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Zayo Group Holdings, Inc. Reports Financial Results for the Second Fiscal Quarter Ended December 31, 2016

Second Fiscal Quarter 2017 Financial Highlights

  • $506.7 million of consolidated revenue, including $107.9 million from
    Zayo Canada;

    • 1% quarter-over-quarter annualized revenue growth;
    • 4% quarter-over-quarter annualized recurring revenue growth (6% in
      constant currency), excluding Zayo Canada.
  • Net income of $19.8 million, including $19.6 million from Zayo Canada;

    • $4.1 million increase quarter-over-quarter.
  • $263.4 million of adjusted EBITDA, including $26.9 million from Zayo
    Canada;
  • Bookings of $5.2 million, gross installs of $6.7 million, churn of
    1.2% and net installs of $2.0 million, all on a monthly recurring
    revenue (MRR) and monthly amortized revenue (MAR) basis, excluding
    Zayo Canada.

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 December 31, 2016.

Second quarter operating income increased $3.7 million and net income
increased by $4.1 million over the previous quarter. Basic and diluted
net income per share during the second fiscal quarter was $0.08. During
the three months ended December 31, 2016, capital expenditures were
$213.6 million, including $9.6 million attributed to Zayo Canada.

As of December 31, 2016, the Company had $144.0 million of cash and
$442.7 million available under its revolving credit facility.

Recent Developments

New Indebtedness

On January 19, 2017, the Company entered into an Incremental Amendment
No. 2 (the “Amendment”) to the Amended and Restated Credit Agreement
dated as of May 6, 2015 (as amended, the “Credit Agreement”). Per the
terms of the Amendment, the existing $1.85 billion of term loans under
the Credit Agreement were repriced at 99.75% with one $500 million
tranche that bears interest at a rate of LIBOR plus 2.0%, with no
minimum LIBOR rate and a maturity date of four years from incurrence,
which represents a downward adjustment of 75 basis points along with the
removal of the previous LIBOR floor, and a second $1.35 billion tranche
that bears interest at a rate of LIBOR plus 2.5%, with a minimum LIBOR
rate of 1.0% and a maturity of seven years from incurrence, which
represents a downward adjustment of 25 basis points. In addition, per
the terms of the Amendment, we added a new $650.0 million term loan
tranche under the Credit Agreement (the “Incremental Term Loan”). The
Incremental Term Loan will be issued at a price of 99.75% and will bear
interest at LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0%, with a
maturity of seven years from the closing date of the Amendment. No other
terms of the Credit Agreement were amended. The Incremental Term Loan
will be available for the Company to borrow in connection with the
Company’s previously announced acquisition of Electric Lightwave (see
below).

On January 27, 2017, the Company completed a private offering of $800.0
million aggregate principal amount of 5.75% senior unsecured notes due
in 2027 (the “2027 Unsecured Notes”).

Acquisition of Electric Lightwave

On November 29, 2016, the Company entered into an Agreement and Plan of
Merger to acquire 100% of the equity interest in Electric Lightwave
Parent, Inc. (“Electric Lightwave”) for cash consideration of $1.42
billion, subject to customary working capital and other adjustments.

Electric Lightwave, which provides infrastructure and telecom services
primarily in the Western United States, has 8,100 route miles of long
haul fiber and 4,000 miles of dense metro fiber, with on-net
connectivity to more than 3,100 enterprise buildings and 100 data
centers.

The Company expects the Electric Lightwave acquisition to close during
the quarter ended March 31, 2017, subject to standard closing conditions
and regulatory approval. The Electric Lightwave acquisition will be
funded with proceeds from the Incremental Term Loan and 2027 Unsecured
Notes.

       

Second Fiscal Quarter Financial Results

 

Three Months Ended December 31, 2016 and September 30, 2016

(in millions)

Three months ended
December 31, 2016 September 30, 2016
Revenue $ 506.7 $ 504.9
Annualized revenue growth 1 %
Operating income 90.7 87.0
Income from operations before income taxes 20.0 22.3
Provision for income taxes   0.2     6.6  
Net income/(loss) $ 19.8   $ 15.7  
 
Adjusted EBITDA $ 263.4 $ 260.6
Annualized Adjusted EBITDA growth 4 %
Adjusted EBITDA margin 52 % 52 %
       
Levered free cash flow/(deficit) $ (43.9 ) $ 24.5  
     

Three Months Ended December 31, 2016 and December 31, 2015

(in millions)

 
Three months ended
December 31, 2016 December 31, 2015
Revenue $ 506.7 $ 369.6
Annualized revenue growth 37 %
Operating income 90.7 58.7

