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Zayo Group Holdings, Inc. Reports Financial Results for the Third Fiscal Quarter Ended March 31, 2017

Press Release

Third Fiscal Quarter 2017 Financial Highlights

  • $550.2 million of consolidated revenue; including $470.9 million from
    the Communications Infrastructure segments and $79.3 million from the
    Allstream segment;

    • 34% quarter-over-quarter annualized revenue growth;
    • 3% quarter-over-quarter annualized organic recurring revenue
      growth (3% in constant currency) for Communications Infrastructure
      (excludes Allstream).
  • Net income of $27.0 million, including $17.3 million from the
    Communications Infrastructure segments and $9.7 million from the
    Allstream segment;

    • $7.2 million increase quarter-over-quarter.
  • $282.0 million of adjusted EBITDA, including $260.0 million from
    Communications Infrastructure and $22.0 million from Allstream;

    • $18.6 million increase quarter-over-quarter.
  • Bookings of $6.9 million, gross installs of $7.1 million, churn of
    1.2% and net installs of $1.5 million, all on a monthly recurring
    revenue (MRR) and monthly amortized revenue (MAR) basis, excluding
    Allstream.

BOULDER, Colo. –
Zayo Group Holdings, Inc. (“Zayo” or “the Company”) (NYSE: ZAYO), a
global leader in Communications Infrastructure, announced results for
the three months ended March 31, 2017.

Third quarter operating income remained consistent at $90.7 million and
net income increased by $7.2 million over the previous quarter. Basic
and diluted net income per share during the third fiscal quarter was
$0.11. During the three months ended March 31, 2017, capital
expenditures were $208.3 million.

As of March 31, 2017, the Company had $198.4 million of cash and $442.2
million available under its revolving credit facility.

Recent Developments

Acquisition of Electric Lightwave

On March 1, 2017, the Company acquired Electric Lightwave Parent, Inc.
(“Electric Lightwave”), an infrastructure and telecom services provider
serving 35 markets in the western U.S., for net purchase consideration
of $1,426.7 million, net of cash acquired, subject to certain
post-closing adjustment. The acquisition was funded through a previously
reported debt issuance.

The acquisition included 8,100 route miles of long haul fiber and 4,000
miles of dense metro fiber across Denver, Minneapolis,
Phoenix, Portland, Seattle, Sacramento, San Francisco, San Jose, Salt
Lake City, Spokane and Boise, with on-net connectivity to more than
3,100 enterprise buildings and 100 data centers.

Third Fiscal Quarter Financial Results

Three Months Ended March 31, 2017 and December 31, 2016

(in millions)

 
        Three months ended
March 31, 2017     December 31, 2016
Revenue $ 550.2 $ 506.7
Annualized revenue growth 34 %
Operating income 90.7 90.7
Income from operations before income taxes 27.6 20.0
Provision for income taxes   0.6     0.2  
Net income $ 27.0   $ 19.8  
 
Adjusted EBITDA $ 282.0 $ 263.4
Annualized Adjusted EBITDA growth 28 %
Adjusted EBITDA margin 51 % 52 %
       
Levered free cash flow/(deficit) $ 54.1   $ (43.9 )
 

Three Months Ended March 31, 2017 and March 31, 2016

(in millions)

 
        Three months ended
March 31, 2017     March 31, 2016
Revenue $ 550.2 $ 478.0
Annual revenue growth 15 %
Operating income 90.7 57.5
Income/(loss) from operations before income taxes 27.6 (11.5 )
Provision for income taxes   0.6     7.8  
Net income/(loss) $ 27.0   $ (19.3 )
 
Adjusted EBITDA $ 282.0 $ 242.8
Annual Adjusted EBITDA growth 16 %
Adjusted EBITDA margin 51 % 51 %
       
Levered free cash flow $ 54.1   $ 11.3  
 

Conference Call

Zayo will hold a conference call to report third fiscal quarter 2017
results at 5:00 p.m. EDT, May 9, 2017. The dial in number for the call
is 866-807-9684. A live webcast of the call can be found in the investor
relations section of Zayo’s website or can be accessed directly at http://services.choruscall.com/links/zayo1705092s01HOaV.html.
During the call, the Company will review an Earnings Presentation that
summarizes the financial, operational and commercial highlights of the
quarter, which can be found at http://investors.zayo.com/earnings-releases.
The Company’s Supplemental Earnings Information will be included in the
appendix of the Earnings Presentation.

