourth quarter, and longer than that. So, as you would expect, as the newcomers become more tenured, they on average deliver more to the overall bookings number.

We had a slight decline in gross installs from $8.1 million to $7.7 million. We do think we have plenty of sales pipeline, bookings pipeline to install. A good portion of the drop was because of zColo not having its normal contributions toward a bookings number, but we also think that in some of the other areas we can improve the cycle time and turn bookings into revenue at a little bit of a quicker pace. So, a lot of focus around there.

I will point out on our fiber solutions business under Jack Waters, that was a record install number at $3 million. So, attaining $8.5 million isn't a matter of adding to our production resource. We think we have plenty of resource to get at the higher install numbers. It's more about selling more of the right products and getting a little tighter on our service delivery timelines.

Let's talk about churn a little bit. On churn, we had churn at 1.2% or $6.2 million, $6.2 million being our highest number by a little bit from past quarters. As you know, our goal is to get our churn below $6 million, ideally in the $5.5 million range. That's proven to be a little bit of a difficult number to get down in. As we looked at our churn profile in the current quarter, we believe the current quarter is going to continue a number at or around the 1.2%.

As we look further out, we do recognize as we've dug deeper into our churn that we do have an opportunity to shave some off of our churn, both by reducing a portion of our churn that we think we can influence, which is a small portion, but we think we can have an impact on that. We also think that a lot of the churn that might be less controllable in the near term is from sources that won't continue over the longer term.

For example, they come from areas like residual revenue streams from some of the -- the acquisitions were not right up the middle of the fairway for sales, so WAN-type business, MPLS-type business, that may have been associated with an Allstream or ELI acquisition. In those types of areas, you see kind of a greater churn profile than you do during the normal course. The good news is, in Zayo's overall mix, we don't have a lot of MPLS-type WAN services, so we don't have the same exposure as perhaps some other companies might have. But where there is that exposure, there is a lot of pressure on those services.

So, as we look out over a few quarters, we do think getting below $6 million should be a reasonable target. We think we're going to have to work at it to make that happen and keep that happening and it's going to take a fair amount of work to get to the $5.5 million. Don't know if that's a realistic expectation in the near-term or not, but we certainly have all hands on deck focused on improving our overall revenue retention capabilities.

Net installs are below the $3 million-ish, which gets you to the middle of the 8% growth range. There's still all hands on deck to get it to that number. We think that's not only an appropriate goal, but we think it's a very achievable goal and we think it's achievable in the near term, but we've got to make that happen, so the messaging internal within Zayo is we've invested in the resources. We believe we're doing the right things. We believe we have the right leadership team in place.

It's a matter of just taking all of that and just getting our execution a little tighter, which will lead to a bit more sales, which will turn into a bit more installs, and a little bit less churn, and those things together get us into that range and then looking beyond that range. So, we continue to believe that's all a realistic expectation in the relatively near term, but we also fully realize that the time is now to show that's not just an expectation, that's a deliverable.

We put a few commercial highlights in here showing the nature of the deals that we're doing. These are just representative samples, but it provides a little bit of color of what kind of deals contributed to this. In the first one, this involved a global cloud provider. What we're seeing a lot of activity on is not just the upgrade from 10G to 100G wavelengths, but we're seeing the volumes of those upgrades, particularly when it comes to cloud-type providers. The volume of the capacity that's needed is growing quite expansively right now. The price-per-100G waves might be lower, the quantity of 100G waves is far greater, and it's these types of deals that we're seeing more and more of on the wavelength side.

On the next page, we share a few other deals. The first one has to do with an international carrier. In this case, the carrier is an Asian carrier who is serving their customers, as those customers have needs in the U.S. and Europe. This is, again, multiple wavelengths connecting major data centers with a long-term contract and my guess is a lot of upside from there. The second one is a Europe-based deal. This is a wireless carrier in London. Again, similar to the trends we've seen in the U.S., converting more and more of their core into an infrastructure-based network. Dark fiber with other services around it, in order to give them more ownership and control of their underlying network.

And then the last one is a transportation services company. Kind of a West Coast style company that is doing a lot in the various areas of transport, consistent with some other themes needing multiple 100G waves, given the amount of data that needs to move around. Also, a good foreshadowing of what's to come, as the transportation industry becomes more and more, I'll say automated over time.

So, in summary, our focus is on change. Maybe you'd say it's intensifying. Where we realize that the kinds of changes we made, the investments that we made over the last year or so are now having time to get fully in place. The teams are starting to coalesce around one another, understanding how together we need to work in order to produce results. So, turning that into the kind of bookings momentum that shows the results above $8.5 million, also gets a little bit tighter around revenue retention, and also leading to installs. Doing all those together will get us to our goals and beyond.

We do fully expect to get to that 6% to 8% organic growth target in the relatively near term, but we also realize that expecting that and doing that are not the same thing and now is the time to get that done. That has to then convert to a similar level of EBITDA growth. So, while we're doing that, we also have to stay very focused on the costs, especially in this inflationary environment, making sure the revenue translates into EBITDA. And as all that happens, we continue to focus on integration, looking at new M&A-type opportunities, deploying our capital efficiency, and continuing to create value both organically and inorganically. So, with that, I'll turn it over to Matt.