Income from operations before income taxes    

20.0 0.3
Provision for income taxes   0.2     11.1  
Net income/(loss) $ 19.8   $ (10.8 )
 
Adjusted EBITDA $ 263.4 $ 218.9
Annualized Adjusted EBITDA growth 20 %
Adjusted EBITDA margin 52 % 59 %
       
Levered free cash deficit $ (43.9 ) $ (26.2 )
 

Conference Call

Zayo will hold a conference call to report second fiscal quarter 2017
results at 5:00 pm. EST, February 9, 2017. The dial in number for the
call is 800-908-1487, (ID: 21842235). A live webcast of the call can be
found in the investor relations section of Zayo’s website or can be
accessed directly at https://cc.readytalk.com/r/df4hzdq5b74n&eom.
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 presentation will also
be made available in the investor relations section of Zayo’s website
after the conclusion of the conference call.

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
115,400-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 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
unaudited condensed consolidated financial statements and notes thereto
for the quarter ended December 31, 2016 included in the Company’s
Quarterly Report on Form 10-Q to be filed with the SEC on February 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 December 31,

Six months ended December 31,

2016 2015 2016 2015
Revenue $ 506.7   $ 369.6   $ 1,011.6   $ 736.4  
Operating costs and expenses
Operating costs (excluding depreciation and amortization) 179.9 112.2 353.7 225.2
Selling, general and administrative expenses 104.7 85.0 210.3 169.6
Depreciation and amortization   131.4     113.7     269.9     230.8  
Total operating costs and expenses   416.0     310.9     833.9     625.6  
Operating income   90.7     58.7     177.7     110.8  
Other expenses
Interest expense (53.7 ) (51.2 ) (107.0 ) (105.0 )
Foreign currency loss on intercompany loans (17.4 ) (7.1 ) (28.6 ) (17.8 )
Other income/(expense), net   0.4     (0.1 )   0.2     (0.2 )
Total other expenses, net   (70.7 )   (58.4 )   (135.4 )   (123.0 )
Income/(loss) from operations before income taxes 20.0 0.3 42.3 (12.2 )
Provision for income taxes   0.2     11.1     6.8     13.8  
Net income/(loss) $ 19.8   $ (10.8 ) $ 35.5   $ (26.0 )
 
Weighted-average shares used to compute net income/(loss) per share:
Basic 243.1 244.8 242.9 243.9
Diluted 245.6 244.8 244.9 243.9
Net income/(loss) per share:
Basic $ 0.08 $ (0.04 ) $ 0.15 $ (0.11 )
Diluted $ 0.08 $ (0.04 ) $ 0.14 $ (0.11 )
 
       

Condensed Consolidated Balance Sheets

(in millions)

 
December 31, June 30,
2016 2016
Assets
Current assets
Cash and cash equivalents $ 144.0 $ 170.7

Trade receivables, net of allowance of $8.6 and $7.5 as of
December 31, 2016 and
June 30, 2016, respectively

156.7 148.4
Prepaid Expenses 52.9 68.8
Other assets   8.6     9.2  
Total current assets 362.2 397.1
Property and equipment, net 4,286.5 4,079.5
Intangible assets, net 902.7 934.9
Goodwill 1,196.9 1,214.5
Deferred income taxes, net 7.0 7.0
Other assets   112.4     94.5  
Total assets $ 6,867.7   $ 6,727.5  
Liabilities and stockholders’ equity
Current liabilities
Accounts payable 39.9 97.0
Accrued liabilities 260.0 225.7
Accrued interest 28.8 28.6
Capital lease obligations, current 7.8 5.8
Deferred revenue, current   121.1     129.4  
Total current liabilities 457.6 486.5
Long-term debt, non-current 4,091.3 4,085.3
Capital lease obligation, non-current 76.6 44.9
Deferred revenue, non-current 849.4 793.3
Deferred income taxes, net 39.2 41.3
Other long-term liabilities   66.1     57.0  
Total liabilities 5,580.2 5,508.3
 
Stockholders’ equity

Preferred stock, $0.001 par value – 50,000,000 shares authorized;
no shares issued
and outstanding as of December 31, 2016 and
June 30, 2016, respectively

Common stock, $0.001 par value – 850,000,000 shares authorized;
244,115,095
and 242,649,498 shares issued and outstanding as
of December 31, 2016 and June
30, 2016, respectively

0.2 0.2
Additional paid-in capital 1,839.5 1,777.6
Accumulated other comprehensive (loss)/income (22.9 ) 4.5
Accumulated deficit   (529.3 )   (563.1 )
Total stockholders’ equity   1,287.5     1,219.2  
Total liabilities and stockholders’ equity $ 6,867.7   $ 6,727.5  
 
       

