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Zayo Group Holdings, Inc. Reports Financial Results for the Fourth Fiscal Quarter Ended June 30, 2017

Fourth Fiscal Quarter 2017 Financial Highlights

  • $638.0 million of consolidated revenue, including $509.1 million from the Communications Infrastructure segments and $128.9 million from the Allstream segment;
  • Net income of $23.2 million, including $11.3 million from the Communications Infrastructure segments and $11.9 million from the Allstream segment.
  • $310.8 million of adjusted EBITDA, including $280.8 million from Communications Infrastructure and $30.0 million from the Allstream segment.
  • Bookings of $7.5 million, gross installs of $7.3 million, churn of 1.2% and net installs of $1.4 million, all on a monthly recurring revenue (MRR) and monthly amortized revenue (MAR) basis, excluding the Allstream segment.
  • Adjusted unlevered free cash flow of $117.2 million.

BOULDER, Colo., August 21, 2017 – Zayo Group Holdings, Inc. (“Zayo” or “the Company”) (NYSE: ZAYO), a global leader in Communications Infrastructure, announced results for the three months ended June 30, 2017.

Fourth quarter operating income increased $14.7 million from the previous quarter primarily due to organic and acquisition related growth. Net income decreased by $3.8 million during the quarter. Basic and diluted net income per share during the quarter was $0.09. During the three months ended June 30, 2017, capital expenditures were $205.3 million.

As of June 30, 2017, the Company had $220.7 million of cash and $442.2 million available under its revolving credit facility.

Recent Developments

KIO Networks US Data Centers

On May 1, 2017, the Company completed the $11.9 million cash acquisition of Castle Access, Inc.’s (d/b/a “KIO Networks US”) San Diego data centers. The two data centers, located at 12270 World Trade Drive and 9606 Aero Drive, total more than 100,000 square feet of space and 2 megawatts of critical, IT power, with additional power available. The acquisition was funded with cash on hand and was considered a stock purchase for tax purpose.

Unsecured Notes Offering

On April 10, 2017 and July 5, 2017, the Company closed private offerings of $550.0 million and $300.0 million aggregate principal amount, respectively, of 5.75% senior unsecured notes due 2027 (the “2027 Unsecured Notes”), which were priced at 104% and 104.25%, respectively, through an add-on to its existing 2027 Unsecured Notes issue. The net proceeds from each offering were used to repay certain outstanding balances on the Company’s term loan facility that mature on January 19, 2024 (the “B-2 tranche”).

July Term Loan Re-Price

On July 20, 2017, the Company entered into a repricing amendment to its credit agreement to re-price its outstanding B-2 tranche (approximately $1.1 billion after the aforementioned July 5 repayment) under its term loan facility at par and to bear interest at a rate of LIBOR plus 2.25%, with a minimum LIBOR rate of 1.0%, which represents a downward adjustment of 50 basis points.

Fourth Fiscal Quarter Financial Results

Three Months Ended June 30, 2017 and March 31, 2017

(in millions)

Three months ended
June 30, 2017 March 31, 2017
Revenue $ 638.0 $ 550.2
Annualized revenue growth 64%  
Operating income 105.4 90.7
Income from operations before income taxes 34.2 27.6
Provision for income taxes 11.0 0.6
Net income $ 23.2 $ 27.0
Adjusted EBITDA $ 310.8 $ 282.0
Annualized Adjusted EBITDA growth 41%  
Adjusted EBITDA margin 49%     51%
Levered free cash flow $ 39.6 $ 54.1

Three Months Ended June 30, 2017 and June 30, 2016

(in millions)

Three months ended
June 30, 2017 June 30, 2016
Revenue $ 638.0 $ 507.3
Annualized revenue growth 26%
Operating income 105.4 72.0
Net income/(loss) from operations before income taxes 34.2 (44.0)
Provision/(benefit) for income taxes 11.0 (13.1)
Net income/(loss) $ 23.2 $ (30.9)
Adjusted EBITDA $ 310.8 $ 257.8
Annualized Adjusted EBITDA growth 21%
Adjusted EBITDA margin 49%     51%
Levered free cash flow/(deficit) $ 39.6 $ (11.2)

 Conference Call

Zayo will host a conference call to discuss fourth fiscal quarter 2017 results at 5:00 p.m. EDT on August 21, 2017. To participate on the live call, listeners in the U.S. may dial 866-737-5498 and international listeners may dial 412-858-4607; please request to join the Zayo Group call. During the call, the Company will review an Earnings Presentation that summarizes the financial, operational and commercial highlights of the quarter. This Earnings Presentation, a live webcast of the conference call, and a Supplemental Earnings Presentation will be made available through the Investor Relations section of the Company’s website at www.zayo.com. 