Matt Steinfort -- Chief Financial Officer

Thank you, Dan. For the quarter, communications infrastructure revenue grew 11% on a quarter-over-quarter annualized basis, 7% excluding the impact of the Spread, Neutral Path, and McLean Data Center acquisitions. CI EBITDA grew 9% on a quarter-over-quarter annualized basis, and 7% organically.

Zayo continued to deliver strong adjusted unlevered free cash flow, $137 million at a 25% margin for the quarter. Levered free cash flow was down quarter-over-quarter due to seasonally higher interest payments, higher capital expenditures, and a negative impact from net working capital. During the quarter, we completed the move to ethernet transport to the transport segment, for the reasons we outlined on the May earnings call.

As part of the Allstream separation process, we also made several intercompany allocation changes. The details of these changes, along with the recast segment financials, are in our earnings press release, and more details will be included in our 10-K, which will be filed with the SEC in the coming days. In addition to the financial recast, we have included recast offering metrics in the earnings supplement as well.

Communications infrastructure revenue of $546.6 million represented 83% of Zayo's revenue, while CI EBITDA of $300.7 million represented 93% of consolidated EBITDA. Over 60% of CI EBITDA came from our core fiber and colocation segments. Speaking to the June '18 financial results, Zayo Group revenue was $657.6 million for the quarter, with EBITDA of $324.9 million. At a total company level, reported annualized revenue and EBITDA growth rates include an impact from the acquisitions of Spread Networks, Neutral Path, and the McLean Data Center property.

As we look ahead to the September quarter, there are a few known items that we expect to negatively impact revenue and EBITDA growth. These items include the continued impact from the Allstream business; the close of the Scott-Rice Telephone divestiture, which Dan indicated closed at the end of July; FX headwinds that to date are greater in the September quarter than were in the June quarter as a result of the strengthening dollar; and increase in REIT conversion expenses; and a higher level of non-recurring revenue in the June quarter, the majority of which was related to an equipment sale that is not likely to reoccur in the September quarter.

From a balance sheet standpoint, our balance sheet remains very strong. With a gross leverage ratio of 4.5x, we remain within our target leverage ratio of 3x to 5x adjusted EBITDA. During the quarter, as a part of a repurchase plan, we repurchased 2.75 million shares of our stock at an average purchase price of $34.02. Stock-based compensation was $26 million for the quarter, a 0.3% dilution. As a remainder, stock-based compensation at Zayo is entirely performance-based. Grants are awarded and vest based on measured equity IRR and stock price performance, which ensures that our incentives are directly aligned with those of investors.

As Dan mentioned, we made traction on a number of our key strategic priorities. In addition to our heavy focus on increasing organic growth, we continue to make progress on our highest priority strategic initiatives -- the separation of our Allstream business segment and the evaluation of a potential REIT conversion.

Along with the closing of the sale of the Scott-Rice Telephone business at the end of July, we have completed the internal operational separation of the remainder of Allstream. We believe there are multiple options available to us to realize value from the Allstream business and we are actively evaluating strategic alternatives. I'll note, however, that there is no specific timeline for resolution.

On the REIT side, we continued our conversations with the IRS, included the filing of a PLR in July. We continue to work with advisors to identify, plan for, and begin implementation of the administrative systems and reporting changes that are needed to operate as a REIT. With that, we will start the question-and-answer portion of the call. Operator, will you please begin?

Questions and Answers:

Operator

At this time, if you'd like to ask a question, please press * then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press * then 2. Our first question comes from Michael Rollins with Citi. Please go ahead.

Michael Rollins -- Citigroup Global Markets -- Analyst

Hi, thanks for taking the questions. A couple, if I could. If you just delve back into the comments that you made on our expectations for the calendar third quarter, did you say that both bookings and installations should each be over $8 million? Then just getting more into the sales side of the equation, was there a particular segment that was weaker in terms of not hitting the bookings contributions that you were looking for? And can you share some of the specific steps you're taking to try to increase the focus on execution, as you described? Thanks.

Dan Caruso -- Chairman and Chief Executive Officer

Sure. It's still early in the quarter to be definitive about the bookings and installs, but the expectation, as we sit here today, is that we will surpass $8 million in both bookings and installs. Because it's not an absolute assurance of that, it's too early to give that, but that's what we think is the likely outcome.

The one segment that performed weaker was the colo segment. The sales there were about, I think, 250,000 lower than they've been in the last few quarters. We did make changes there in about a quarter ago at the leadership level, as well as making additional changes. The person heading up zColo now is a Zayo, I'll say a Zayo veteran, someone who's been here a number of years. He's been on the commercial side, Bruce Garrison. Many of you have met him, had various different contacts. He's been involved in heading up our global reach. He's involved in overseeing our partner channel reach recently, as well as overseeing our international carriers from a sales perspective. So, he moved over and has taken over zColo and we do expect that will get on a better track.