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
122,000-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 filed on August 26, 2016 (our “Annual Report”) and in our
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission (“SEC”) on February 9, 2017. 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
unaudited condensed consolidated financial statements and notes thereto
for the quarter ended March 31, 2017 included in the Company’s Quarterly
Report on Form 10-Q to be filed with the SEC on May 9, 2017 and the
Company’s audited consolidated financial statements and notes thereto
for the year ended June 30, 2016 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, and levered free cash
flow.

Adjusted EBITDA, as defined below and in Note 16 – 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. Levered free
cash flow is defined as operating cash flow minus purchases of property
and equipment, net of stimulus grants. Levered free cash flow is not a
measurement 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. 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.

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

Condensed Consolidated Statements of Operations

(in millions, except per share data)

 
    Three months ended March 31,     Nine months ended March 31,
2017     2016 2017     2016
Revenue $ 550.2   $ 478.0   $ 1,561.8   $ 1,214.4  
Operating costs and expenses

Operating costs (excluding depreciation and amortization)

195.0 170.8 548.7 396.0
Selling, general and administrative expenses 108.8 112.5 319.1 282.1
Depreciation and amortization   155.7     137.2     425.6     368.0  
Total operating costs and expenses   459.5     420.5     1,293.4     1,046.1  
Operating income   90.7     57.5     268.4     168.3  
Other expenses
Interest expense (63.0 ) (57.7 ) (170.0 ) (162.7 )
Loss on extinguishment of debt (4.5 ) (4.5 )
Foreign currency gain/(loss) on intercompany loans 3.9 (11.1 ) (24.7 ) (28.9 )
Other income/(expense), net   0.5     (0.2 )   0.7     (0.4 )
Total other expenses, net   (63.1 )   (69.0 )   (198.5 )   (192.0 )
Income/(loss) from operations before income taxes 27.6 (11.5 ) 69.9 (23.7 )
Provision for income taxes   0.6     7.8     7.4     21.6  
Net income/(loss) $ 27.0   $ (19.3 ) $ 62.5   $ (45.3 )
 

Weighted-average shares used to compute net income/(loss) per
share:

Basic 244.1 243.3 243.3 243.7
Diluted 246.1 243.3 244.7 243.7
Net income/(loss) per share:
Basic $ 0.11 $ (0.08 ) $ 0.26 $ (0.19 )
Diluted $ 0.11 $ (0.08 ) $ 0.26 $ (0.19 )
 
 

Condensed Consolidated Balance Sheets

(in millions)

 
                March 31,     June 30,
2017 2016
Assets
Current assets
Cash and cash equivalents $ 198.4 $ 170.7
Trade receivables, net of allowance of $8.6 and $7.5 as of March 31,
2017 and June 30, 2016, respectively
189.7 148.4
Prepaid expenses 72.4 68.8
Other assets   36.7     9.2  
Total current assets 497.2 397.1
Property and equipment, net 4,839.5 4,079.5
Intangible assets, net 1,196.6 934.9
Goodwill 1,822.6 1,214.5
Deferred income taxes, net 62.7 7.0
Other assets   129.8     94.5  
Total assets $ 8,548.4   $ 6,727.5  
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt $ 25.0 $
Accounts payable 50.2 97.0
Accrued liabilities 286.1 225.7
Accrued interest 75.3 28.6
Capital lease obligations, current 7.8 5.8
Deferred revenue, current   144.2     129.4  
Total current liabilities 588.6 486.5
Long-term debt, non-current 5,498.8 4,085.3
Capital lease obligation, non-current 76.5 44.9
Deferred revenue, non-current 940.6 793.3
Deferred income taxes, net 39.9 41.3
Other long-term liabilities   59.0     57.0  
Total liabilities 7,203.4 5,508.3
 
Stockholders’ equity
Preferred stock, $0.001 par value – 50,000,000 shares authorized; no
shares issued and outstanding as of March 31, 2017 and June 30,
2016, respectively
Common stock, $0.001 par value – 850,000,000 shares authorized;
245,752,049 and 242,649,498 shares issued and outstanding as of
March 31, 2017 and June 30, 2016, respectively
0.2 0.2
Additional paid-in capital 1,866.3 1,777.6
Accumulated other comprehensive (loss)/income (19.2 ) 4.5
Accumulated deficit   (502.3 )   (563.1 )
Total stockholders’ equity   1,345.0     1,219.2  
Total liabilities and stockholders’ equity $ 8,548.4   $ 6,727.5  
 
 

Consolidated Statement of Cash Flows

(in millions)