About Zayo

Zayo Group Holdings, Inc. (NYSE: ZAYO) provides communications infrastructure services, including fiber and bandwidth connectivity, colocation and cloud infrastructure to the world’s leading businesses. Customers include wireless and wireline carriers, media and content companies and finance, healthcare and other large enterprises. Zayo’s 124,000-mile network in North America and Europe includes extensive metro connectivity to thousands of buildings and data centers. In addition to high-capacity dark fiber, wavelength, Ethernet and other connectivity solutions, Zayo offers colocation and cloud infrastructure in its carrier-neutral data centers. Zayo provides clients with flexible, customized solutions and self-service through Tranzact, an innovative online platform for managing and purchasing bandwidth and services. For more information, visit zayo.com.

Forward Looking Statements

Information contained in this earnings release that is not historical by nature constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “believes,” “expects,” “plans,” “intends,” “estimates,” “projects,” “could,” “may,” “will,” “should,” or “anticipates” or the negatives thereof, other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that future results expressed or implied by the forward-looking statements will be achieved and actual results may differ materially from those contemplated by the forward-looking statements. Such statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those relating to the Company’s financial and operating prospects, current economic trends, future opportunities, ability to retain existing customers and attract new ones, outlook of customers, and strength of competition and pricing. In addition, there is risk and uncertainty in the Company’s acquisition strategy including our ability to integrate acquired companies and assets. Specifically, there is a risk associated with our recent acquisitions, and the benefits thereof, including financial and operating results and synergy benefits that may be realized from these acquisitions and the timeframe for realizing these benefits. Other factors and risks that may affect our business and future financial results are detailed in the “Risk Factors” section of our Annual Report on Form 10-K to be filed with the Securities and Exchange Commission (our “Annual Report”). We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after releasing this supplemental information or to reflect the occurrence of unanticipated events, except as required by law.

This earnings release should be read together with the Company’s consolidated financial statements and notes thereto for the year ended June 30, 2017 included in the Company’s Annual Report.

Non-GAAP Financial Measures

The Company provides financial measures that are not defined under generally accepted accounting principles in the United States, or GAAP, including Adjusted EBITDA, Adjusted EBITDA Margin, adjusted unlevered free cash flow and levered free cash flow.

Adjusted EBITDA, as defined below and in Note 15 – Segment Reporting of our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, is the primary measure used by our chief operating decision maker to evaluate segment operating performance.

Adjusted EBITDA is defined as earnings/(loss) from continuing operations before interest, income taxes, depreciation, and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/ (losses) on intercompany loans, and non-cash income/(loss) on equity and cost method investments. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue. Adjusted unlevered free cash flow is defined as Adjusted EBITDA minus purchases of property and equipment, net of stimulus grants, plus additions to deferred revenue, less non-cash monthly amortized revenue. Levered free cash flow is defined as operating cash flow minus purchases of property and equipment, net of stimulus grants. Adjusted unlevered free cash flow and levered free cash flow are not measurements of our financial performance under GAAP and should not be considered in isolation or as alternatives to net income, net cash flows provided by operating activities, total net cash flows or any other performance measures derived in accordance with GAAP or as alternatives to net cash flows from operating activities or total net cash flows as measures of our liquidity.

Adjusted EBITDA is a performance rather than cash flow measure. In addition to Adjusted EBITDA, management uses adjusted unlevered free cash flow, which measures the ability of Adjusted EBITDA to cover capital expenditures. We use levered free cash flow as a measure to evaluate cash generated through normal operating activities. These metrics are among the primary measures used by management for planning and forecasting future periods. We believe the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and make it easier to compare our results with the results of other companies that have different financing and capital structures. We believe that the presentation of levered free cash flow is relevant and useful to investors because it provides a measure of cash available to pay the principal on our debt and pursue acquisitions of businesses or other strategic investments or uses of capital.