There was also a higher churn quarter in zColo this past quarter. That was driven largely by a handful of events that were, I'll call them, I'm trying to think of the right word. They were associated with longer-term deals. One that dated back 10+ years, a big circuit switch and a carrier hotel with an international carrier that was destined to be decommissioned at some point. So, we've known that for several years and the revenue stream that went away and another two that have to do with consolidation events. Kind of one content-type company acquired another one a year or two back that then leads to a decommissioning of space.

So, on the churn side, it's largely driven by a handful of very specific events, but overall we need kind of a refresh of leadership with the zColo business. Having said that, that might have affected the current quarter. The bigger contributor to the quarter not being a large quarter was just big deals kind of hit at certain quarters. They seem to not hit other quarters. There wasn't a big contribution of larger deals. That was probably the bigger deal mover in the June quarter.

Michael Rollins -- Citigroup Global Markets -- Analyst

And can you share some of the additional steps that you're taking in terms of working with the salesforce and focus on the execution to hit the aspirations that you laid out for your target?

Dan Caruso -- Chairman and Chief Executive Officer

Yeah, absolutely. The first and foremost is we converted into a vertical sales structure early in the year. We started it last year but really did the full conversion during the first quarter. There is strong support with Zayo from whatever direction you look. The steps we've taken to go vertical are the right steps and creating the right momentum. The structural steps have largely been taken, so now each of the teams is off to the races. They're all showing the right signs. So first and foremost, it's just giving that a chance to get fully baked in.

The second is we did realize that there was a gap that we had and it was a gap between kind of the sales organization and the fiber solutions organization. So fiber solutions is set up by regions and we are investing more in the business development functions within each of the geographies. That's contributing to the success we have and we think there's additional opportunity there as well.

But between those two organizations, when it comes to some of the bigger, more complex deals, particularly in the areas of 5G small-cell related, as well as areas of some of the bigger network deals with the webscale providers, that we need a group to sit in between both sales and the fiber regions, so we formed a group that we call Strategic Networks. That's being led by one of our other veterans of Zayo, that several of you met, Brian Daniels, reporting in to Jack Waters. We only did that a couple months ago, but it's already having a noticeable impact in helping to frame and advance some of the bigger, more complex deals. Some of which we think will bear fruit even in the current quarter.

So, those are a couple examples of what we believe -- and again, what we're talking about is instead of delivering an $8 million number, delivering and $8.5 million to $9 million number. And then bigger when we have a larger contribution of larger deals, but seeing our day-to-day sales activity producing a number north of $8 million and then getting a contribution of large deals over and above that. So, we think we're on course to make that happen. It's not a big lift from where we are right now, but it's something that we all have an urgency to see it put in place in the here and now.

Michael Rollins -- Citigroup Global Markets -- Analyst

Thank you.

Operator

Our next question comes from Brett Feldman with Goldman Sachs. Please go ahead.

Brett Feldman -- Goldman Sachs -- Analyst

Thanks. Maybe just following up on the whole large deal funnel. I'm curious, where there no really big deals in the market to be won? Is that why you didn't book any this quarter? Or are you finding that there are some emerging competition around those types of deployments. Then a question on churn. You talked about how 20% of churn you believe is avoidable, but on the other hand you think that there's probably going to be some continued elevated churn in the near term. So, I was hoping you could walk us through what is it about that churn that you think is avoidable? And how long is it going to take and what do you need to do to get to the point where you are indeed avoiding it?

Dan Caruso -- Chairman and Chief Executive Officer

First of all, when we think about avoidable churn, you'll never avoid 100% of the churn that's avoidable, because to do that, you're almost operating at perfection. So, the goal is to kind of differentiate between what portion of churn, even if we're doing all the right things that we think would've happened anyways. So, what would happen anyways? Well, two companies combined and they are grooming their networks. You probably don't have much of an opportunity to retain certain amounts of revenue. Or, if a company is going through structural change and there's certain facilities are no longer needed or only a fraction of a facility is needed, like some of the colo examples I described earlier. Those are going to go away no matter what you do.

That doesn't mean that stronger engagement with the customer won't produce a better outcome, but it may not produce a better outcome in area reduced churn. So, the first thing I would say is the portion of churn that is unavoidable as we go deeper and deeper into that wane over time. That is, there's probably less unavoidable churn during the natural course of each quarter as it goes forward.

That might not manifest itself in the current quarter, maybe not the next quarter. But as we look at it, it looks like it's the kind of stuff that reduces over time because the origin of it are events that are unlikely to repeat themselves. Acquisitions of certain natures we've done in the past that have to do with revenue and product stream, that have to do with legacy, telephone company-environments, as opposed to infrastructure-focused companies. So, that's one.

On the avoidable side, the kinds of things that are avoidable is if you weren't heavily engaged with a customer and then something else happens, such as a competitor wanted a service or if you did have some service issues, you weren't all over them at the time you were having them and maybe you could have kept that revenue anyways. Not a lot of just service-related, but there are a number of areas where we think better, stronger engagement with the customer probably would've led to us retaining the revenue as opposed to seeing it drift away.