 
        Nine Months Ended March 31,
2017     2016
Cash flows from operating activities
Net income/(loss) $ 62.5   $ (45.3 )
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities
Depreciation and amortization 425.6 368.0
Loss on extinguishment of debt 4.5
Non-cash interest expense 7.7 9.1
Stock-based compensation 93.0 122.5
Amortization of deferred revenue (85.5 ) (66.6 )
Additions to deferred revenue 156.7 145.4
Foreign currency loss on intercompany loans 24.7 28.9
Excess tax benefit from stock-based compensation (7.9 )
Deferred income taxes (6.4 ) 14.3
Provision for bad debts 2.1 3.1
Non-cash loss on investments 0.7 1.2
Changes in operating assets and liabilities, net of acquisitions
Trade receivables (6.0 ) 15.3
Accounts payable and accrued liabilities 9.1 (44.7 )
Other assets and liabilities   (23.8 )   (5.5 )
Net cash provided by operating activities   664.9     537.8  
Cash flows from investing activities
Purchases of property and equipment (630.2 ) (516.7 )
Cash paid for acquisitions, net of cash acquired (1,426.8 ) (417.0 )
Other   1.5      
Net cash used in investing activities   (2,055.5 )   (933.7 )
Cash flows from financing activities
Proceeds from debt 3,293.8 395.2
Principal payments on long-term debt (1,837.4 ) (13.4 )
Principal payments on capital lease obligations (4.8 ) (3.3 )
Payment of debt issue costs (29.0 ) (2.9 )
Common stock repurchases (81.1 )
Excess tax benefit from stock-based compensation       7.9  
Net cash provided by financing activities   1,422.6     302.4  
Net cash flows 32.0 (93.5 )
Effect of changes in foreign exchange rates on cash   (4.3 )   0.1  
Net increase/(decrease) in cash and cash equivalents 27.7 (93.4 )
Cash and cash equivalents, beginning of year   170.7     308.6  
Cash and cash equivalents, end of period $ 198.4   $ 215.2  
Supplemental disclosure of non-cash investing and financing
activities:
Cash paid for interest, net of capitalized interest $ 109.2 $ 145.0
Cash paid for income taxes $ 9.8 $ 11.4
Non-cash purchases of equipment through capital leasing $ 11.6 $ 5.9
Increase in accounts payable and accrued expenses for purchases of
property and equipment
$ 37.1 $ 26.2
 
 

Reconciliation of Non-GAAP Financial Measures

(in millions)

 
Adjusted EBITDA and Cash Flow Reconciliation     Three months ended
March 31, 2017     December 31, 2016     March 31, 2016
Reconciliation of Adjusted EBITDA:
Net income/(loss) $ 27.0 $ 19.8 $ (19.3 )
Interest expense 63.0 53.7 57.7
Provision for income taxes 0.6 0.2 7.8
Depreciation and amortization 155.7 131.4 137.2
Transaction costs 8.4 6.2 14.2
Stock-based compensation 26.5 34.5 33.5
Loss on extinguishment of debt 4.5
Foreign currency (gain)/loss on intercompany loans (3.9 ) 17.4 11.1
Non-cash loss on investments   0.2     0.2     0.6  
Adjusted EBITDA $ 282.0   $ 263.4   $ 242.8  
 
Reconciliation of levered free cash flow/(deficit):
Net cash provided by operating activities $ 262.4 $ 169.7 $ 196.4
Purchases of property and equipment, net   (208.3 )   (213.6 )   (185.1 )
Levered free cash flow/(deficit), as defined $ 54.1   $ (43.9 ) $ 11.3  
 
 
Adjusted EBITDA and Cash Flow Reconciliation Three months ended March 31, 2017

Zayo
Consolidated

Allstream

Consolidated
Excluding
Allstream

Reconciliation of Adjusted EBITDA:
Net income $ 27.0 $ 9.7 $ 17.3
Interest expense 63.0 3.3 59.7
Provision/(benefit) for income taxes 0.6 0.6
Depreciation and amortization 155.7 6.6 149.1
Transaction costs 8.4 1.9 6.5
Stock-based compensation 26.5 0.5 26.0
Loss on extinguishment of debt 4.5 4.5
Foreign currency gain on intercompany loans (3.9 ) (3.9 )
Non-cash loss on investments   0.2         0.2  
Adjusted EBITDA $ 282.0   $ 22.0   $ 260.0  
 
Reconciliation of levered free cash flow/(deficit):
Net cash provided by operating activities $ 262.4 $ 21.4 $ 241.0
Purchases of property and equipment, net   (208.3 )   (1.9 )   (206.4 )
Levered free cash flow, as defined $ 54.1   $ 19.5   $ 34.6  

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Zayo Group Holdings, Inc.
Media:
Shannon Paulk,
303-577-5897
Corporate Communications
press@www.zayo.com
or
Investors:
Brad
Korch
, 720-306-7556
Investor Relations
IR@www.zayo.com