Consolidated Statement of Cash Flows

(in millions)

 
Six Months Ended December 31,
2016 2015
Cash flows from operating activities
Net income/(loss) $ 35.5   $ (26.0 )
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities
Depreciation and amortization 269.9 230.8
Non-cash interest expense 5.1 6.6
Stock-based compensation 66.5 89.0
Amortization of deferred revenue (55.6 ) (41.9 )
Additions to deferred revenue 84.3 86.6
Foreign currency loss on intercompany loans 28.6 17.8
Excess tax benefit from stock-based compensation (7.9 )
Deferred income taxes (0.5 ) 8.3
Provision for bad debts 1.4 2.5
Non-cash loss on investments 0.5 0.6
Changes in operating assets and liabilities, net of acquisitions
Trade receivables (16.5 ) 15.3
Accounts payable and accrued liabilities (33.0 ) (26.0 )
Other assets and liabilities   16.3     (14.3 )
Net cash provided by operating activities   402.5     341.4  
Cash flows from investing activities
Purchases of property and equipment (421.9 ) (331.6 )
Cash paid for acquisitions, net of cash acquired (1.3 ) (117.7 )
Other   1.5     (0.3 )
Net cash used in investing activities   (421.7 )   (449.6 )
Cash flows from financing activities
Principal payments on long-term debt (8.3 )
Principal payments on capital lease obligations (2.0 ) (2.2 )
Payment of debt issue costs (0.7 )
Common stock repurchases (17.9 )
Excess tax benefit from stock-based compensation 7.9
Other       (0.4 )
Net cash used in financing activities   (2.7 )   (20.9 )
Net cash flows (21.9 ) (129.1 )
Effect of changes in foreign exchange rates on cash   (4.8 )   (3.3 )
Net increase in cash and cash equivalents (26.7 ) (132.4 )
Cash and cash equivalents, beginning of year   170.7     308.6  
Cash and cash equivalents, end of period $ 144.0   $ 176.2  
Supplemental disclosure of non-cash investing and financing
activities:
Cash paid for interest, net of capitalized interest $ 97.3 $ 112.5
Cash paid for income taxes $ 6.0 $ 6.7
Non-cash purchases of equipment through capital leasing $ 37.9 $ 5.8
Increase in accounts payable and accrued expenses for purchases of
property and equipment
$ 22.7 $ 25.5
 
           

Reconciliation of Non-GAAP Financial Measures

(in millions)

 
Adjusted EBITDA and Cash Flow Reconciliation Three months ended
December 31, 2016 September 30, 2016 December 31, 2015
Reconciliation of Adjusted EBITDA:
Net income/(loss) $ 19.8 $ 15.7 $ (10.8 )
Interest expense 53.7 53.3 51.2
Provision/(benefit) for income taxes 0.2 6.6 11.1
Depreciation and amortization 131.4 138.5 113.7
Transaction costs 6.2 3.0 3.3
Stock-based compensation 34.5 32.0 42.9
Foreign currency loss on intercompany loans 17.4 11.2 7.1
Non-cash loss on investments   0.2     0.3     0.4  
Adjusted EBITDA $ 263.4   $ 260.6   $ 218.9  
 
Reconciliation of levered free cash flow/(deficit):
Net cash provided by operating activities $ 169.7 $ 232.8 $ 146.2
Purchases of property and equipment, net   (213.6 )   (208.3 )   (172.4 )
Levered free cash flow/(deficit), as defined $ (43.9 ) $ 24.5   $ (26.2 )
 
 
Adjusted EBITDA and Cash Flow Reconciliation Three months ended December 31, 2016

Zayo
Consolidated

Zayo Canada

Consolidated
Excluding Zayo
Canada

Reconciliation of Adjusted EBITDA:
Net income $ 19.8 $ 19.6 $ 0.2
Interest expense 53.7 0.2 53.5
Provision for income taxes 0.2 0.2
Depreciation and amortization 131.4 1.7 129.7
Transaction costs 6.2 3.7 2.5
Stock-based compensation 34.5 2.0 32.5
Foreign currency loss/(gain) on intercompany loans 17.4 (0.3 ) 17.7
Non-cash loss on investments   0.2         0.2  
Adjusted EBITDA $ 263.4   $ 26.9   $ 236.5  
 
Reconciliation of levered free cash flow/(deficit):
Net cash provided by operating activities $ 169.7 $ 17.1 $ 152.6
Purchases of property and equipment, net   (213.6 )   (9.6 )   (204.0 )
Levered free cash flow/(deficit), as defined $ (43.9 ) $ 7.5   $ (51.4 )
 

Zayo Group Holdings, Inc.
Investor Relations:
720-306-7556
IR@zayo.com