It's not a big portion, I will say, unfortunately, of the churn, because if it was a bigger portion, that means we would be able to impact it through better execution. But we think it's big enough that it could make a different of several hundred thousand in a given quarter. So, instead of a $6.2 million number, it could've been $5.8 million if we were executing far better. A lot of that is just getting -- we have staffed up the sales organization. We went vertical. So, now they're getting more intimate relations with the customers and they can kind of lead the rest of the company in making sure we're appropriately and heavily engaged with the right people at a broader set of customers, so that we can around the edges avoid some of that churn.

Brett Feldman -- Goldman Sachs -- Analyst

Got it. Then on the bookings, the larger opportunities?

Dan Caruso -- Chairman and Chief Executive Officer

The larger opportunities? It wasn't that there were larger opportunities, discrete opportunities that we lost during the quarter. There are definitely larger opportunities that we have been working very hard in during the quarter that just weren't of the nature that were going to get signed during that quarter. Some of those we do expect to get signed during this quarter. So, it's just ebb and flow. If you look at our history for the past X number of years, you just see that pattern where certain quarters it seems like you get a higher proportion of those to sign and other quarters you don't. It's not a function of we lost some in one quarter and we won some the next quarter. They tend to be deals that are one year, two years in the making.

Brett Feldman -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

Our next question is Philip Cusick with J.P. Morgan. Please go ahead.

Philip Cusick -- J.P. Morgan -- Analyst

Hi, guys. Thanks. Salesforce of 254, up about 15% from a year ago. It sounds like you're pretty confident that's enough people. What's the sort of tenure look like in that base? Is that maturing over time? Have you seen much churn there? Then do you think that bookings is really about getting this group more efficient or does it not make sense to add more heads as well?

Dan Caruso -- Chairman and Chief Executive Officer

Yeah, so it might make more sense to add more heads, but I don't think that's the near-term answer. The near-term answer is get existing heads up the maturing in Zayo. As part of going to the verticalization and as part of just, if you look at not just the size of our salesforce a year, year and a half ago, but a lot of that salesforce a year, year and a half ago was relatively recent additions to Zayo that came through the acquisitions that we did about a year and a half ago.

Those acquisitions were not the types of companies that were infrastructure-focused. So, there was a significant portion of our overall sales force that probably wasn't aligned with the kind of salesforce that we need in the field to be successful. Now, we did have a portion that were of that profile, but there were a number of them who weren't. So, in addition to growing the salesforce, we also had to evolve the salesforce to get a much higher proportion of the field-based salesforce to be the kind of people who are in their comfort zone selling larger infrastructure-type product set to customers who buy on a much more global scale.

So, people who are used to operating at a small regional level sometimes have trouble adjusting and selling across many geographies. Salespeople who are comfortable selling typical telcom products have trouble when you ask them to sell to larger, more sophisticated customers whose needs are more infrastructure in flavor. So, the biggest thing we need is having, not just the quota bearing, but the sales leaders have a bit more time to mature into their positions and the scope of their responsibilities. So, that's happening in the one chart we shared that shows how that happens over time. But we still have quite a portion of our salesforce that has less than one year of tenure within Zayo. So, we think that's on the right course.

Philip Cusick -- J.P. Morgan -- Analyst

Have you seen churn come down with the salesforce?

Dan Caruso -- Chairman and Chief Executive Officer

We would expect to see churn come down within the salesforce. We do think some of the churn as we look backwards over the last year has included people who weren't great fits for what Zayo's business plan was. So, the churn would've been higher, not because good people were leaving, but because we needed to change the profile while we were augmenting the size of the salesforce.

Philip Cusick -- J.P. Morgan -- Analyst

Okay. But it doesn't sound like churn has started to come down yet. Is that fair?

Dan Caruso -- Chairman and Chief Executive Officer

Yeah, but we don't perceive churn of the salesforce to be a problem looking to be solved. [Crosstalk]

Philip Cusick -- J.P. Morgan -- Analyst

If I can ask one more. Unity announced they got a PLR from the IRS recently. It took them about 10 months to get that. Did theirs help you at all in your process and could we compare the 10 months it took for them to your timing as well?

Matt Steinfort -- Chief Financial Officer

So, we haven't seen the details. I don't believe they've shared the details of the PLR. So, we're not sure exactly what it includes. From their comments in their call, it appears that there's some aspect of lit services that are covered by the PLR that they received. If that's the case, that's certainly positive for us, although not knowing to the extent that they included different services, it will be difficult for us to assess whether it supports the position that we've taken.

From a timeframe standpoint, it's consistent with what we've said externally. We said it could take anywhere from 6 to 12 months to get feedback, if we get feedback from the IRS. So, a 10-month process for them would fall within that range and wasn't surprising to us.

Philip Cusick -- J.P. Morgan -- Analyst

Great. Thanks, Matt.

Operator

Our next question is from Colby Synesael with Cowen. Please go ahead.