We also monitor Adjusted EBITDA because our subsidiaries have debt covenants that restrict their borrowing capacity that are based on a leverage ratio, which utilizes a modified EBITDA, as defined in our credit agreement and the indentures governing our notes. The modified EBITDA is consistent with our definition of Adjusted EBITDA; however, it includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the quarter for which the debt compliance certification is due. Adjusted EBITDA results, along with the quantitative and qualitative information, are also utilized by management and our Compensation Committee, as an input for determining incentive payments to employees.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results of operations and operating cash flows as reported under GAAP. For example, Adjusted EBITDA:

    • does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;
    • does not reflect changes in, or cash requirements for, our working capital needs;
    • does not reflect the interest expense, or the cash requirements necessary to service the interest payments, on our debt; and
    • does not reflect cash required to pay income taxes.

Adjusted unlevered free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. For example, adjusted unlevered free cash flow:

    • does not reflect changes in, or cash requirements for, our working capital needs;
    • does not reflect the interest expense, or the cash requirements necessary to service the interest payments, on our debt; and
    • does not reflect cash required to pay income taxes.

Levered free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. For example, levered free cash flow:

    • does not reflect principal payments on debt;
    • does not reflect principal payments on capital lease obligations;
    • does not reflect dividend payments, if any; and
    • does not reflect the cost of acquisitions.

Our computation of Adjusted EBITDA, and levered free cash flow may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate these measures in the same fashion.

Because we have acquired numerous entities since our inception and incurred transaction costs in connection with each acquisition, borrowed money in order to finance our operations and acquisitions, and used capital and intangible assets in our business, and because the payment of income taxes is necessary if we generate taxable income after the utilization of our net operating loss carry forwards, any measure that excludes these items has material limitations. As a result of these limitations, these measures should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as a measure of our liquidity. See “Reconciliation of Non-GAAP Financial Measures” for a quantitative reconciliation of Adjusted EBITDA to net income/(loss) and for a quantitative reconciliation of levered free cash flow to net cash provided by operating activities.

Annualized revenue and annualized Adjusted EBITDA are derived by multiplying the total revenue and Adjusted EBITDA, respectively, for the most recent quarterly period by four. Our computations of annualized revenue and annualized Adjusted EBITDA may not be representative of our actual annual results.

Measures referred to as being calculated on a constant currency basis are intended to present the relevant information assuming a constant exchange rate between the two periods being compared. Such metrics are calculated by applying the currency exchange rates used in the preparation of the prior period financial results to the subsequent period results.

Tables reconciling non-GAAP measures are included in the Reconciliation of Non-GAAP Financial Measures section of this presentation. A glossary of terms used throughout is available under the investor section of the Company’s website at http://investors.zayo.com/glossary.

 

Consolidated Financial Information

Consolidated Statements of Operations

(in millions, except per share data)

Year Ended June 30,
2017 2016 2015
Revenue $  2,199.8 $  1,721.7 $  1,347.1
Operating costs and expenses
Operating costs (excluding depreciation and amortization)  782.9  578.7  413.5
Selling, general and administrative expenses  436.2  386.4  358.4
Depreciation and amortization  606.9  516.3  406.2
Total operating costs and expenses  1,826.0  1,481.4  1,178.1
Operating income  373.8  240.3  169.0
Other expenses
Interest expense  (241.5)  (220.1)  (214.0)
Loss on extinguishment of debt  (18.2)  (33.8)  (94.3)
Foreign currency loss on intercompany loans  (10.3)  (53.8)  (24.4)
Other income/(expense), net  0.3  (0.3)  (0.4)
Total other expenses, net  (269.7)  (308.0)  (333.1)
Income/(loss) from operations before income taxes  104.1  (67.7)  (164.1)
Provision/(benefit) for income taxes  18.4  8.5  (8.8)
Net income/(loss) $  85.7 $  (76.2) $  (155.3)
             
Weighted-average shares used to compute net income/(loss) per share:            
Basic    243.9    243.3    235.4
Diluted  246.8  243.3  235.4
Net income/(loss) per share:      
Basic and diluted $  0.35 $  (0.31) $  (0.66)

 

 

 

 

Consolidated Balance Sheets

(in millions, except share amounts)