Colby Synesael -- Cowen and Company -- Analyst

Great. Two quick housekeeping questions and then I have one other. So, first off, I think previous messaging was that you expected to be at greater than $8.5 million in bookings exiting 2018 and I'm just curious if you're still on track for that. I recognize that you mentioned it would be above $8 million in calendar 3Q. So, I guess I'm wondering more as you exit '18, like you said before. And also, the equipment charge or revenue that you mentioned in terms of things that will negatively impact the September quarter. Could you just tell us what that number is so we can properly back that out of our own model?

Then my other question had to deal with installs. So, you just completed your L.A.-to-Dallas route and I believe that was a multi-year process in terms of building that. And you've been receiving bookings, if you will, throughout that time. Should that help drive up installs as we go into that third quarter? Are there other big projects coming due soon that could also contribute to a ramp in that install? Thank you.

Dan Caruso -- Chairman and Chief Executive Officer

On the first question, do I expect to be at greater than $8.5 million exiting 2018, I'd say yeah. I can't guarantee that, but as I said earlier, I think we're going to be safely about $8 million in the quarter we're in right now and if we're safely above $8 million, it's somewhere within that vicinity, give or take. I think that momentum will continue in the December quarter. So, as always, no guarantees, but I think that's a realistic expectation.

Matt Steinfort -- Chief Financial Officer

On the equipment side, Colby, if you look at Page 6 of the supplement under the other revenue, in the June quarter we reported $12.5 million in other revenue and if you just look back over the prior quarters, and remember in the December quarter there was a blip in the other revenue as a result of the cyber settlement. And you just take the average, the June quarter is probably about $7 million to $8 million higher in the quarter, which is primarily due to that one large equipment sale.

Dan Caruso -- Chairman and Chief Executive Officer

Then on the L.A.-to-Dallas, we always have projects completing that are material. As we've given projects, the L.A.-to-Dallas shouldn't be viewed in isolation because in any given quarter, we probably could cite some larger things that are getting done that lead to bigger installs in a given quarter. I don't know if there's anything special about the September quarter.

Colby Synesael -- Cowen and Company -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analyst

This is Lisa. Thanks for taking the question. Just two questions, if I may. On the PLR, can you give us a sense of what percentage of your revenues will be covered under this PLR and what kind of response you're expecting from the IRS in order to make a go/no-go decision on the REIT conversion? Then on the churn, you mentioned that you were still seeing legacy churn from stuff like MPLS and such. Can you quantify the size of impact of that on the churn for this quarter? Thanks.

Matt Steinfort -- Chief Financial Officer

On the first question, and this is very consistent with previous comments, if you think about our business and the various segments that we have, we feel very comfortable with the REITability of the fiber business and the colo businesses, which there is a lot of the precedent in the industry and other companies having broken that ground. The transport business, particularly as newly constructed with the ethernet transport now included in transport, we believe that's where I'd call the line of scrimmage and that's where I would expect that Unity's PLR addressed products that would fall within our transport business. As I said, I haven't seen their PLR, so I don't know which or if all or some of those would be included. But that's really where we think the active conversation in the market by us, by Unity, and others with the IRS is focused.

The enterprise networks business, as newly constructed without the ethernet transport, is very less likely to be considered REITable in the near future from our standpoint. Clearly, Allstream, we've been clear about that with voice and SNB, that's not something that we factor into the REIT mathematics when we assess it.

In terms of talking about the probability, I have no way of knowing that the IRS is going to do or say and it certainly would be presumptive of me to make those statements and I'm also hesitant to make any sort of attribution because we're still in the middle of conversations and it's just not appropriate. Do you want to take the churn?

Dan Caruso -- Chairman and Chief Executive Officer

Yeah, on the churn, the biggest difference this quarter versus last quarter was in colo. So, the MPLS was more a comment about things like MPLS and Sonnet are kind of legacy services from the past. They'll have a reducing kind of influence on our churn as we look forward in time relative to what they had backwards just because they'll be much lesser portion of the overall embedded base, but no, we don't quantify individual aspects of the churn itself, other than at the segment level. The only segment area where you see a noticeable change from prior quarters is the colo one.

Simon Flannery -- Morgan Stanley -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Amir with Barclays. Please go ahead.

Amir Rozwadowski -- Barclays Capital, Inc. -- Analyst

Hi, this is Matt for Amir. Thanks for taking the questions. I had a couple. First one, just going back to the colo business. This quarter, the implied growth rate dropped to -1% versus the 7% achieved last quarter. Have your growth expectations changed for this piece of the business? I know now in the past you guys have got it to an implied growth rate of the high single digits.

Dan Caruso -- Chairman and Chief Executive Officer

No. Our long-term growth rate for that business, we still would expect to be in the high single digits. There is some pressure this quarter that just ended and the quarter we're in right now. But the expectation is that we'll get back to a point where we're selling and installing and churning at a level where the higher single digits should be an appropriate expectation.

Amir Rozwadowski -- Barclays Capital, Inc. -- Analyst

Okay, thank you. And then in your prepared remarks, you had mentioned Allstream as one headwind to revenue growth going forward. On your last call, I believe that you didn't anticipate Allstream revenue to decline at the same rate on a go-forward basis. So I just was wondering what has changed since then?