Year Ended June 30,
2017 2016
Assets
Current assets
Cash and cash equivalents $  220.7 $  170.7
Trade receivables, net of allowance of $9.5 and $7.5 as of June 30, 2017 and June 30, 2016, respectively  191.6  148.4
Prepaid expenses  68.3  68.8
Other assets  34.0  9.2
Total current assets  514.6  397.1
Property and equipment, net  5,016.0  4,079.5
Intangible assets, net  1,188.6  934.9
Goodwill  1,840.2  1,214.5
Deferred income taxes, net  38.3  7.0
Other assets  141.7  94.5
Total assets $  8,739.4 $  6,727.5
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt $  5.0 $  —
Accounts payable  72.4  97.0
Accrued liabilities  325.4  225.7
Accrued interest  63.5  28.6
Capital lease obligations, current  8.0  5.8
Deferred revenue, current  146.0  129.4
Total current liabilities  620.3  486.5
Long-term debt, non-current  5,532.7  4,085.3
Capital lease obligation, non-current  93.6  44.9
Deferred revenue, non-current  989.7  793.3
Deferred income taxes, net  40.2  41.3
Other long-term liabilities  52.4  57.0
Total liabilities  7,328.9  5,508.3
Stockholders’ equity
Preferred stock, $0.001 par value – 50,000,000 shares authorized; no shares issued and outstanding as of June 30, 2017 and June 30, 2016, respectively  —  —
Common stock, $0.001 par value – 850,000,000 shares authorized; 246,471,551 and 242,649,498 shares issued and outstanding as of June 30, 2017 and June 30, 2016, respectively  0.2  0.2
Additional paid-in capital  1,884.0  1,777.6
Accumulated other comprehensive income  5.4  4.5
Accumulated deficit  (479.1)  (563.1)
Total stockholders’ equity  1,410.5  1,219.2
Total liabilities and stockholders’ equity $  8,739.4 $  6,727.5 


Consolidated Statement of Cash Flows

(in millions)

  Year Ended June 30,
  2017 2016 2015
Cash flows from operating activities
Net income/(loss) $  85.7 $  (76.2) $  (155.3)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
Depreciation and amortization  606.9  516.3  406.2
Loss on extinguishment of debt  18.2  33.8  94.3
Non-cash interest expense  9.6  11.9  19.7
Stock-based compensation  114.1  155.9  200.7
Amortization of deferred revenue  (117.6)  (111.5)  (72.1)
Additions to deferred revenue  200.5  184.0  149.1
Foreign currency loss on intercompany loans  10.3  53.8  24.4
Excess tax benefit from stock-based compensation  —  (7.9)  —
Deferred income taxes  12.6  (2.8)  (13.3)
Provision for bad debts  3.7  3.9  1.9
Non-cash loss on investments  1.2  1.2  0.9
Changes in operating assets and liabilities, net of acquisitions
Trade receivables  (7.2)  1.9  (11.2)
Accounts payable and accrued liabilities  5.2  (36.0)  (22.1)
Other assets and liabilities  (33.4)  (14.3)  (17.8)
Net cash provided by operating activities  909.8    714.0  605.4
Cash flows from investing activities
Purchases of property and equipment  (835.5)  (704.1)  (530.4)
Cash paid for acquisitions, net of cash acquired  (1,434.8)  (437.5)  (855.7)
Net cash used in investing activities  (2,270.3)    (1,141.6)  (1,386.1)
Cash flows from financing activities
Proceeds from debt  3,865.8  929.3  1,787.3
Proceeds from equity offerings  —  —  413.7
Direct costs associated with initial public offering  —  —  (26.5)
Principal payments on long-term debt  (2,408.8)  (535.0)  (1,288.5)
Payment of early redemption fees on debt extinguished  —  (20.3)  (62.6)
Principal payments on capital lease obligations  (6.6)  (4.9)  (3.5)
Payment of debt issue costs  (35.4)  (4.2)  (24.2)
Common stock repurchases  —  (81.1)  —
Excess tax benefit from stock-based compensation  —  7.9  —
Cash paid for Santa Clara acquisition financing arrangement  (3.7)  —  —
Net cash provided by financing activities  1,411.3    291.7  795.7
Net cash flows  50.8    (135.9)  15.0
Effect of changes in foreign exchange rates on cash  (0.8)  (2.0)  (3.8)
Net increase/(decrease) in cash and cash equivalents  50.0  (137.9)  11.2
Cash and cash equivalents, beginning of year  170.7  308.6  297.4
Cash and cash equivalents, end of period $  220.7 $  170.7 $  308.6
Supplemental disclosure of non-cash investing and financing activities:
Cash paid for interest, net of capitalized interest $  195.6 $  228.5 $  191.2
Cash paid for income taxes  13.1  14.0  14.5
Non-cash purchases of equipment through capital leasing  12.0  7.6  6.8
Increase in accounts payable and accrued expenses for purchases of property and equipment  16.9  25.7  8.4