Matt Steinfort -- Chief Financial Officer

I don't believe we made any kind of forward-looking statement around that.

Amir Rozwadowski -- Barclays Capital, Inc. -- Analyst

I think it was around there was one carrier customer that had accounted for the decline last quarter.

Matt Steinfort -- Chief Financial Officer

Yeah, you were talking about a, yeah, I understand what you're saying. You're saying there was a specific churn related to a financial services provider?

Amir Rozwadowski -- Barclays Capital, Inc. -- Analyst

Yeah.

Matt Steinfort -- Chief Financial Officer

Yeah. So, that has, as we indicated, it's kind of worked its way through the system. But again, the overall performance of the Allstream business is one of a declining business, but a very strong cash flow producer. We expect that will continue. We expect strong cash flows and declining revenue from that business for the foreseeable future.

Amir Rozwadowski -- Barclays Capital, Inc. -- Analyst

Okay. Thank you for taking the questions.

Operator

Our next question comes from Jonathan Atkin with RBC Capital Markets. Please go ahead.

Jonathan Atkin -- RBC Capital Markets -- Analyst

Thanks. A couple questions. I was just interested, as you look at your sales pipeline, maybe not the actual bookings, but the sales pipeline, so a broader set of possibilities, how do you judge the capital intensity of that compared to the actual business that you've driven over the past several quarters?

Dan Caruso -- Chairman and Chief Executive Officer

That's a good question. The capital intensity tends to be a tale of two cities for us. You can see that in the patterns of what's been sold in the past. There's a certain amount of the business that we tend to get that takes a lot of advantage of our current network and hence has very quick payback. And so you see that in the current quarter. You saw that two quarters ago. So, the absence of very large deals usually coincides with a very strong aggregate payback profile. So, when we look forward in the funnel, we certainly see a lot more of that, but we also see a lot of large deal activity.

Obviously, those have got to get to the finish line, but we see a lot of large deal activity that also involves a lot of building of additional network and hence would have, by itself, a long payback cycle. But when you're doing that, you're building a lot of network that gets leveraged to the next 10, 15, 20 years. So, we're seeing kind of a healthy mix between the big deal activity, as well as the more kind of standard, more rapid payback, leveraging network that's already in place.

Jonathan Atkin -- RBC Capital Markets -- Analyst

Okay. And then I was interested in the term, your dark fiber deal, is there any trend to call out in terms of the number of years that your dark fiber deals are either in Europe or the U.S.?

Dan Caruso -- Chairman and Chief Executive Officer

I don't think there's any trends. With dark fiber, there are two different types of deals, maybe three different types you tend to see done. Some of them are very long-term deals. Those typically involve where it's key underlying infrastructure for a customer that they need to secure rights on for 10, 15, 20 years because they're going to be building a lot of network capability on top of the fiber itself. So, you definitely have a proportion of that.

At the other end of the extreme, you'll see dark fiber deals that are where it's metro fiber use is kind of an extended interconnect platform that looks more like cross-connects in a colo facility. Those tend to be shorter-term deals, but the revenue lasts a lot longer than the term of the deal.

Then in the middle is where you'll see private networks for enterprise customers. Private where they have dedicated fiber and it may include the optronics with the dedicated fiber. Those tend to be maybe 5-year-type deals on average. So, you'll see a mix of shorter term that is fiber interconnect; medium term that is more enterprise-related where they're using it to connect up some of their key locations; and very long-term, where it's their underlying infrastructure to support kind of their networks for the next 10, 15, 20 years.

Jonathan Atkin -- RBC Capital Markets -- Analyst

Great. That's it for m. Thank you.

Operator

Our next question comes from Josh Frantz with Bank of America Merrill Lynch. Please go ahead.

Joshua Frantz -- Bank of America Merrill Lynch -- Analyst

Hi, guys. Thanks for taking the question. Just was curious if any of you conversations have changed over the course of the year with your customers about redeploying their savings from tax reform and if any of the verticals kind of stand out? And secondly, do you think -- I appreciate your comments on the colo before, but do you think you need to scale up in this business to kind of hit some of those growth targets? Thanks.

Dan Caruso -- Chairman and Chief Executive Officer

Personally, I have not heard any direct relation between a customer spending more on capital that's directly tied to tax reform. I'm sure that's happening within those companies. I'm sure that leads to them having more capital budget, so I don't know what we see that direct correlation, but I'm sure it exists. Particularly with enterprise-type companies. On the colo side, we need to continue to scale colo. A lot of that is through organic investment, not inorganic investment.

We do have a lot of capability within or existing platform in the form of land or shelf passes that can be built out. That needs to continue in order to support the growth. I think our opportunity when it comes to colo is the combination of colo plus network becomes very important to a particular solution for a customer, where we can bring a more seamless end-to-end solution, where fiber and the metro is important, kind of big wavelengths between cities are important and they need to locate colocation sites. So, that's not the only sweet spot, but that's where our sweet spot tends to be when it comes to colo.

Joshua Frantz -- Bank of America Merrill Lynch -- Analyst

Great. That's all for me. Thanks so much.

Operator

Our next question comes from Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo -- MoffettNathanson -- Analyst

Thanks for taking my question. First, if we think about the flip side of the MPLS churn you experienced this quarter, how meaningful is the opportunity for you to press into MPLS revenue that might be at risk at other service providers, with products like SD-WAN? And are you of the view that we're going to a significant migration away from MPLS in coming years?

Dan Caruso -- Chairman and Chief Executive Officer

The first thing is I probably overstate the MPLS. MPLS is more of a medium-term trend. We've seen it in past quarters and we'll see it in future quarters. It wasn't particularly pronounced in the quarter that just ended. So, I was using that as more of an example than a reference to current growth. I said in the most recent quarter, if you look at anything that was noticeably different from prior quarters, it was colo trend. But in general, yeah, MPLS is giving way to other connectivity solutions. It's not just SD-WAN. It could be ethernet transport. But it also is waves and it is also fiber.

So, as companies take more control over their core network, you see some level of substitution between MPLS and connecting their data centers with a dedicated wave solution at times. Then as they attach broader locations, that's where SD-WAN will come into plan more. So, it's just a general migration. There's always technology change going on in our industry that's probably not going to stop ever. MPLS is one area coming under pressure now. Like I said, fortunately, we don't have a big base of MPLS, so most of what we have has been recently inherited, but it's not a big base overall. So, I think you'll see an ongoing migration there throughout the industry. In our case, it won't be a pronounced impact.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay. That's great color. Then maybe can you also update us on the capital allocation front? Based on what you see in the market, prices that are out there, how are you thinking about the relative attractiveness of organic investment versus M&A versus share repurchases versus any other investment outlines you might be considering?

Dan Caruso -- Chairman and Chief Executive Officer

Sure. Well, let's start with the inorganic side. The inorganic side, I think everyone has to have their eyes wide open right now. On the inorganic side, you see some deals being done where the acquired company, you might look at the quality of the business as being middle of the road, maybe even less than middle of the road. You have the acquisition multiple being high by even recent historical standards. So, if you look at that, that either means that those businesses have always been worth a lot more than people have been paying for them, or it might mean that people are overpaying right now relative to what they should do.

So, I think whatever the answer is, the observation is you're seeing higher-level multiples, including for some businesses that -- when I say mediocre, what I mean by that is that in our world, the more heavy you are in infrastructure and the more your revenue streams are infrastructure-based, so if you've got deep, dense, owned fiber network with kind of unique network with thick fiber counts and a lot of your revenue is based on that infrastructure, it's not MPLS-based type revenue or DIA-type services or voice-type services, so it's the higher quality property versus the lower quality would be where you have more voice in the mix, you have some copper in the mix, you have smaller enterprises, so you have less fiber that you're putting to work. We're seeing deals get done for companies that are more in the mediocre mix category, yet the EBITDA multiples can be very high.

So, that makes us scratch our heads a little bit. I think you've got to be careful on the inorganic side. Having said that, I think some of our best inorganic deals that we've done have been some of our recent deals. For example, the Spread deal is going to be one of the deals that's property in the Top 5 of the 40+ deals that we've done over time, is my expectation. So, you've just got to be selective.

On the organic side, our goal is not to generate levered free cash flow. Our goal is to be lever free cash flow negative, so long as we're finding the deals to invest in that we feel real good about. If we were unable to find those and our conviction that we were going to find those was low, I think we'd be much more aggressive on the buy-back front. What we're seeing is that there's a lot of activity out there that could culminate in a lot of opportunities to invest organically. We've seen that in the area of IT/small cell.

We're seeing that in building out additional fiber networks, both densification opportunities, but also at about unique routes between cities. So, we're seeing opportunities to invest. Right now, the cumulative amount of those opportunities is still leaving us lever cash flow positive, but that's not by design. That's by us wanting to take advantage of those opportunities but trying to be disciplined at the same time.

For the Zayo people on the call, my challenge is, if all you remain, let's close enough of those big, juicy deals such that I'm explaining to this group why we're levered cash flow negative.

Nick Del Deo -- MoffettNathanson -- Analyst

That's great detail. Thanks, Dan.

Operator

Our next question comes from Frank Louthan with Raymond James. Please go ahead.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. Just to clarify with the colo, just more of the sales execution and a little bit of management shifting, there weren't any deals that got pushed out that might come back in later quarters? Then as you look ahead to REIT conversion, how should we think about how you're looking at a timing for that? There's the issue of converting to calendar year reporting and so forth and how would you approach that and think of a timing for that?

Dan Caruso -- Chairman and Chief Executive Officer

On the colo side, it wasn't about deals getting pushed out. I think it was more of the culmination of the last several quarters not doing enough just good execution. I think it was weaker execution, at frankly the leadership level that led to a slowdown of momentum that we need to get back on track. I think we'll get it back on track because I think it's a strong team overall. But the strong team also needs strong day-to-day leadership and I believe we have that now.