Reconciliation of Non-GAAP Financial Measures

(in millions)

Adjusted EBITDA and Cash Flow Reconciliation Three months ended Year Ended June 30,
June 30, 2017 March 31, 2017 June 30, 2016 2017 2016
Reconciliation of Adjusted EBITDA:
Net income/(loss) $  23.2 $  27.0 $  (30.9) $  85.7 $  (76.2)
Interest expense  71.5  63.0  57.4  241.5  220.1
Provision/(benefit) for income taxes  11.0  0.6  (13.1)  18.4  8.5
Depreciation and amortization  181.3  155.7  148.3  606.9  516.3
Transaction costs  2.9  8.4  4.0  20.5  21.5
Stock-based compensation  21.1  26.5  33.4  114.1  155.9
Loss on extinguishment of debt  13.7  4.5  33.8  18.2  33.8
Foreign currency (loss)/gain on intercompany loans  (14.4)  (3.9)  24.9  10.3  53.8
Non-cash loss on investments  0.5  0.2  —  1.2  1.2
Adjusted EBITDA $  310.8 $  282.0 $  257.8 $  1,116.8 $  934.9
         
Reconciliation of adjusted unlevered free cash flow:          
Net cash provided by continuing operating activities $  244.9 $  262.4 $  176.2 $  909.8 $  714.0
Cash paid for income taxes  3.3  3.8  2.6  13.1  14.0
Cash paid for interest, net of capitalized interest  86.4  11.9  83.5  195.6  228.5
Excess tax benefit from stock-based compensation  —  —  —  —  7.9
Transaction costs  2.9  8.4  4.0  20.5  21.5
Provision for bad debts  (1.6)  (0.7)  (0.8)  (3.7)  (3.9)
Additions to deferred revenue  (43.8)  (72.4)  (38.6)  (200.5)  (184.0)
Amortization of deferred revenue  32.1  29.9  44.9  117.6  111.5
Other changes in operating assets and liabilities  (13.4)  38.7  (14.0)  64.4  25.4
Adjusted EBITDA  310.8  282.0  257.8  1,116.8  934.9
Purchases of property and equipment  (205.3)  (208.3)  (187.4)  (835.5)  (704.1)
Additions to deferred revenue  43.8  72.4  38.6  200.5  184.0
Amortization of deferred revenue  (32.1)  (29.9)  (44.9)  (117.6)  (111.5)
Adjusted unlevered free cash flow $  117.2 $  116.2 $  64.1 $  364.2   $  303.3
         
Reconciliation of levered free cash flow:
Net cash provided by operating activities $  244.9 $  262.4 $  176.2 $  909.8 $  714.0
Purchases of property and equipment, net  (205.3)  (208.3)  (187.4)  (835.5)  (704.1)
Levered free cash flow/(deficit), as defined $  39.6 $  54.1 $  (11.2) $  74.3   $  9.9

 

Adjusted EBITDA and Cash Flow Reconciliation Three months ended June 30, 2017
Zayo Consolidated Allstream Consolidated Excluding Allstream
Reconciliation of Adjusted EBITDA:
Net income $  23.2 $  11.9 $  11.3
Interest expense  71.5  3.8  67.7
Provision for income taxes  11.0  —  11.0
Depreciation and amortization  181.3  13.1  168.2
Transaction costs  2.9  0.7  2.2
Stock-based compensation  21.1  0.5  20.6
Loss on extinguishment of debt  13.7  —  13.7
Foreign currency gain on intercompany loans  (14.4)  —  (14.4)
Non-cash loss on investments  0.5  —  0.5
Adjusted EBITDA $  310.8 $  30.0 $  280.8
Reconciliation of levered free cash flow:
Net cash provided by operating activities $  244.9 $  5.5 $  239.4
Purchases of property and equipment, net  (205.3)  (4.5)  (200.8)
Levered free cash flow, as defined $  39.6 $  1.0 $  38.6