Matt Steinfort -- Chief Financial Officer

On the REIT conversion, just as a reminder, we're not in a sprint to that. We have a lot of work to do to work with the IRS and to figure out what the implications are in terms of operating the business. Our NOLs should last us to 2023, 2024. So, we're not a cash taxpayer. But you're correct. If we decide that we're going to convert to a REIT at some point, we would have to shift to calendar year financials. And so if you take all of the work that needs to be done, the likely response time from the IRS, the earliest that would be at the very early end of when we could convert if we decided to do so, would be January of 2020. But there's a variety of things that could change our timing that could push that out. But, again, we don't believe that's an issue given the coverage we have from an NOL standpoint.

Frank Louthan -- Raymond James -- Analyst

Great. That's very helpful. Thank you.

Operator

Our next question comes from Tim Horan with Oppenheimer. Please go ahead.

Tim Horan -- Oppenheimer -- Analyst

Thanks, guys. Two things. First, Dan, it looks like you just need sales productivity to improve by 5% to 10%. I know you gave some charts there. I guess just you conviction on that then the metrics you tried to provide, just any more color around the conviction and the timing on that?

Dan Caruso -- Chairman and Chief Executive Officer

Yeah, so I would say my conviction is very highlight. Period. I think we're -- sales productivity starts with sales leadership. I think we have the right overall sales leadership, both at the sales leader level with Phil and with the team underneath Phil. It's a consistent team that's strong across the board. They're getting to a point where they've had enough time both within Zayo, but also they're only not even a third quarter into us being set up by mega vertical, so even though that's still very fresh, I think the progress that's already been made is what leads to very strong conviction. But in addition to having a strong sales organization, that's not nearly enough. You need a strong execution around it.

First, you need enough things to sell. But one thing that Zayo walks around scratching their head about is man, do we have enough to sell into the market? It's the opposite thing that could start within the four walls of Zayo that we have so much networking capability, much of which we're not fully exploiting. So, how do we more fully exploit everything we have that's already in our arsenal? So, plenty of product and capability to sell and the support structure around it, the people who are helping to make the sales happen from a fiber region standpoint, from a transport group, from our enterprise group who do really interesting and crazy things, and even our colo group which has been a solid contributor for Zayo can get itself back on track.

So, the conviction is high for al those reasons. I don't think there's anything than other some kind of execution details that come with just a little bit more time in the saddle, there's nothing holding us back. Everything else you could want to have in order to certainly sell 5% to 10% more is in place. Now it just needs to start showing up fully within the numbers. By the way, I also think the big deal activity is there as well. As we saw the prior quarter, you layer on some big deal activity, and all of a sudden you've got a number that's not just $8.5 million, it's well north of that. Those types of opportunities are still out there for us to go get to the finish line.

Tim Horan -- Oppenheimer -- Analyst

Related to the big deal activity, it seems like the hyperscale capex has gone through the roof this year. The wireless guys are about to spend a lot more. Not to put words in your mouth, but can you talk about the level of interest for big deal activity from your customers now versus what you've seen in your career over the last few years?

Dan Caruso -- Chairman and Chief Executive Officer

You hit the nail on the head with the two examples you gave. It's not just those two areas, because there's more I'll call it medium-deal activity. You see accounts that you would think of as more traditional enterprise accounts who also are contributing pretty sizable deals as their businesses move more toward looking like e-commerce companies or fintech companies. So, it might look like a traditional financial customer or it might look like a traditional retail customer, starts to have pretty significant networking needs as well. But, you're right.

On the webscale side and on the wireless side, that's where a lot of that activity goes. Yeah, I think there's a lot of activity out there. There's been other times where there's been a lot of activity. We have a lot more to offer now because of our much more expanded geography, but there's a ton of reasons to feel optimistic there.

Tim Horan -- Oppenheimer -- Analyst

Thank you.

Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to Dan Caruso, Chairman and CEO, for any closing remarks.

Dan Caruso -- Chairman and Chief Executive Officer

Well, I was told by Brad that all you guys would be on vacation by now since it's the last two weeks of August. So, thank you for sticking with us the full hour an we appreciate your continued interest in Zayo. Have a good rest of vacation.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 68 minutes

Call participants:

Dan Caruso -- Chairman and Chief Executive Officer

Matt Steinfort -- Chief Financial Officer

Brad Korch -- Senior Director, Investor Relations

Michael Rollins -- Citigroup Global Markets -- Analyst

Brett Feldman -- Goldman Sachs -- Analyst

Philip Cusick -- J.P. Morgan -- Analyst

Colby Synesael -- Cowen and Company -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Amir Rozwadowski -- Barclays Capital, Inc. -- Analyst

Jonathan Atkin -- RBC Capital Markets -- Analyst

Joshua Frantz -- Bank of America Merrill Lynch -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

Frank Louthan -- Raymond James -- Analyst

Tim Horan -- Oppenheimer -- Analyst

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Contents:

Prepared Remarks:

Questions and Answers:

Call participants: